Wednesday, August 5, 2009

Mr. McClendon Goes to Washington

Here is an interesting interview with Aubrey McClendon, CEO of Chespaeake Energy, on cleanskies.com on a variety of topics, but most notably natural gas's lobbying efforts, or the need to improve these efforts. (Please note that cleanskies.com is a part of the American Clean Skies Foundation, an industry funded site that was established by Chesapeake, but the content is nevertheless interesting.) You may have to turn up the sound as McClendon is surprisingly soft-spoken in the interview.


If you don't feel like sitting through a 20 minute interview, let me summarize:
  • The natural gas lobbying effort this year and for the past X number of years has sucked. I lost count of the number of times McClendon used the word "naive" to explain the natgas industry's approach to Washington. The lesson: you can't wait for Washington to read about you in the paper. You have to get in front of the elected officials and their staffs to make your point. Even if you have the superior product, it's no good if you don't tell the right people about it.
  • Things are going to change. Heard that before? The biggest change is going to result from a self-imposed penny tax per MMcf (I thought he said "Mcf" but that wouldn't make sense) to fund ANGA, the American Natural Gas Alliance, the main lobbying arm of the independent natural gas producers.
  • The immediate lobbying agenda will focus on the Senate version of carbon legislation since the utility and coal lobbies kicked natgas's butt in the House version of the bill. Will it be too little too late? McClendon said with confidence that the house version of the bill will not pass and the whole bill might not pass at all.
  • Paradigm change needed: the industry needs to make Washington understand that the natural gas supply paradigm has changed from scarcity to abundance.
  • McClendon suggested that natgas needs to position itself as part of the alternative energy Trinity with solar and wind (he actually said, "triangle" but I prefer "Trinity").
  • Carbon emissions come from two main sources, the tailpipe and the smokestack, and natgas can be a solution for both.
  • Utilities by nature prefer coal plants because of they way the utility industry is structured relative to its customer base. Utilities work on a cost-plus reimbursement system, so they favor high upfront costs of coal plants (natgas plants are cheaper to build) and lower variable costs of coal (natgas can be more expensive). It reduces their risk and improves their bottom lines.
  • McClendon cited 300,000 MW of unused natgas power plant capacity in the U.S., which is more than all of the coal-generated capacity in the country. The coal and utility lobbies are throwing a smoke screen to say that there will be a huge cost to build new natgas plants. The capacity is there - utilities just need to decide to use them. Without an incentive, utilities will be slow to act (see bullet above).
It is refreshing to hear a mining executive use the phrase "externalities" or "external costs," which for decades had been reserved for environmentalists. If the external costs are correctly applied to the coal industry (both in terms of mining and burning), coal would be too expensive to use.

I also found it interesting that McClendon referenced U.S. efforts to urge countries like India to reduce their carbon footprint. He suggested the "let us show your the way" approach. In other words, by taking tangible steps to reduce our carbon emissions through legislation (or other means) we've taken real steps to reducing our carbon footprint, now you try. This is the opposite approach that the Bush administration took in its rejection of the Kyoto Protocols early this decade. But if we want to be the world leader, we actually have to lead.

(Note: Please don't take the above as my endorsement of any particular carbon legislation. I'd prefer a market-driven solution, but I don't think one is available any time soon.)

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