Chesapeake describes response to low natural gas prices

TOWANDA - Low natural gas prices are resulting in some changes at Chesapeake Energy.

This week, The New York Times News Service reported that Chesapeake Energy announced that it would cut gas production "in response to plummeting prices."

In a news release, Brian Grove, Senior Director - Corporate Development for Chesapeake based in Chesapeake's Towanda office, explained the effects locally.

He said that "in response to natural gas prices that are at their lowest in a decade, Chesapeake is redeploying some of its rigs from areas with dry gas to expand production in liquids-rich areas, which are delivering superior economic returns."

He continued: "We currently have 17 drilling rigs in northeastern Pennsylvania and will be reducing our rig count locally to 12."

Grove said that adjustments will be made in field construction to reflect changes in the level of new well development, but projects underway will continue as normal.

"While we are not actively seeking large amounts of new acreage, a limited amount of leasing activity will continue in many areas to complete planned drilling units," he stated.

These steps will begin immediately and will be largely completed by the end of second quarter in this area, he said.

"We have more than 1,500 employees in Pennsylvania and more than a dozen facilities. While some employees will be redirected in their activities (e.g. drilling crews), no layoffs are planned. In fact, we plan to hire 1,200 people in our Eastern Division in 2012."

"We have been an attractive JV (Joint Venture) partner to global companies because we have generated compelling returns on invested capital," he said. "If we are to ensure that Chesapeake can continue to be the leading driller for new U.S. natural-gas supplies and ensure reliable supplies to our varied customers, we must shift our focus from domestic dry gas that is selling at a decade low to other products and our drilling focus to more liquids rich project areas that also still produce a fair share of associated dry gas."

He explained what effects will be seen.

"Vendors could possibly be affected, however, service and supply companies, however, should experience increased demand from us as we add rig count in our liquids-rich plays," he said. "Vendors typically adapt their operations to serve areas where there is the highest level of drilling activity."

"We will expand our drilling activity again locally when we can earn a return on investment that is competitive with the ROI (Return on Investment) from drilling in liquids-rich plays," he said. "This depends on many factors, including service cost, liquids cost, dry natural gas pricing and the play-specific regulatory/ permitting environment."

"We are not anticipating any complete well shut-ins, but we will bring wells online at lower production rates and some wells will be 'choked back,' which means they will produce through a smaller wellhead orifice that restricts the flow of natural gas," he continued. "The exact number of potentially affected wells has yet been determined."

Grove said, "Royalty owners should keep in mind that the volumes involved in today's announcement include only a portion of our production. For those who have producing wells or who have wells awaiting completion or a pipeline, this action will actually benefit them over the long term since we will essentially be storing or deferring their production until they can be sold into a higher-priced market. CHK's financial interests are completely aligned with royalty owners'."

"This is a dynamic and changing situation based on shifting market conditions, completion of pipeline projects, volume of new wells coming on line, and individual production results," he said. "It may not be possible to proactively alert all lessors in affected units, but we will do our best to address the questions we receive."

Grove stated, "Additionally it is important to note that we are not reducing any time, attention or focus away from our production sites. We will continue to operate them at the highest levels of safety and environmental concern, with the most professional and highly trained staff in the industry. There are no budget cuts in this regard."

"Over the past three years, our dry-gas drilling plans have been designed to hold our most valuable leases by production, and that has been largely accomplished," he continued. "There are leases that we may choose not to drill, but those decisions have been regularly and routinely made in the past based on drilling data and production results. A major factor in selecting the number of dry-gas rigs that will remain in each play in 2012 was to hold the remaining leases of sufficient value that are not yet held by production."

"We have made substantial investments in shale gas and believe in its future," he said. "Dry gas assets would be extremely undervalued in today's market. We believe in the long-term value of natural gas and prefer to hold our gas assets for a return to higher prices. The steps we are taking right now are designed to maximize the value of our asset portfolio and preserve our long-term commitment to the natural gas market."

Grove said, "However, our action won't solely affect natural gas prices. Weather and nation's industrial recovery and commitment to burning more natural gas instead of coal and wind for electricity are the drivers of natural gas prices."

Sustained low natural gas prices are expected to accelerate demand in the industrial, power generation, and transportations sectors due to their significant cost advantages over substitute fuels and over global natural gas prices, he said. "In fact, our main industrial consumers have a very receptive export market for their derivative products at today's natural gas liquids prices."

According to Grove, this drop in natural gas prices to their lowest point in a decade began in 2008 with a recession-fueled reduction in demand.

"Since then, America's abundance of natural gas is testimony to Chesapeake's and the industry's success in finding enormous reserves of the clean-burning American fuel. Compared to prices of only a few years ago, today's natural gas prices are providing the American economy with over $300 million a day in economic stimulus."