Chesapeake Energy responds to Rolling Stone article

8/2/2019 Chesapeake Energy responds to Rolling Stone article

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Dear Fe llow CHK Employees and Friends:

Chesapeake responds to Rolling Stone

B y now , som e of you m ay have heard abou t or read the H olling S tone m agazine artic lereleased th is w eek entilled "The B ig Fracking B ubble : The S cam B ehind the G as B oom ."A s o ur co mpa ny's V P w ith re spo nsitJility for com mu nica tions , I thin k it's im porta nt thatyou know m ore about the even ts and activ ities that led to th is a rtic le . A lso, J haveinc lude d b elo w ou r spe cific re spo nses to the portion s o f th e a rtic le that w ere m oste g re g io u s I n t he ir m i sr ep re s en ta ti on s or inaccuracies of o ur co mp any and Ind ustry.W hen w e w ere first con tacted tJy R olling S tone and looked at the w riter's prio r w ork, b logposts, and tw eets, w e figured w e'd never ge t a fair shake and suggested he talk to o therind ustry grou ps to get a perspe ctive o n na tural gas . B ut w hen h e decla red his inte ntio nto write a s tory focused on our com pany and Aubrey - w ith or w ithou t our cooperation -w e d ecid ed th at pro vidin g th e full trans parenc y that the m edia an d o ur critics so oftendem an d fro m ou r indu stry w ould potentia lly resu lt in a m ore h one st and fa ct-b ase d sto ry.A lthou gh o ur exp ectation s for h one sty and faim ess w ere quite low , the w riter faile d toreach even tha t low bar.D espite givin g the w rite r ac cess to o ur rig lo catio ns a nd b rie fings fro m sen ior exe cutive sover th ree days , H olling S tone has pub lished a sto ry that recycles the sam e oldd eb un ke d th eo rie s o f a fe w s ho rt-p os itio ne d a na ly sts , a ct iv is t academics an dp ubliC ity-see king litiga nts that h ave m ischa rac teriz ed our com pa ny a nd our indu stry fo rth e p as t fiv e y ea rs .There is litlle new in th is sto ry and m uch tha t is eithe r ha lf true or just nat w rong Thew rite r clea rly c hose to ig no re crit ic al info rm ation a nd con text tha t a ddresse d the falsea lle ga tions he cho se to pu blish. D esp ite polite ly listenin g, he ha d no in ten tion ofreporting facts that w ould have show ed C hesapeake to be the responsible operato r andgenerous corporate citizen that w e are and the vast m ajority of observers o f ourcom pany know us to be . S om e exam ples o f R olling S tone's selective reporting aredetailed be low - these m istakes and om issions w ou ld be inexcusab le from a responsiblejou rna list, bu t co min g from R ollin g S ton e they a re p erh ap s m ore u nde rsta nda ble.

C hesap ea ke b eliev es in ope nne ss and tho ug htfu l en gag em ent w ith all stak eho lders inthe com munities w here w e opera te. W e stand by our position on the abundance ofnatural gas in the U .S., our success in drilling and recovering na tural gas in ane nviro nm entally sen sitive an d sa fe m an ner, a nd the via bility a nd succe ss of our b usin essm od el in g en era tin g a ttra ctiv e r etu rn s fo r s ha re ho ld ersW hile it is pa in ful to read suc h m isre pre sen tatio ns a bo ut our in dustry, com pan y andCEO, I h ope you w ill take pride in know ing that when faced w ith an expected assau lt onour repu tation, w e d idn't just s it back and take it W e engaged fully and did so becausew e have such grea t con fidence in the u ltim ate assessm ent tha t the truth w ill w in out andthe facts w ill speak for them se lves. Tha t opin ion w as bu ttressed by the fact that w e havethe m ost articula te, kno wled gea ble, an d visiona ry C EO in the In dustry an d an un equ aledteam of senior leadership a t h is side. W e played it straight and transparent W e treatedth e re po rte r W ith respect and integrity. Tha t he ohose not to recip rocate does notdim in ish C hesapeake or our m ission . It m akes us m ore reso lved to continue to p rove thenaysayers w rong. I hope you w ill find the analysis be low to be o f assistance to you.As our CEDIS fond of saying , "onward and upwardl"

