Earlier this week, Chesapeake Energy (CHK) and General Electric (GE) announced a collaboration with the goal of increasing domestic natural gas consumption via CNG/LNG in the transportation chain (read the press release here). While the announcement has little-to-no impact on either company's current business, it may prove beneficial to Chesapeake down the line.
While Chesapeake has publicly advocated for adopting CNG more broadly in the US transportation infrastructure, many market watchers have pinned hopes of a revival in natural gas prices on LNG exports, which would open abundant shale gas to the world market where gas prices are multiples of the current domestic price around $2.25. While LNG export capacity will require heavy investment and federal approval, this is a more centralized and direct path towards monetization of shale gas than switching huge swaths of American transport infrastructure over to support CNG and at this point in time, exported gas is much closer to reality.
Cheniere Energy (LNG) has secured approval from the US Department of Energy to build the first LNG export terminal to export gas abroad (DOE approval is needed to export to non-free-trade agreement countries). Recently, the company announced a $2B deal between its subsidiary, Cheniere Energy Partners (CQP) and Blackstone (BX) to help fund the construction.
But even as US LNG exports marches closer toward realization, there is some resistance politically, primarily from Democratic lawmakers. One Congressman even introduced legislation barring natural gas exports in hopes of keeping prices low here at home. The concerns just aren't political -- Lee Raymond, ex-CEO of ExxonMobil (XOM), has expressed concerns about the long-term viability of shale gas resource to support exports.
Clearly, exporting LNG is not a lock and even if Cheniere begins exporting gas by 2014/2015, the political climate may limit export capacity. All of which brings us back to GE's partnership with Chesapeake. While the deal provides little tangible benefit for CHK, it increases the odds of increased CNG/LNG consumption here at home, thus providing another path toward balancing the current supply/demand curve. GE's technological prowess and corporate reputation will provide more credibility to an effort that's been defined to this point by long-term energy tycoons like Boone Pickens and Aubrey McClendon, Chesapeake's co-founder and CEO. Perhaps more importantly, it provides some political diversification as both Pickens and McClendon are renowned Republican supporters but GE's CEO, Jeffrey Immelt, is the head of President Obama's Jobs Council and could provide much needed traction with the other side of the political aisle. As Wall Street showed in 2008 by heavily favoring Obama donation-wise, it is beneficial to play both sides of the aisle to promote business interests.
Late last year, McClendon publicly stated that he did not want to see the US export its natural gas but rather move toward using clean gas domestically. Despite his reservation, Chesapeake committed up to half a billion cubic feet per day of gas to the Cheniere project as that seemed the likely winning bet. Like a good politician (and McClendon would be a great one), he was hedging. But with the GE collaboration, McClendon's vision of a CNG-fueled America becomes a little more viable, if still a bit of a longshot, and Chesapeake may now have two feasible paths toward value realization of their gas assets.
Disclosure: I am long GE.
Additional disclosure: Long CHK preferred D shares