Chesapeake Energy – Paper 2

Over the past year, the price of crude oil has plummeted. Fiscal year 2014 ended with oil prices soaring around $90 per barrel whereas, the same unit costs roughly $40 at its current price. For most Americans the concept of cheap oil is incredibly attractive. Consumer spending at the pump is directly related to discretionary income which in excess, can boost economic growth in the United States. On a surface level, it seems that the big oil companies have lost to the will of the domestic consumer. Declining prices have deteriorated Big Oil’s profit margins resulting in further subsidies and tax cuts provided by the U.S. government. While oil prices are notorious for fluctuating widely, the most recent decline in price is due to the surge of global supply brought on by domestic extraction of oil from shale deposits, better known as fracking. While fracking has created tremendous wealth it is also under fire from activist groups, political candidates, and local communities for its dangerous externalities. For many, fracking has brought industry to otherwise desolate regions of the country. In the early onset of the industry, there was hope for the future of fracking— that it could positively change the lives of millions of people. On the contrary, shale based oil production has brought about a bleak reality of contamination, pollution, and social unrest to its local communities. Among other factors, the influence of large corporations such as Chesapeake Energy has greatly impacted the extent at which fracking has been implemented and the conditions under which its employees live and work. In this essay I will analyze the effect of Chesapeake Energy on the living conditions in fracking intensive regions and the ethicality of its decision to continue extracting oil amidst social and environmental revolt.

Founded in 1989 by Aubrey McClendon and Tom Ward, Chesapeake Energy’s initial focus was on natural gas exploration and production using innovative horizontal drilling technology. Much of the company’s early success was attributed to its “growth through the drill bit strategy which involved purchasing large leaseholds in Oklahoma and Texas to conduct exploratory drilling and develop new wells.” (1) As the company aged, it invested heavily in acquisitions to promote the extraction of unconventional gas and oil reserves onshore in the United States. Chesapeake Energy states as its goal to “create value for investors by building and developing one of the largest onshore natural gas and liquids-rich resources bases in the United States.” (2)  In doing so, Chesapeake invested heavily in the exploration and ultimate discovery of large natural gas reserves in shale formations across the United States.

During this time, the oil and gas industry saw rapid innovation in satellite imaging, 3-D surveys, and techniques for vertical and horizontal fracturing turning once economically unfeasible reserves into viable drilling options. (8) As a result, Chesapeake Energy was able to capitalize on such technological advancements to implement a new method of oil extraction known as fracking. “Hydraulic fracturing is the pumping of high-pressure water, sand and chemical additives into cracks within shale formations to expand and capture deep natural gas and/or oil deposits.” (2) The fractures induced by high-pressure, high volume hydraulic fracturing “provide the conductivity necessary to allow natural gas and oil to flow from the formation to the well and then up through the well to the surface.” (11) The potential of increased natural gas extraction is extensive. At current oil prices of $40 per barrel the projected 345 billion barrels of global shale-oil reserves is worth approximately $14 trillion –or $31 trillion at $90 per barrel. As such, the economic potential of harvesting shale based oil is immense.

In addition, public concerns regarding the environmental impact of fracking have complemented the rapid growth in energy production. According to the Energy Information Administration (EIA) U.S. shale producers are becoming more efficient by drilling bigger and faster wells, however, some at a significant cost to local communities. According to Russel Gold of the Wall Street Journal, “over 15 million people in the United States live less than a mile from a well that has been drilled since 2000” and as a result, fracking is one of the most debated topics in the United States. While the Environmental Protection Agencies assures society that “hydraulic fracturing activities in the U.S. are carried out in a way that have not led to widespread, systematic impact on drinking water resources,” (9) many environmentalists claim that hydraulic fracturing can pollute groundwater, release pollution into the air, and cause unsettling ground movements. While many of these issues are not unique to nonconventional oil production, “the scale of hydraulic fracturing operations is much larger than for conventional exploration onshore,” (11) and as stated by the Annual Review of Environment and Resources “extensive industrial development and high-density drilling are occurring in areas with little or no previous oil and gas production, often literally in people’s backyards” (11) and as a result, public pressure for oversight has dramatically increased.