M ichae l D . K ehsV ic e P re sid en t - S tr ate gic A na irs & Pu bl ic R e la ti on sC h es ap ea ke E n er gy C o rp or at io n

T he re alily o f a t le as t 100 ye ars' w arth of sha le g as abundance ha s beens up po rte d b y v ir tu ally e ve ry c re dib le th ird -p arty e xp er t, s uc h a s th e U S.E ne rg y I nf or ma ti on A dm in is tr at io n, t he C o lo ra do S ch oo l o f M in es ' P ot en ti alG as C om m itte e, t he M as sa ch us et ts In st it ute o f T ec hn olo gy , N av ig an tC onsulting and the larg est ene rgy co mp anie s in th e w orld, am on g th emb ei ng E xx on M ob ll , S h el l, C h ev ro n, C on oo oP hi ll ip s, B P , T ot al , S ta to il ,C NO OC , S in ope c, R elia nce , R ep sol, B G, E NI a nd m an y o the rs, no t tom en tio n e ve ry m ajo r in de pe nd en t in th e U.s., Induding Oxy, Anadarko ,A pa ch e, E DG , D ev on , E nC an a,. T alls m. an a nd d oz en s m or e. T he c olle ctiv em ark et c ap o f th es e e ne rg y le ad er s a pp ro ac he s $ 2. t rillio n - a sk y ou rs elf : d oI be lieve R olling S tone an d A rth ur B erm an or the w orld 's oig gest and m os ts u cc es s fu l e n er gy c omp an ie s?F or y ea rs , M r. B erm an h as b ee n u nd er es tim at in g n at ura l g as r es er ve s a ndt he p ro mis e p re se nt ed b y th e in du st ry . J us t t ak e his e ve r c ha ng in g p os it io no n th e H ay ne SV ille S ha le . In A pril 2 00 9, B erm an w ro te th at it w as "d iff ic ult toim ag in e th at th e H ay ne sv ille S ha le c an become cornrncrcel.' O nly t wom onths late r, in Jun e, B erm an had cha nge d h is tune , sayin g that "[ n owt hin k th at th e H ay ne sv ille S ha le r es er ve e stim ate s t ha t I p re se nte dp revio usly w ere to o low " S till, in a 2 01 0 a rtic le , B erm an sugg ested theH a yn es vi ll e n um b er s w er e "disappontinq," I n M a r ch 2 01 1, t he H a yn es vi lleb ecam e the top prod ucing natu ra l g as field in the U .S ., a nd n ow sta nd sa mo ng th e to p te n p ro du cin g fie ld s in t he e ntire w orld ,A s f ar a s a cc ou nt in g p ra ct ic es , C h es ap ea ke f ol lo ws f ul l- co st a cc ou nt in grules In th e le tte r a nd r ou tin ely h av e o ur m in gs re vie we d by the U SS ec uritie s a nd E xc ha ng e C om m is sio n, a s is t yp ic al fo r a ny p ub lic c om pa nyo f our size. T he s am e hold s tru e tor the rest o f o ur ind ustry - ou r rese rvea ccou nting te chn ique s are strong a nd h ave sto od the test of tim e fo rdecades.

Counci l on Fore ign Relat ions energy expert Michaet Levi answersthe ques tion: Is shale gas a Ponzi Scheme?/rollingstone/index.html

The Big Fracking Bubble: The ScamBehind the Gas BoomIt's not only toxic - it's driven by a right-wing billionaire whoprofits more from flipping land than drilling for gas.

By JEFF GOODELLMARCH 1, 2:012: 8:00 A.M ET

Aubrey Mcf'lendon, America's second-largest producer of natural ga s, ha s neverbeen afraid ofa fight. He has become abillionaire by directing his company,Chesapeake Energy, to b last apart gas-soaked rocks a mile underground andpump the fuel to the surface. "We' re the

~~~~~~~~~~~~~~~~~ biggest trackers in the world," he declaresproudly over a $400 bottle of FrenchBordeaux at a restaurant he co-owns in hishometown of Oklahoma City. "We frack

A n a tur aqaa d r il li n! ll iQ st ands nn a Cheaapeake En !: lQYCDr p. dri ll s it e in E-radfo i : l County, pennsvlven!a.

