Looking beyond the wellhead

TOM PRICE, JR., Senior Vice President- Corporate Development and Government Relations, Chesapeake Energy Corporation

Imagine for a moment, a pharmaceutical company that, through privately funded research, develops a medication to cure a deadly form of a rare disease. However, instead of promoting this life-saving product to potential patients, the company makes no effort to market or distribute it. The result? While the company might continue to develop innovative treatment options, those options would rarely reach the patients who are so desperately in need of them.

Customers’ needs for our products are an economic cornerstone. Seem like a stretch? The approach above illustrates a significant mistake that our industry has made over the past few decades. For generations, E&P companies have failed to look beyond the wellhead, ignoring the reality that natural gas and NGLs have broad-reaching value and are as important to the steel, chemical, and agricultural industries as a lifesaving medication is to a sick patient.

We can explain this failure by the historical uncertainty related to conventional drilling with dated drilling and completion technologies, and the resulting unpredictable success with the drill bit. However, the new technologies employed, including horizontal drilling and hydraulic fracturing in the vast, shale formations, have created a new reality and a new opportunity. It serves as a reminder that our industry must think beyond exploration, production and distribution. We can do this in two ways—first, by better understanding the needs of our industrial and advanced technology customers, as well as the economics required for them to relocate plants to the U.S. Secondly, by demonstrating the global competitive advantage available to them by partnering with U.S. firms.

Through increased awareness of the needs of our industrial customers, 2013 can move from being one of the potentially most challenging years our industry has faced to date, to one of the most promising.

No doubt, the challenges are imposing. The uncertainty around the “fiscal cliff” in Washington, D.C., has placed a bull’s-eye on critical tax policies, such as intangible drilling costs (IDCs), which have historically played a vital role in the growth of our sector by providing accelerated capital recovery for non-salvageable expenses. Contemplation of the elimination of this century-old critical tax provision reflects the misunderstanding of our industry, its capital intensity, and the multi-millions of dollars required to drill a 5,000-plus-ft lateral in a single horizontal well, and complete it utilizing multi-stage hydraulic fracturing. This is compounded by growing obstacles with the controversy surrounding natural gas drilling and completion. This is evident by the many lawsuits, ballot initiatives, feature films and slick public relations campaigns designed to bring clean, low-emission gas production to a screeching halt. Preclusion of a massive economic recovery, and the creation of hundreds of thousands of high-paying jobs in the industrial sector and across the U.S. economy, seems an awfully high price to pay for the goal of competing for an Academy Award.

Customers can deliver our message. In today’s tense political environment, it is critical that we focus on job creation provided by our industry. To do that, it is critical that we enlist our most sophisticated and scientifically astute customers to help deliver the message of the value our industry adds to their companies, employees and customers, and the unintended consequences that myopic and punitive tax policies would have on a myriad of key American industries.

At first glance, one may question why our key consumers should care about the legislative battle that will occur around IDCs. However, I am reminded of a recent conversation that I had with a chemical industry leader, who offered that natural gas is as vital to his industry as flour is to a baker. Despite rhetoric to the contrary, IDCs do not benefit “Big Oil,” as the majors are responsible for only a small portion of the domestic shale drilling campaign. Furthermore, they only qualify for a percentage of the applicable deductions. Instead, it is the independent companies, those responsible for the majority of onshore drilling, that rely on IDCs to meet the capital-intensive needs of long-term shale development. Eliminating such provisions would lead, ultimately, to a higher price for natural gas, which would dramatically impact our customers.

One additional area ripe for partner engagement centers around supporting CNG and LNG as transformative transportation fuels. Large fleet operators, such as AT&T, FedEx, UPS and Waste Management, are taking steps to convert their fleets, to take advantage of the environmental and economic benefits of natural gas. These companies, and many others like them, are making this transition, because they believe in the reliable, long-term supply of gas at an affordable price, and the resulting benefits to the environment and their customers. Bans on hydraulic fracturing would dramatically reduce the supply of the fuel powering CNG/LNG fleets and discourage those progressive natural allies.

No matter the issue, our industry must remain vigilant, as we work to mitigate the challenges and allay the variety of concerns that lay ahead for our industry. We must work diligently to recruit, educate and ultimately activate our customers to help tell our story, and validate the importance of our industry to our nation’s economy and all the nation’s beneficiaries. Success will not come from slick advertising campaigns or lobbying elected officials, as has been done in the past. It will take boots on the ground with educated, highly trained advocates, who patiently and empathetically work to educate both practical decision-makers as well as those who all too frequently ignore science in favor of emotion.

Our environmental friends, for the most part, are not ill-intended. However, it is imperative that at each engagement we have with them, we explain that the idealistic world they dream about has a realistic cost projection. It can impact senior citizens, exacerbate the high number of unemployed and underemployed, and continue the likelihood that our government remains over-indebted. Their fantasy world has significant costs, while our real world has real, tangible benefits.