Among Big Independent Producers, Chesapeake Endures Like No Other

When Chesapeake Energy was created by founder Aubrey McClendon in 1989, its asset base was tilted heavily to oil production. Oil was the trendy commodity at that time, as the natural gas market had collapsed under de-regulation. I was at Meridian Oil - later to become Burlington Resources - at the time, and we were fire-selling New Mexico natural gas in those years, often for less than 50 cents per Mmbtu.

But McClendon began to shift the company’s production to a more gassy mix during the 1990s, and Chesapeake became one of the early adapters of the horizontal drilling/hydraulic fracturing technique that enabled the recovery of natural gas from the Barnett Shale in North Central Texas shortly before the turn of the century. Throughout the “naughts” - the first decade of the 21st century - McClendon spoke often of his belief that natural gas prices were destined to be permanently elevated, and famously bet his company’s future on that proposition.

One feature of McClendon’s business practices was to enter into a new play area and immediately bid up the price for acquiring leases. He did this in play after play after play, entering a region in which prevailing lease bonuses were selling for a few hundred dollars an acre and immediately bidding them up into the multiple thousands per acre in order to ensure Chesapeake would be able to have a dominant position and take advantage of some economies of scale. The practice was pleasing to holders of mineral rights, but let’s say more than slightly irritating to Chesapeake’s competitors.