a ll the t ime. What' s the big deal?"Mcf'lendon dominates America's supply of natural gas the same way the Tea Party-financing Koch brothers control the nation's pipelines and refineries. Like them, McClendonis an inf luential right-wing power broker - he helped fund the Swift Boat at tacks aga instJohn Kerry in 2004, donated $250,000 to the presidential campaign ofRick Perry, andcontributed more than $500,000 to stop gay marriage. But unlike his fellow energy czars,MoClendcn knows how to tone down his politics and present a friendlier, less ideological faceto the public. He secre tly gave $26 mill ion to the Sier ra Club to f ight Big Coal , and bui lt aGoogle-like campus for Chesapeake's 4,600 employees in Oklahoma City, complete with a63,00o-square-feot day care center, a luxurious gym and four cafes manned by cook-to-order chefs. He even voted for Barack Obama because he thought the country needed "aninspirational figure."At 52,McClendon still looks likethe whip-smart accountant he once aspired to be - crispwhite shirt, polished shoes, a toss ofwhite hair. Tohear him tell it, the cleaner-than-coal fuelhe produces will revive our faltering economy, f ree us from the tyranny offoreign oil andsave the planet from global warming. "Ihave a fossilfuel that makes other fossilfuelsobsolete," he boasts. ByMcClendon's estimate, the industry has drilled more than 1.2millionwells nation wide, yet sofar there have been only a few confirmed cases where things havegone wrong - despite dire warnings from scientists and environmentalists that frackingpollutes rivers and streams, contaminates drinking water and turns large:swaths offarmlandinto industrial moonscapes. "Where isthe mushroom cloud?" McClendon asks. ""\'Vhererethe dogs with one leg? VV"herere the people that have been maimed OT hurt?"He sipshis Bordeaux; his own private wine cellar once boasted more than 10,000 bottles. It'sa good riff, with some truth toit. But what Mcf'lendon leaves out isthe real nature of thebusiness he's in. Fracking, itturns out, is about producing cheap energy the same way themortgage crisis.was about helping realize the dreams of middle-class homeowners. PorChesapeake, the primary profi t in f racking comes not f rom sel ling the gas i tsel f, but f rombuying and flipping the land that contains the gas; The company is new the largestleaseholder in the United States, owning the drilling rights to some 15million acres - anarea more than twice the size ofMaryland. McClendon has financed this land grab withjunk bonds and complex partnerships and future production deals, creating a highlyleveraged, deeply indebted company that has more in common with Enron thanExxon Mobil....\sMcClendon put it in a conference call with Wall Street analysts a few yearsago, "I can assure you that buying leases for x and selling them for 5x or lOX is a lot moreprofi table than trying to produce gas at $5 or $6 per mill ion cubic feet ."~ecordingloto:;,."4rtoor.


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Over the past three years alone, Chesapeake has distr ibuted over $14bil lion in payments to lease and roya'lty owners throughout the country.The posit ive impact from natural gas goes wel l beyond the landowner.Chesapeake and its partners. for example, have invested almost $30bil lion in the search for clean, abundant and affordable natural gas injust the past three yeers. As a resul t o f Chesapeake's investments andthose of others in our industry, Americans enjoy the cheapest electrici tyand natural gas prices in the industr ia lized world. And 10the extentthere is an economic recovery underway in the U.s., our company andour industry have been among the most impor tant drivers of thairecovery.According to the U_S_Federal Reserve, natural gas pnces, which are ata 1D-year low this month, could save U.s. consumers a lmost $20 bi ll ionon home energy b il ls this year. Total sav ings to the US_ economy fromlow natural gas prices compared to current natural gas prices in Europeand Asia, Will i I iImlyexceed $250 b ill ion in 2 []12 - tha t's more than a$600 mil lion dai ly stimulus to the lf.S. economylAdd it iona lly . low natura l gas prices have led to a rena issance in USmanufacturing jobs. A recent report from PricewaterhouseCoopershighl ighted how affordable. domestic suppl ies of natural gas wil l saveu.s. manufacturers more than $11 b il lion per year over the next decade,in add it ion to crea ting a mill ion new jobs dur ing that same periodThis affordable energy supply is also projected to increase disposableincome for each household in the U.s. by as much as $2,.000 per year.

Bloomberg: Shale gas $100 b il lion savings to U_S_exceed tax cuts

Many aspects of Gasland have been repeatedly and thoroughlydelJunked by credible third party experts, but perhaps no area of the filmhas proven to be more d is ingenuous than the now infamous faucetl igh ting scene. Af ter a ll. according to the Colorado Oil & GasConservation Commission (COGCC), "Dissolved methane inwell waterappears to be biogenic [naturally occurring) in origin There are noindications of all & gas related impacts to water wel l."

Watch Gas/and director Josh Fox admitto ski rt ing ' the facts on f tammable faucets

The reporter is referring to two papers produced by Cornell UniversityProfessors Robert Howarth ana Anthony Ingraffea_ Chesapeake sharednumerous rebukes of the studies, including Carnegie Mellon University.the U_S_Department of Energy and one from a fel low Cornell Professor,Larry Cathles who concluded that the methane leakage rate promotedby the study was "unreasonably large and misleading."