In order to fully understand Chesapeake Energy as a corporation, it’s important to highlight the personal qualities and aspirations of its founder, dubbed the “fracking king”, Aubrey McClendon. According to his obituary from Bloomberg, “he was a prime example of the buccaneering breed. He gambled big in the oil business –and lost—but in the process he changed the world.” (7) McClendon started his career investing in land through signing leases for oil drillers in Oklahoma. At 29 years old, he founded Chesapeake Energy and was an early proponent of hydraulic fracturing. As Russel Gold states, “McClendon wasn’t the inventor of fracking, but he was its chief apostle. He led the energy revolution that swept North America for the past decade.” (5) While it’s undeniable that McClendon helped transform the energy industry, he also broke the rules and took enormous risks. In April 2012, McClendon was accused of borrowing between $1.1 and $1.4 billion against investments in company wells. (1) He then used the loan proceeds to pay for his personal stake in wells drilled by Chesapeake. The arrangement was noted for giving McClendon a personal stake in every Chesapeake owned well. The arrangement therefore loosened shareholder trust in management for its CEO was able to negotiate questionable financial deals with other executives and external financial institutions. As a result of the corporate governance conflict, Chesapeake Energy’s shareholders decided to move the company in a new direction, away from risky land acquisitions and shady financial deals, towards a focus on the company’s core mission. In retrospect, the ousting of McClendon was beneficial as he was recently indicted on a charge of conspiring to rig the price of oil and gas leases – followed shortly by his untimely death. Similar to the personality of its founder, Chesapeake Energy operated in a high risk environment unafraid to exploit others in pursuit of self-gain.

For residents of economically depressed towns in North Dakota, Pennsylvania, or Texas it’s hard to imagine what the shale boom hasn’t done to the region. The extraction of oil has “minted millionaires, paid off mortgages, created businesses, financed multimillion dollar recreation centers, and built new hospital wings.” (12) The influx of economic activity has challenged the exodus of residents to urban areas. Instead, the energy industry has created widespread migration towards the shale rich regions. To Susan Connell, a big-rig driver in Fort Berthold, North Dakota the shale boom was an unpleasantly disguised blessing. As production in the Bakken oil field ramped up, the need for semi-truck operators increased rapidly. As the industry developed into a full-scale mining operation, Connell was offered various jobs transporting water and fracking fluids throughout the oil patch. (3)

While the newfound industry was effective in creating jobs in local communities, Chesapeake Energy and its competitors outsourced the majority of profits to corporate headquarters to satisfy executive compensation plans. The costs, however, remain in oil producing communities. In addition to economic consequences, fracking is host to many environmental externalities such as contaminated water supplies and ground trembles. Lastly, as the global supply of oil increases, Chesapeake Energy and its competitors are forced to produce oil below cost. In turn, the “Walmart effect” is putting increased pressure on the supply chain to extract natural gas at lower costs putting increased strain on workers’ wages and living conditions. Chesapeake Energy has made numerous decisions dictating the outcome of these aforementioned externalities. I will now examine each one and assess the ethicality of the energy company’s actions as they relate to consequentialism.

Consequentialism is the view that morality is all about producing the right kind of overall consequences where the point of morality is to spread happiness and relieve suffering, or create as much freedom as possible in the world. (6) In the case of outsourcing profits from oil producing regions to company headquarters, it’s clear that Chesapeake Energy is not producing maximum happiness. As addressed by Edwin Dobb of National Geographic “profits are flowing to oil company executives living in Canada, Texas, and Oklahoma, as well as to shareholders everywhere. The costs, by contrast, are localized.” (3) As a result of McClendon’s corporate governance scandal, he owned rights to every Chesapeake drill further increasing his propensity to retain profits. Aubrey McClendon was worth around $500 million at the time he died—Connell was paid $2,000 a week. It’s clear that there is a wide divide between oil executives and the blue collar employees that work for them. While a wage divide seems commonplace in today’s corporate society, ground workers in oil rich regions are exposed to significantly more risk, whereas 545 people died between 2008 and 2012 according to Lise Olsen of the Houston Chronicle. (10) In addition to outsourcing profits, Chesapeake Energy and its competitors have been accused of polluting local water sources as a byproduct of fracking. As Edwin Dobb states, “a recent U.S. Geological Survey study of decades old wells in eastern Montana found plumes of salt water migrating into aquifers and private wells, rendering the water from them unfit for drinking.” (3) In addition to published studies of water sources near fracking sights, community members are fearful that their local water is being contaminated by dangerous byproducts unbeknown to the energy companies. To make matters worse, oil companies are not required to disclose the contents of their proprietary blend of chemicals used in the fracking solution. While it’s unclear that these chemicals pose a real threat, the close proximity and reputation of “Big Oil” is enough to cause serious concern to those living in oil producing regions.

