Tuesday, March 31, 2009

Interesting Interview About Natural Gas Prices

I read an interesting interview today with a commodities analyst Michael Hall of Stifel Nicolaus. It's a good read and not too technical.

The bottom line, says Hall, is that you can't predict future prices but he believes that natural gas prices will start increasing in a sustainable way in the fourth quarter of 2009. That assumes there are no unexpected circumstances like a warm winter or geopolitical strife. He thinks the reduction in supply and the significant reduction in rig count will lead to lower prices. He notes that when the prices do increase it will be harder to re-mobilize idled rigs that it was to lay them down in the first place, so there will be a lag time where prices increase and companies can't get the resources out of the ground fast enough.

The real issue is finding the bottom of the recession and building from there. For crude oil, he sees long-term demand drivers in China and India, each of which have very low resource consumption per capita (approximately 8% that of South Korea and Japan). If that consumption ramps up, even just a little bit, the corresponding increase in demand will be significant. But he doesn't expect that kind of growth from the developing world until the developed world, especially the U.S., gets its act straight.

Friday, March 27, 2009

U.S. Rig Count Drops Again This Week

As discussed earlier this week, the number of active rigs in the U.S., as reported by Baker Hughes, continues to drop, this week by 46 to 1,039, a six year low. This is hardly news. The rig count has been sliding along with the prices of oil and gas. The number of rigs has decreased 50% since August 2008. Expect it to continue to drop. But where will it stop? I've seen credible predictions at 750 and 600 by industry and financial analysts. Who knows? A year ago, the rig count was 1,808. In 1981, the figure peaked at 4,530 (!).

There were 70 rigs running in north Louisiana, down from 73 the week before. In northeast Texas, there were 75 rigs running last week, down from 82 the week before. Back in August, north Louisiana averaged 80 rigs, while NE Texas averaged 126. Clearly the Haynesville Shale has not been as impacted as the rest of the country, and north Louisiana has has seen very little downturn.

Of the rigs running nationwide, 810 were exploring for natural gas, 217 for oil and 12were listed as miscellaneous. Of the major oil- and gas-producing states, Texas lost 17 rigs, Oklahoma lost six, Louisiana lost four and North Dakota and Wyoming each lost two. New Mexico, Colorado and Alaska each lost one. California added three rigs, and Arkansas was unchanged.

The Baker Hughes rig count web site is pretty cool. It has spreadsheets that offer all kinds of great information. The data is broken down by state and subdivision, i.e. North Louisiana, land-based rigs.

Thursday, March 26, 2009

Shreveport's New CNG Buses

In a win-win-win situation, the City of Shreveport announced that it will purchase five new compressed natural gas buses using federal stimulus money (article). This is a big step in the right direction. Shreveport has the opportunity to show the world that natural gas isn't just for power plants and industrial uses. It is cleaner and cheaper and can be used in many, many different ways. The fact that Shreveport is the closest city to the Haynesville Shale also factored into the city's decision.

The project will also include a CNG refueling station and worker training. To me it's a great way to use federal stimulus dollars. Shreveport is putting the money to work quickly and employing it on a greener technology. The stimulus package isn't perfect but it's first purpose is to get money flowing through the economy and its second purpose is to use it for more progressive purposes. This is win-win-win to me.

Other cities in the region are following this lead, including Fort Worth, Baton Rouge and Birmingham. Groups like CNG NOW and the Pickens Plan are calling for the use of natural gas in automobiles, which might take many years to accomplish. But a good first step is for municipalities to begin the adoption of this technology and start building infrastructure to support it.

Wednesday, March 25, 2009

Good Technical Images from GMX

I'm not a geologist, but I have to say that I loved some of the technical images from the recent GMX presentation at the Howard Weil Energy Conference. (Note that GMX refers to the Haynesville Play as "H/B" which refers to Haynesville/Bossier Shale. This is because they operate mostly on the Texas side of the play, where there is more of the Bossier Shale.)

The slides below graphically show the various geological layers. The first is more user friendly, showing the cross section from the Haynesville Shale to the surface. The other two slides are log and cross-section data from multiple locations that show more technical data. It's not much to look at from the naked eye, but it is probably very informative to a geologist or petroleum engineer. Me, I just think they look cool.

GMX Resources Update

It's safe to say that GMX Resources is banking its future on the Haynesville Shale. In a recent presentation, it disclosed that 98% of its $150 million 2009 capital budget is dedicated to drilling in the Haynesville Play. The same percentage will hold for the 2010 $75 million capex budget.

In a recent investor presentation, GMX went on at length about their holdings in the Haynesville Shale, which are mostly in Texas. The first slide below shows GMX's properties (discussed in a previous post) and their relation to competitors Chesapeake and Petrohawk. The second slide shows GMX's interpretation of "de-risked" acreage - their estimate of the boundary of the paying fields. There are many versions of this map, and this is GMX's.

Tuesday, March 24, 2009

Goodrich Petroleum Maps

In a recent investor presentation, Goodrich published several slides with maps of its holdings and some of its results. Since Goodrich has numerous leases in Texas, the maps below offer a glimpse into the East Texas portion of the Haynesville Play.

Decline Curves

One of the big issues that we will see with the Haynesville Play as it develops is the rate at which production declines from the initial production. Watching the news and press releases, you see some eye-popping IP numbers. What you often don't see is the average production numbers three, six or nine months out. Those figures aren't nearly as sexy.

These shale wells are interesting in that they have strong initial production, but they play down quickly. A recent image from a Goodrich Petroleum presentation (below) illustrates these so called "decline curves" quite well.

Generalizations don't apply to each well, but because the production companies are drilling in the same immediate area and using the same techniques, such generalizations likely will prove fairly accurate.