Read Lar ry Cathles ' report cha llenging Howar th and Ingraf fea

After graduation, McClendon married his college sweetheart and went to work for a smallOklahoma City oil company owned by his uncle. Heworked in accounting for a fewmonths , but qu ick ly became what is known in the : industry as a "landman" - the personwho finds and negotiates the leases that allow drillers to extract oil and gas. "Landmen werealways the:stepchild ofthe industry," he says. "Geologists and engineers were the importantguys - but itdawned on me pretty early that all their fancy ideas aren't worth very much ifwedon't have a lease. Ifyou've got the:lease and I don't, you win."

As recently as a decade ago, many energy experts believed that America was nearlypumped out - that the only oiland gas lefthere athome was too difficult and tooexpensive to get out ofthe ground. Until we can ferment synthetic fuels with geneticallyengineered yeast or develop solar cells as cheap as Frisbees, the argument went, wewould bes tuck buying oil f rom the Arabs,Geologists had long known there was a lot more energy buried deep underground - theycalled these subterranean rock layers "the kitchen," because i t was where the gas and oilwere actually made, before:they bubbled up and gathered in reservoirs. But nobody knewhov v to extract these deep reserves+ at least, not in a way that made economic sense. Then,in the 19805. a Texas wildcat ter named George Mitchel l began working on a way to dri ll amile down into the earth, turn the drill sideways, and keep drilling horizontally into a thinlayer ofshale. Next, he pumped in a few million gallons ofwater and sand under enoughpressure to shatter the rock. VVhenhe pumped the water out, gas and oilflowed out oftherock's fractured pores.The new technique ignited a boom in drilling for "unconventional" sources ofgas and oil:Shale gas now provides 25 pes-cent ofAmerica's gas supply, enabling the Ll.S. to pass Russiaasthe wo-ld's largest producer ofnatural gas. Initially, even environmentalists wereenthusiastic, Fl-ed Krupp. who heads the Environmental Defense Fund, called the gas booma "potential game changer" - a cleaner energy source that could replace coal and oilfor afew decades, until the cost of wind and solar power dropped enough to put fossilfuels out ofbusiness. But exactly how much gas and oil .we can continue to squeeze out ofdeep sourceslike shale rock isunclear. In his State ofthe Union address, President Obama estimated thatthere's enough to fuel the country f01"nearly 100 years. T. Boone Pickens, the energybillionaire 'i.....o has a major stake in Chesapeake Energy, offers an even more sweepingassessment. "Natural gas," he tells me point-blank, "is the solution to America's energyproblems."At first, when oil and gas producers confined themselves to tracking in the wide-open spacesofTexas and Oklahoma, nobody much gave a damn. The trouble started in 2007, whendrilling operators made a run onthe Marcellu.sShale, a broad region ofgas reserves thatstretches through Pennsylvania and up Into Ohio and New York Almost overnight,fracking's technological miracle was recast asthe next great environmental menace:..Lffi~r'Oscaecnnmirrated-film @aslandte::.\'oPnFed;J:h-e';'"dOO",k'ilirrdellbM1y...Jof,;:lfu:'a~clrlrrgj"ir",esidents~O'-~ould,yteralJy:light the;da1l~e1;Sl"O'",;fue";'tlmn:l


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Rolling Stone refers to Deborah Rogers as a "former investmentbanker: conven ient ly fai ling to mention tha t Ms. Rogers is also an act ive"steering committee member" of the Oil and Gas Accountabil ity Project(OGAP), an activist g roup that considers natura l gas to be a " fi lthyenergy" source , and has vigorously worked in New York andPennsylvania to institute bans on hydraulic fracturing.