In this instance it’s clear that Chesapeake Energy’s primary goal was to maximize profits and through the extraction of oil, they were able to create significant wealth. This wealth came at the cost of environmental unrest and the exploitation of blue collar workers. In terms of consequentialism where “the only thing that really matters about an action is its results,” (6) Chesapeake Energy acte d ethically. However, similar to the Encyclopedia of Philosophy, I believe this definition is confused, for consequentialism holds that actions do matter, because they are among their own consequences. If only personal things mattered, then happiness and misery in this life would not matter at all, but surely they do. In this case, the disparity between executives’ actions and oil workers’ actions do matter and therefore Chesapeake Energy acted unethically to dramatically outsource profits from oil producing regions.

Lastly, it’s important to consider the effects of continued extraction of natural gas from shale deposits. As production increases, the global supply of oil has increased as well creating a dramatic decrease in prices. As oil prices decline, domestic energy producers have become less profitable and are therefore less able to service their debt obligations resulting in an increased risk of bankruptcy. The ethical dilemma results from domestic energy companies’ unwillingness to curb production to allow the price of oil to return to equilibrium. While looking at this situation through a consequentialism perspective, I think it would be in the best interest of Chesapeake Energy and its competitors to temporarily curb production. The fracking industry has created hundreds of thousands of jobs and it’s important for oil companies to remain solvent in order to continue operations into the future. If done properly, the temporary lapse in production will cause oil prices to return to equilibrium creating a much more stable market for oil. In reality, domestic oil producers have continued to produce oil and as a result, wealth is being created, but at the cost of workers’ standard of living. As prices decrease, the pressure to reduce costs along the supply chain increase, resulting in the termination of jobs, decline in wages, or worsening working conditions. In consequentialism, if there is truth in saying that we should “love all people”, we should do what is good for people and not bad for them. In this case, many workers will be able to keep their jobs while sacrificing quality of life.

Overall, the development of fracking has radically altered the landscape of oil producing regions. While many people in similar situations as Susan Connell had many hopes for the economic boom, the reality appears to be vastly different.


  1. Blaylock, Brian. Earle, David. Smith, Danielle. Harrison, Jeffrey., Chesapeake Energy Corporation. Robins School of Business., 2014. Print.


  1. Chesapeake Energy. 2012 Form. 10-k. Oklahoma City, Oklahoma: Chesapeake Energy Corporation: 2.


  1. Dobb, Edwin., The New Oil Landscape., National Geographic., Mar 2013., Proquest. Print


  1. Gold, Russel. “Fracking Has Had No ‘Widespread’ Impact on Drinking Water, EPA Finds.” WSJ. Wall Street Journal, 4 June 2014. Web. 14 Apr. 2016.


  1. Gold, Russel. “How Aubrey McClendon Led Today’s Energy Revolution.” WSJ. Wall Street Journal, 4 Mar. 2016. Web. 14 Apr. 2016.


  1. Internet Encyclopedia of Philosophy., Print.


  1. Johnson, Luke., Swashbucklers Who Failed but Made the World Better. Sunday Times., Mar 27. 2016. Print


  1. Kay, M. 2013. Industry Surveys-Oil & Gas: Production & Marketing. New York: S&P Capital IQ Industry Surveys.


  1. “Natural Gas Extraction – Hydraulic Fracturing.” EPA. Environmental Protection Agency, 1 Feb. 2016. Web. 15 Apr. 2016.


  1. Olsen, Lise. “As Fracking Grows, so Does the Number of Oil-field Worker Deaths.” The Columbus Dispatch. Houston Chronicle, 11 May 2014. Web. 15 Apr. 2016.


  1. Robert B. Jackson, Avner Vengosh, J. William Carey, Richard J. Davies, Thomas H. Darrah, Francis O’Sullivan, and Gabrielle Pétron Annual Review of Environment and Resources, Vol. 39: 327 -362 (Volume publication date October 2014)


  1. Brown, Chip. “North Dakota Went Boom.” The New York Times. The New York Times, 02 Feb. 2013. Web. 15 Apr. 2016.

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