Chesapeake shuts in gas, may idle more rigs
By OGJ editors
HOUSTON, Mar. 2 -- Chesapeake Energy Corp., Oklahoma City, has shut in 7% of its operated natural gas and oil production due to low Midcontinent wellhead prices and is considering a further 10% reduction in drilling in 2009 if prices stay low the next few months.
The volumes shut in at least through March are 200 MMcfd of gas and 6,000 b/d of oil.
Chesapeake, however, said it "believes conditions are developing that will support higher prices for natural gas and oil later this year and in 2010."
Chesapeake said it was taking the action to protect shareholder and royalty owner values with Midcontinent gas prices at most major interstate delivery points at $2.70/MMbtu, a price at which most gas production is unprofitable.
Chesapeake said, "We believe low wellhead prices combined with constrained capital availability will likely cause US drilling activity to decline well beyond the 40% drop already seen since August 2008. As a result, US natural gas production will begin to dramatically decline before the end of 2009 and consequently natural gas markets will regain better supply-demand balance by the end of 2009, if not sooner."
The company said its attractive hedges and cash availability provide it with the operational and financial flexibility to shut in production in periods of unusually low prices, such as the current market.
A 10% reduction in rigs, if implemented, would be in addition to a drop to 110 rigs from the 158 it operated in August 2008.
Meanwhile, Chesapeake granted its Haynesville shale joint venture partner Plains Exploration & Production Co. a one-time option to avoid paying the last $800 million of Plains's $1.65 billion drilling carry obligation to Chesapeake. The amount is 25% of the original joint venture transaction consideration.
Plains may exercise the option only during June 15-30, 2010. If it so elects, it will be required to convey 50% of its Haynesville shale joint venture assets to Chesapeake as of Dec. 31, 2010, including all investment in leasehold, production, and reserves. Chesapeake estimates that Plains's investment by then will total $3.0-3.2 billion, substantially greater than the cost basis.
Until Dec. 31, 2010, Plains's obligations to pay 50% of Chesapeake's drilling costs and participate in each well in which Chesapeake participates remain unchanged and mandatory. Chesapeake said it believes Plains will not exercise the option.