See Deborah HOllers' agenda on I .he agenda at a2010 EARTHWORKS summit all oil and lias

/rollingstone/index.html

In1982,McCleudon struck out onhis own as a landman. Hewas 2,3, living in a modesthouse, making $24,000 a year. " Ibought a typewri te r, rented an off ice, bou.ght some mapsand basically just started to follov....around other companies, trying to see \....at crumbs theywould leave," he says. He calledhis tiny outfit Chesapeake Investments - for no reasonexcept that "I a]'.....ays loved that region of the country." He soon forged a partnership withanother landman, Tom lNard. "'Ne worked together forsix years," "\'Vardrecalls, "doingdealsfor scraps ofland in Oklahoma, faxing each other in the middle ofthe night. Eventually, wegot the hang of it."\'Vhen the tracking revolution began.,McClendon says, he andWard quickly realized that thenew technique offered them an opening. In the natural gas industry, the advantage had longgone to operators with the geological and engineering expertise to pinpoint gas reservoirs.Now it didn't matter where you drilled - the gas was pretty much evenly distributedthroughout the earth's deep shale layers. The edge suddenly belonged to operators who couldlockup as much land as quickly and as cheaply as possible - precisely the skill. that lardand McOendon had developed scraping around Oklahoma land deeds. In 1989, the two menchipped in $50,000 to form a new company, Chesapeake Energy, to focus primarily onshale gas. It grew like a SiliconValleystartup: By 1993,when Chesapeake went public, thefi rm was valued a t $25 mil lion.Prom the outset, financial risk-taking was as much a part ofthe firm's success astechnological innovation. Chesapeake was the first gas-exploration company to issue high-yield junk bonds, which gave it a steady cash flowto pay for leasing and drilling. "I'obe ableto borrow money for 10years and ride out boom-and-bust cycles was almost asimportantan Insight ashorizontal drilling," McClendon says. "For the first time, we were ableto build acompany where, if something didn't work for a little bit oftime, we couJ.dregroup and findsomething that did work."By 2003. Chesapeake had expanded deeper into Oklahoma and Texas, as well as Louisianaand Arkansas. "They became a land-acquisition machine," says Phil Weiss, an analyst atArgus Research who has followed the firm for more than a decade. The:key to success wasdiscovering new gas plays before other companies, then leasing vast tracts ofland as quicklyand quietly as possible.Chesapeake's land operation became almost as technologically sophisticated as its drillingoperation, with a huge databank ofproperty records and mineral-ownership rights acrossthe country. "Thegoal is not just to pump gas.v explains Pickens. "It's also to lockup futurereserves." The company's financial statements estimate that it currently holds -drillingrightsto as much as 100 trillion cubic feet ofgas - enough to supply the entire country for fiveyears_At Chesapeake, McClendon ope-ated more like a land speculator than an oilman. "Ourapproach isto go in early, quietly and big," says Henry Hood, who directs Chesapeake's landpurchases. "We liketo get our deals signed before anybody knows what we're up to'and triesto run up prices." Butbuying up such huge swaths ofland requires huge chunks ofcash -and the money often comes not from gas production, but from selling offland orgoing intodebt. After Chesapeake drills a few wells in a region and "proves up" the reserves, it hawksthe leases to big oil and gas companies looking to get into the shale-gas game. In 2010, itpocketed $2_2 billion by selling land itbought in Texas for $2.,000 an acre to one ofChina'slargest oil companies for $11,000 an acre. "That's a five-to-one return on investment," saysJeff Mobley, Chesapeake's senior vicepresident for investor relations.In recent years, the company ha s also sold offthe future proceeds it expects to receive fromthousands ofwells - a complex financing deal that enables it to borrow cash now withoutcounting the debt it will owe when ithas to drill the wills later. The very first deal, madewith Deutsche Bank and a Swiss investment firm, brought Chesapeake more than $1billion.inreturn for 15years of future production from 4,000 wells, "It's not illegal, but most gasand oil companies don't do it," .saysBob Brackett, an analyst with Sanford C. Bernstein & Co"Chesapeake's poor credit rating pushes them to tum to unconventional financing."To make :itsoperations even riskier, leaseholders like Chesapeake are required by law to drillonthe land within three to fiveyears after acquiring the rights or wind up forfeiting thelease. ~'Fflg"morebndllrre.y acqml",e7the-mOl'ecapit-a3the;y'TI-ave~ upITont~'says~DB5Oralj~Roger.s,."fOf'nl8'rin::v-e.sfmenf6a-Ii:k---erwno;Qea:1"n ii:PJ~owprBca:riou:sOO6Sapeike-'?IILtu,sine~rifodeJ::':i;;lj[as'!i.",,:hen~herl(rol1ed:..:iflLoh~fitrn.Js-:finan0.a:lll'5tat'einents'fte;:t.h 8 > " " " - C - G ~ m p a r f S l . . '~su_tl!k~&1E'rrea~lie:'F'Pr,operlY4W'lil~a&:'Then they have to drill it or loseit, which furtheradds to capital costs. And the more they drill, the more gas they produce. which lowers theprice ofgas:and further reduces their revenues. In the end, this drilling treadmill isdifficultto sustain for long - especiallyif the wells:underperform, or the resource turns out to not beasvaluable asthey thought. "Thissort ofgambling suits McClendon, who is known for placing big bets - and sometimeslosing big. During the financial meltdown in 2008, McClendon was forced to selloff94percent ofhis stock in Chesapeake - some 33million shares - tor $550 million to meet amargin call on his personal investments. (Dilly a few months earlier, the stock had been
http://www.chk.com/rollingstone/index.htmlhttp://www.chk.com/rollingstone/index.html


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Chesapeake responds to Rolling Stonewortn :j:i2. I:lUnOH.)trespste the dramatic setoacx, t.nesapeases board boosted Mct.Jendonsannual salary to $112 million, making him the highest paid CEO at any S&P soo companyat the time. The pay hike, which sparked a shareholder Iawsuit, was scorned by 1N all Streetanalysts. "McClendon clearly thinks ofChesapeake as his own personal piggy bank," saysone. In the end, that piggy bank may prove to be empty: In February, Chesapeakeannounced that, because oflow gas prices, its revenues will fall $,3.,5billion short ofitsexpenses this year.

