Chesapeake Energy to invest some $1B over 10 years to support natural gas demand, infrastructure and end-use technologies; $305M in initial investments in Clean Energy Fuels and Sundrop Fuels
Chesapeake Energy Corporation plans to create a $1.0-billion venture capital fund over the next 10 years, Chesapeake NG Ventures Corporation (CNGV), dedicated to identifying and investing in companies and technologies that will replace the use of gasoline and diesel with natural gas and natural gas-to-liquids (GTL) fuels. Chesapeake is the second-largest producer of natural gas, a Top 15 producer of oil and natural gas liquids and the most active driller of new wells in the US.
Chesapeake also announced $305 million in two initial investments for CNGV: $150 million to Clean Energy Fuels Corp. for the accelerated buildout of an LNG fueling infrastructure; and $155 million to Sundrop Fuels to support the construction of a 40 million gallon per year plant producing drop-in gasoline from natural gas and cellulosic materials using the company’s novel gasification process. Chesapeake is also taking a 50% stake in that company.
To fund this effort, Chesapeake will redirect approximately 1-2% of its forecasted annual drilling budget away from efforts to increase natural gas supply toward projects that will instead stimulate increased natural gas demand.
Aubrey K. McClendon, Chesapeake’s CEO, said that Chesapeake has developed a three-pronged plan to transform the US transportation sector and move the US toward greater energy independence and enhanced national security during the next 10 years:
Increase existing domestic onshore oil and natural gas liquids (NGLs) production of approximately 8 million barrels a day by 3-4 million barrels a day through the acceleration of horizontal drilling and hydraulic fracturing to develop the enormous unconventional oil and NGL resources that underlie many parts of our country;
Invest in enough publicly accessible compressed natural gas (CNG) and liquefied natural gas (LNG) fueling stations to reach a tipping point where original equipment manufacturers (OEMs) of all vehicular classes will have sufficient confidence to increase their production of CNG and LNG vehicles and provide American businesses and consumers access to vehicles that run on a cleaner fuel made by and for Americans that should be approximately $1.50 - $2.00 per gallon cheaper than gasoline and diesel; and
Deploy innovative and scalable GTL processes to convert natural gas into a room temperature, tank-ready, liquid transportation fuel that can be blended with existing supplies of gasoline and diesel or used as a stand-alone replacement product that is cleaner and more affordable..
Chesapeake is so convinced of the economic attractiveness of this plan that we are redirecting approximately 1-2% of our annual drilling cap-ex over the next 10 years, or at least $1.0 billion in total, to stimulate market adoption of CNG, LNG and GTL fuels. We also intend to take full advantage of the associated cost savings and emissions reductions by accelerating the conversion of all 4,500 of Chesapeake’s light duty fleet vehicles to run on CNG and 400 of our heavy duty fleet vehicles to run on LNG, which will reduce our fuel costs by an estimated $15-20 million per year.
In addition, we are converting at least 100 of our drilling rigs and all of our planned hydraulic fracturing equipment to run on LNG. Just converting our rigs and hydraulic fracturing equipment will cut the company’s diesel fuel consumption by approximately 350,000 gallons a day and save the company approximately $230 million annually, bringing our overall CNG and LNG fuel savings to approximately $250 million.—Aubrey K. McClendon
Clean Energy Fuels Corp. Chesapeake has agreed to invest $150 million in newly issued convertible debt of Clean Energy Fuels Corp., based in Seal Beach, California. The investment will be made in three equal $50 million tranches, the first of which has been made and the other two are planned for June 2012 and June 2013. The convertible debt carries a 7.5% interest rate and a 22.5% conversion premium.
Clean Energy will use Chesapeake’s $150 million investment to accelerate its build-out of LNG fueling infrastructure for heavy-duty trucks at truck stops across interstate highways in the US.
McClendon said that the investment is projected to help underwrite approximately 150 LNG truck fueling stations, increasing by more than tenfold the number of publicly accessible LNG fueling stations and providing a foundational grid for heavy-duty trucks to have ready access to cleaner and more affordable American natural gas fuel along major interstate highway corridors.
McClendon said that Chesapeake believed that a coast-to-coast and border-to-border build-out of CNG and LNG fueling stations will require approximately $1.5-$2.0 billion to complete, and that a combination of private sector interests will step up to provide this capital in the next few years.
