Chesapeake Forms $1 Billion Fund to Boost Natural-Gas Demand

Chesapeake Energy Corp. (CHK), the most- active U.S. natural-gas driller, will form a $1 billion fund to invest in companies that develop infrastructure or technology to increase the use of gas as a motor fuel.

For the fund’s initial investments, Chesapeake will spend $155 million to buy half of closely held Sundrop Fuels Inc., which plans to build a plant to convert gas and waste products into motor fuel, the Oklahoma City-based company said in a statement today. The plant is expected to open in 2013 with a capacity of 40 million gallons of fuel a year.

It will also spend $150 million over three years on bonds issued by Clean Energy Fuels Corp. (CLNE), a company that builds fueling stations for heavy trucks that run on gas instead of diesel fuel. Chesapeake will make the current and future investments via Chesapeake NG Ventures over the next 10 years, it said.

“What we’re trying to do is create a demand revolution that will have even more benefits than the supply revolution that our company helped create in the last five years,” Chesapeake Chairman and Chief Executive Officer Aubrey McClendon said in an interview.

Chesapeake and other gas producers are hoping that converting cars and trucks to using gas can help boost prices that have declined by 68 percent in the past three years as production climbed. Prices have dropped to an average of $4.288 per million British thermal units this year, after reaching $13.577 in 2008.

Gas Infrastructure Play

“It’s really the largest natural-gas vehicle infrastructure play to date,” Clean Energy Fuels Chief Executive Officer Andrew Littlefair said of Chesapeake’s plan in an interview.

About 1,600 of the more than 3 million heavy trucks in the U.S. -- defined as those with a gross vehicle weight of more than 33,000 pounds (15,000 kilograms) -- run on liquefied natural gas, or LNG, Littlefair said. Manufacturers are beginning to roll out new engines for the long-haul tractor trailer rigs that run on LNG, he said.

LNG sells for $1.50 to $2 less a gallon than the equivalent amount of diesel and produces less carbon dioxide and other pollutants when burned, Chesapeake said in a statement.

Clean Energy Fuels will use the investment to add about 100 new fueling stations on major highways, Littlefair said. The company, co-founded by Littlefair and Dallas billionaire T. Boone Pickens and based in Seal Beach, California, has about 240 fueling stations already.

Demonstration Plant

Chesapeake chose to invest in Louisville, Colorado-based Sundrop because its technology may be able to produce a liquid from natural gas that costs about the same as LNG, McClendon said. Sundrop is backed by Oak Investment Partners and Kleiner Perkins Caulfied & Byers, according to its website.

“We certainly think the demonstration plant is going to prove the efficacy of the technology and the compelling nature of the economics underneath it,” McClendon said.

Chesapeake has begun converting its fleet of 4,500 light trucks to run on compressed natural gas. The company will convert 100 of its drilling rigs and some of its fleet of hydraulic fracturing equipment to run on LNG, it said today.

Converting the rigs and fracturing equipment will cut the company’s diesel fuel consumption by about 350,000 gallons a day, according to the statement.

Chesapeake is operating 157 drilling rigs in the U.S. this week, the most among oil and gas producers, according to data from Baker Hughes Inc.

To contact the reporter on this story: Mike Lee in Dallas at mlee326@bloomberg.net

To contact the editor responsible for this story: Susan Warren at susanwarren@bloomberg.net

Bloomberg reserves the right to remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.