To compare this incident to the BP spi ll is both mis leading andirresponsible An independent report by SAIC concluded that: "Overal l,few impacts were rea lized due to the release of f luids from the ATGASwel l con trol inc ident Those tha t did occur were local ized , of shortduration, and were confined to surface waters and shallow soi lssurrounding this site. There were no ecological impacts to TowandaCreek or the unnamed tribu tary; nor were any impacts noted to nearbyor regional water wel ls or spr ings."The PADEP f ine for the Atgas wel l con trol event in Bradford County was$123,000 and $67,000 in expense reimbursement. In i ts press release,the DEP noted "Fluids from the well mixed wrth rainwater and entered anearby unnamed tributary to Towanda Creek and Towanda Creek itsel f.On April 20, DEP detected levels of total dissolved sol ids, chlor ides andbar ium that were higher than background levels a t the mouth of thetributary, where It enters Towanda Creek. Subsequent tes~ng furtherdownstream and on the fol lowing days showed these levels returned 10normal background levels."

Read SA'IC's independent report on ATGAS


Until a f ew y ears ago, Bradford County was a forgotten landscape of struggling dairyfarms and strip-ma'I nail salons dotting the Susquehanna River in northeastern

Pennsylvania. Then, in '2007, gas speculators looking for the next big play 'Zeroedin on thegeologic forma tion cal led the Marce llus Sha le , a gee -foot- th ick laye r ofgas -soaked rock tha tunderlies mu.ch of Pennsylvania, as well as parts ofOhio and New York. Chesapeake wasone ofthe first operators to rush into the region, buying up nearly two million acres oflandinjust a few months. Sincethen, the company has drilled more than 600 wells here, and ithopes to drill thousands more, virtually covering the region with rigs. "In 10 years,"McClendon says, "the Marcellus is likelyto become the most productive natural gas field inthe wor ld ," The county, populat ion 62,000, has a lready been transformed f rom sleepyfarmland to industrial boomtown: the roads crowded with trucks hauling water, the raillines rumbling with trains hauling sand, the roadside bars overf.owing "..ith drill hands fromOklahoma and Texas, the hotels and motels booked.for months in advance.Chesapeake's operations in the region are run out ofan olddepartment store in the countyseat ofTowanda, located onthe banks ofthe Susquehanna some 20 miles south ofthe NewYork state border. It feels more like a military outpost than a corporate office, ~....ith dozens ofwhite SUVs emblazoned. with the Chesapeake logo parked in rows out front. Inside, officesare separated bythin wallsthrown up in a hurry, many ofthem decorated with arty shots ofdrilling rigs in pristine landscapes. In these parts, the company's PR efforts are squarelyaimed at quelling any environmental fears. Tounderscore how safe feacking is, Brian Grove,Chesapeake's director of corporate development in the Marcellus region, explains that thelayer of shale being drilled is 7,,000 feet beneath the surface, whereas drinking ........ater rarelyruns deeper than 1,000 feet. "That leaves .6,000 feet ofrock in between," he says. "There isno way that any fluids are going to migrate from the shale rock up to the drinking-wateraquifers."Grove, an affable guy in a Chesapeake shirt, alsopoints out that the entire length ofthe wellbore is encased in heavy steel, to prevent gas from leaking into the drinking water. VVhat'.smore, he adds, the top 750 feet ofthe well.where it's most likely to pass through aquifers,gets a triple layer ofsteel - a precaution the company took after it had some problems withmethane near the surface getting into drinking water, In short. he suggests, the fluids andgas traveling up the ,.....el l bore are completely isolated from the surrounding earth byup tothree layers ofheavy steel. "It's a closed system," he says. "Done right, milling and frackingdoes not pollute drinking water." This, in essence, is the mantra at Chesapeake: Everythi.ngwe do is safe and ettvirontnentally responsible. Trust us.One afternoon, Grove drives me out to the N omac 7 rig, which is drilling about 15 miles eastof Towanda. Iclimb up into the operations box onthe rig and watch as the driller guide-sabit a miledown into the earth through an eight-inch hole. Once the drilling is finished,millions ofgal lons of f raeking f luid - water and sand, mixed Veitha host of chemica ls tha tmake the water "slippery" - will be inj ected deep into the well to fracture the undergroundshale. The wastewater, known as flowback, \....ill then be pumped out, and gas production wilbegin.The problem with a n sophisticated technology, of course, isthat things inevitably go wrong.