As confidence grows in the build-out of a national grid of CNG and LNG fueling infrastructure, he said, Chesapeake was confident that OEMs of all vehicular classes will vastly increase their production of CNG and LNG vehicles.
|The Sundrop gasification process|
|Sundrop Fuels uses natural gas, electricity, concentrated solar power or a hybrid energy source to generate ultra-high temperatures inside the RP Reactor.|
|Finely ground cellulosic biomass material is then delivered by entrained flow into a feeder unit above the RP Reactor.|
|Natural gas is added to the biomass feedstock to create a two-to-one hydrogen-to-carbon ratio necessary for “drop-in” transportation fuels that can be used in today’s engines.|
|The feedstock is dropped into the RP Reactor processing tank, where temperatures of more than 1,300°C instantly gasify the material.|
|Synthesis gas (syngas) is collected and delivered to the adjacent processing unit to create biobased “green gasoline”, diesel or aviation fuels.|
Sundrop Fuels. Sundrop Fuels uses an ultra high-temperature heat transfer process to gasify virtually any cellulosic feedstock into synthesis gas, which is then converted into bio-based “green gasoline” and other drop-in transportation biofuels for use in today’s automobiles, diesel engines and aircraft. At the core of Sundrop Fuels’ intellectual property is its RP Reactor, a high-efficiency radiant particle technology that is more than 20 times faster than conventional convection gasification methods.
By creating ultrahigh temperatures to drive the endothermic gasification reaction, Sundrop Fuels technology lowers significantly the high capital cost and intensive energy use that have been barriers to large-scale application of gas-to-liquid technologies in nonstranded gas markets like the US, the company says.
In addition, Sundrop Fuels is able to maximize its synthesis gas production by integrating natural gas with biomass feedstock, facilitating the most efficient utilization of hydrogen from both the biomass and natural gas to produce higher yields than any other biomass process, it says. The combination of Sundrop Fuels technology with the efficient reactor-heating and hydrogen-enrichment properties of natural gas can provide a foundation for massive-scale biorefineries, according to the company.
Sundrop Fuels plans to break ground in 2012 demonstrating its RP Reactor technology with ExxonMobil’s Methanol-to-Gasoline (MTG) process. The company expects to go into full production 24-30 months after groundbreaking. Sundrop Fuels plans to build and operate large-scale biorefineries each generating more than 200 million gallons of drop-in transportation biofuels annually, with production launch at its first large-scale, 200-million gallon per year biorefinery in 2016.
Chesapeake has agreed to invest $155 million in Sundrop for a 50% ownership stake. The investment over the next two years will fund construction of a plant capable of annually producing more than 40 million gallons of ultra-clean gasoline from natural gas and waste cellulosic material.
The first $35-million tranche of Chesapeake’s investment has been funded and the remaining tranches of preferred equity will be scheduled around certain funding and operational milestones to be reached over the next two years. The investment gives Chesapeake 50% of Sundrop Fuels’ equity on a fully diluted basis. The CNGV investment will be augmented by an additional $20 million pro rata investment by a current investor, Palo Alto, California-based venture capital firm Oak Investment Partners, which along with Sundrop Fuels’ management and Menlo Park, California-based venture capital firm Kleiner Perkins Caufield & Byers, have provided substantially all of Sundrop Fuels’ capital to date.
Chesapeake considers Sundrop Fuels’ plant a critical strategic development to initiate the commercialization of its novel gasification process. This gasification process is the foundational technology for a number of chemical processes converting natural gas to higher value chemicals and fuels. This technology will utilize a proven methanol-to-gasoline process for producing tank-ready fuel, rather than the more capital intensive Fischer-Tropsch (F-T) process. The company expects to break ground in early 2012 and be in full production by late 2013. Full-scale commercial plants are expected to be 5-10 times the size of the initial plant, with the first such plant scheduled to break ground approximately one year after start-up of the commercial demonstration plant.
The US Department of Energy has placed a priority on seeking advanced, cleaner-burning, sustainable biomass-based fuels capable of becoming immediate drop-in replacements for gasoline and diesel fuels and still use our nation’s existing liquid fuel-based distribution infrastructure. After extensive evaluation and due diligence of various GTL processes during the past three years, we believe there is no doubt Sundrop Fuels’ proprietary approach will be a breakthrough to achieving affordable and scalable GTL fuels using America's natural gas and America’s nonfood biomass to produce a tank-ready green biogasoline replacement or supplemental fuel for gasoline and diesel.
With Sundrop Fuels’ efficient synthesis gasification process, natural gas becomes the enabling technology for a safer, stronger and greener economy. Natural gas supplies the missing link—hydrogen—needed to turn our nation’s biomass waste stream into a bountiful flow of truly green biogasoline that can fuel our cars, trucks, aircraft and industry. This breakthrough technology creates extraordinary economic and environmental upside for our country by decreasing our dependence on OPEC oil and lowering greenhouse gas emissions while at the same time creating thousands of high-paying American jobs. It also creates significant upside for Chesapeake and its shareholders by providing a large new demand driver for American natural gas.—Aubrey K. McClendon
McClendon said that Chesapeake expects to make investment opportunities with CNGV available to other natural gas producers, venture capitalists, private equity players and other large-scale energy and technology investors, especially those looking for breakthroughs in scalable, green energy technologies.