==B"aS~pril~a"c?fi'esap~aKe,~lt!:i_ii:'Bf.aafed:@Oun~uff~re'ijita"-FfiiasSive~b10Wo1:lfffiw&~sliofe,natu-I"m gaVe'I"si~f~1ia.t~appeneal:D'B-p.::iwtliWG,@f~eiJllie.3.(f!!.i'Zflange"failetl;rra1i'd"OXiC'~'V"ate;r~gu~tIe:d:.u.ncontrollabl-ft0If}ntfrt~eNOtr':Severa"3.ay.sbe.fo~'WOrkert"i"I Ie: r:@'aMB'o~15ring"'ifo."iElderclZln't :Frill S -~a .:m il i e s w 8 :f e >ne " i' a cu a te d - fr om j_ l fr l ci t~ome . .5 t ;1a.\'ro;etre.gaJloil>oNtackifrlJ'flllitl-.;plll~d"tn~'iIr"D'firiling p:a5tu'i'e.I'a'ftd::strean\:s.?-,"F'e:n",yl""llia"liil:'ea"th'e~oiiijI'iIh:l"$25b;r;bd'-""l'h1;'lligfil!1.t'lWlf"alty--a[Iowed'lindi'j :s"tilm1a~w="Vell failures, in fact, are fairly common at drilling sites. I ask Anthony Ingraffea, anengineering professor at Cornell University and a former consultant for oil-service firms, tolook at the 141 violations leviedagainst Chesapeake in Pennsylvania last year. According toIngraffea, 24 ofthem involved failures ofwellintegrity. "When a well loses 'integrity, :itmeans the seal is broken and something - usually methane, but it could alsobe flowbackwater - is leaking out underground," he says. "And it's impossible to know where itis going,or in what amounts."

"-rt'-:S''3J.s6'iffip''ai.'illle ~O"lillo"W'Wliat"'cliillliiea'lS~,,"e'IlOV;illg"ou1"of'tITh""*""ellSfOT'h"il';,qoc"" roared allday and night , When the gas was f la red off before product ion began,the flame was 50bright in the night sk-y that she could see it glowing red on the horizon 12miles away.Vargson noticed not long after production began in 2009 that water in the trough out backstopped freezing on coldnights. Inside the house, the faucet began to sputter and spit. Herhusband seemed to have a lot ofheadaches, and Vargson felt nauseous ifshe stayed in theshower for more than a few minute-soActing on a tip from a friend, she had her water te-stedItwas loaded with methane,"Idiscovered I could light my water on fire,"she says. "AndI still can." Todemonstrate, shewalks overto the faucet in her kitchen, lights a match and turns onthe faucet. vVhoosh! Aflame shoots out like a blowtorch.Vargson stopped drinking the water after she discovered the methane - but tests showedthat her water also contained elevated levels oftoxic chemicals:likeradium, manganese andstrontium. Chesapeake agreed to supply Vargson with fresh drinking water, delivered to herdoor in five-gallon jugs once a month, but it denies any re-sponsibilityfor the elevatedmethane levels.ri[10lii_1[J;)~Il,]Th;~ogi~--'iflaB'lexarrkina1fili~ri!.swellIDl"t'a'new"2:.i

For Vargson, and many homeowners just likeher, fracking has proved to be a full-blowndisaster. Since she signed up with Chesapeake, her back pasture has become a full-timeindustrial zone, her water supply has been contaminated, and it will be virtually impossibleto sell her home, since i t l acks drinkabl e water, What's more, her well t urned out to be a dud:The landman from Chesapeake who soldher onthe deal failed to mention that 80 percent ofa 'i.....ell's gas is often depleted \.....thin the first two years. In all likelihcod, Vargson's wellwillend up being a money-loser for Chesapeake, either soldoffto another company or refrackadin an attempt to dislodge more gas. Either way, the royalty checksthat Vargson and herhusband were counting on for retirement " W i l l hardly pay fOTdinner and a movie. "\'Vemadeabout $1,400 the first month, and it's been all downhill from there," she says. Her check forlast November: $'70.I ask her how she feels about the promise offracking novv,"I think the industry is destroyingDUll" water resource to extract a gas resource, ,.,she says. "Andin the long run, I don't thinkthat's a very smart trade."As fracking has comeunder increasing attack, McClendonhas usedhisfinancial clout to

keep the drills pumping, Chesapeake spent only $2 million on federal lobbying last year- about average for a company its size- but ithas contributed almost as much topoliticalcandida tes and PACs in the current e lect ion cyc le as the Koch brothers, (McClendon makes iclear that he won't bevoting for Obama this time around.) In Pennsylvania, Chesapeakehas contributed more than half a million dollars to state and local politicians since 2008 -the highest total in the industry.Mcf'Iendon, who funds an industry lobbying group called America's Natural Gas , A . .lliance,has also used his cash to attack Big Coal, hoping to topple his chief competitor and refit coalplants to run on natural gas. In :2007,when a Texas utility threatened to build 11 new coalplants, he won over many clean-energy activists by spending $1million on a "Coal IsFilthy"media bli tz. The $26 mill ion he gave to the Sie rra Club helped fund i ts "Beyond Coal"campaign, which has:blocked more than 1,50 new coalplants. But in 2010, when


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M,cCle:nrlontried to cement an alliance with 'environmental groups at a two-day conferencein Colorado, the plan backfired. McClendon struck many ofthe assembled activists as aloofand arrogant. A few \....eekslater, after he backed away from a promise to lobby for tougherlaws requiring the industry to disclose the chemicals it uses in fracking fluid, one topenvironmentalist sent an e-mail to other participants calling McOendon "a pathologicalliar,"But McClendon's wont enemy may not be environmentalists or coal companies, but his ownrecklessness, He played a leading role in creating the tracking bubble by hyping the promiseofendless natural gas and sweet-talking Wall Street into funding a massive land grab. Ifthebubble bursts, Chesapeake's stockholders won't bethe only ones who pay the price - theshock waves v - " w befelt throughout the ,economy, from homeowners who rely on naturalgas for heat to manufacturers 'i...ho were betting on it to power their-new factories. Thanks toMcClendon's gambles, Chesapeake is struggling to cover $10 billion in long-term debt. Inrecent weeks, the company has announced it will sell off more land and shut down someproduction. McClendon also hope-sto increase demand and boost gas prices by promotingcars and power plants that run on natural gas, and by cutting deals to export gas to Europeand Asia, where prices are five times higher than in the U.S.Turning vast stretches of Pennsylvania into a pincushion in order to,ship gas to,Chinadoesn't exactly mesh with McClendon's emphasis on making America energy independent.But unless something changes, that's precisely where things are headed - on a grand scale."In the Marcellus, the boom has just begun," says Ingraffea, the Cornell engineer. "Theideaisto drill everywhere.'-' Tougher laws and stricter enforcement could mitigate the damage top-eopleand the environment, but widespread drilling - 'esp-eciallyat the boomtown pace thatMcC1endon is pushing - will inevitably result in mishaps. " \ ' \ l e D casings will fail. Prackingchemicals will be spilled. Drinking water will be contaminated. Methane will seep into theatmosphere, accelerating global warming. \'Vhen you add it a n up, you can see why manyenvironmentalists and clean-energy activists no longer see natural gas as a bridge to,a moresustainable future. "It's time to stop thinking of natural gas as a 'kinder, gentlerenergysource," M:ikeBrune, executive director ofthe Sierra Club, recently blogged. "Instead ofrushing to see hov...quickly we can extract natural gas, we should be focusing en how to besure we are using less."That kind oftalk enrages McClendon. ""\'Vhatdoes that mean, Mike?"he asks angrily when Iask him about Brune's corrrment over dinner at his restaurant. "Does that mean wemaximize the use of coal? That we fill the countryside with windmills and kill all themigratory birds and double electricity prices while we do it? What's the human costtodoubling electricity prices? What's the human benefit to halving them? I think those areenormously important questions that are never imposed atthe same time people say,'Fracking is bad.'"I look at the $400 bottle of \......ne on the table. Much of what McClendon says is misJeading-wind power is as cheap asgas in some places and falling fast, and cutting back en gasdoesn't have to,mean burning more coal. But his plan is clear. He's not going to back offuntil every last square foot ofshale rockin America isdrilled and fracked and sucked cleanofgas. McClendon may rely on sophisticated new drilling technologies, but at heart, he'sdriven bythe same -dream of endless extraction that has gripped oil barons and coalcompanies since the dawn ofthe Industrial Revolution. In the end. allhis talk of energyindependence and a cleaner, brighter future boils dos...n to a single demand, as simple as itisdisastrous: Deill, baby, drill.This stor'Y is_fronl the March 15} 2012 issue ofRoW.ng Stone.

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Chesapeake Energy responds to Rolling Stone article