Chesapeake Update

In its most recent investor presentation, Chesapeake provided an updated map of its activities, most notably where it is currently drilling. If my eyes don’t deceive me, Chesapeake has a piece of 31 drilling rigs operating (20 operated by them and 11 non-operated).

The map clearly indicates areas the company has identified as Haynesville hot spots, southwestern Caddo Parish, the area where Caddo, Bossier, Red River and DeSoto Parishes meet and southern DeSoto. Expect to hear more news of well completions soon.

Chesapeake’s Take on the Gas Market

In its most recent investor presentation, Chesapeake detailed its beliefs about the domestic natural gas market and how the supply and price issues will play out over the next several years. In a nutshell: because of the continued derease in drilling rigs deployed and the steep decline rates of gas wells, supply should drop in the next 1-2 years as production wanes without new drilling to support it, and price should rise accordingly. Below is an excerpt from the Company's presentation:

"* Higher production levels and lower demand will keep natural gas prices low in 2009

* However, the fix is already in, gas directed rig counts are now at the lowest level since early ’03 and headed lower, fast

* Industry first year depletion rate of ~25-30% will fix supply/demand in balance by YE’09, just as the economy likely begins to recover

* CHK sees U.S. natural gas market as oversupplied in 2009, but balanced thereafter
> CHK sees U.S. natural gas prices at Henry Hub averaging $4-6/mmcf in 2009 and $7-9 in 2010 and beyond
> Natural gas prices not likely to stay permanently low because of great success of the “Big-4” Shale plays (Barnett, Fayetteville, Haynesville and Marcellus). Instead, it will be the highest cost one-third of U.S. production that will set out-year natural gas prices, not the lowest cost one-third...

* Against unrelenting pessimism about U.S. natural gas prices in early 2009, there is emerging evidence that market forces are creating the conditions for a strong natural gas price recovery in 2010 and 2011

* What is that evidence? It’s plunging rig counts (40-50/week lately) and accelerating decline curves (the “dark side” of technology)

* What do we know today?
> First year U.S. decline rate is ~25-30%, i.e. ~15-18 bcf/day
> 2008 U.S. gas production YOY increase of ~7%, or ~4 bcf/day
> 2008 natural gas rig count averaged ~1,500 rigs – this overcame first year depletion of ~25% and generated growth of ~7%, for a combined ~32% addition rate
> If natural gas rig count went to zero, then all would agree this ~32% number would also become zero
> So, if natural gas rig count goes down by 50% in 2009, CHK believes industry will lose nearly 40% of this ~32% production capacity increase, through which ~7% growth disappears and ~7% production declines appear by 2010. So, YOY growth of ~4 bcf/day in 2008 will soon give way to a decrease of ~4 bcf/day, setting up a big price rebound in 2010 and 2011 if U.S. economy does not materially weaken from here."

Chesapeake strongly argues the point that new drilling is important to keep up the national supply. In a chart, below, they show that because of well decline rates nearly half the U.S. production comes from wells drilled within the past three years. With severe decreases in rig count, the lack of new production will shock supply within a year or two. Chesapeake estimates that the rig count decline will stop at 750, which is still considerably below where we are today (Baker Huges reported that the U.S. rig count as of last week was 1,085). This condition will significantly curtail supply and impact the overall price of natural gas. There are reputable analysts that expect the number of operating rigs to drop to 600, which would cause even greater shocks to the system. See Chesapeake's slides below.

Saturday, March 21, 2009

Schlumberger Expands in Shreveport

On Friday, Schlumberger, Ltd., the world's largest oil field services company, announced an expansion of its operation in Shreveport, LA to support the Haynesville Shale (AP story from nola.com). The company is investing $48 million to expand its footprint by 250,000 square feet and will add 400 jobs.

It is particularly encouraging that the Schlumberger is adding jobs given the fact that the company recently cut 5,000 jobs worldwide. Clearly Schlumberger sees strong potential in the Haynesville Play.

Thursday, March 19, 2009

A Future Water Issue?

Given the amount of water it takes to bring a horizontal shale well to completion, I'm pretty sure water is going to be a big issue for the oil and gas exploration industry going forward. The Wall Street Journal published an interesting article discussing how major oil companies are buying and stockpiling water rights in the Rocky Mountains, specifically in Colorado.

While the Haynesville Shale, especially in Louisiana, is not likely to have the same issues concerning water as the arid western states, it's a sure bet that drilling water wells into the aquifer to support oil and gas operations will be a contentious issue anywhere there is drilling. Keep an eye on it.

Good Pipeline Map

In its March investor presentation, Exco provided a good map of the various pipelines, existing and proposed, serving the Haynesville Shale.

Third Well from Exco

In its monthly investor presentation, Exco Resources gave an update on its two existing wells and its new third well, Sammo 18 #5. Exco has got some good wells. The following results are as of March 9, 2009:

Oden 30 H #6 - IP’d 22.9 Mmcfd on 12/8/08
Cumulative gas = 1,385 Mmcf (gross), 1,041 Mmcf (net)
Average gas rate = 14.5 Mmcf/d (95.6 days)
Last 24 hrs = 11.4 Mmcf/d (20/64ths choke)

Lattin 24 #4 – IP’d at 24.2 Mmcfd on 2/15/09
Cumulative gas = 505 Mmcf (gross), 378 Mmcf (net)
Average gas rate = 17.5 Mmcf/d (28.8 days)
Last 24 hrs = 14.1 Mmcf/d (20/64ths choke)

Sammo 18 #5 – IP’d at 21.4 Mmcf/d on 3/3/09
Cumulative gas = 148 Mmcf (gross), 113 Mmcf (net)
Average gas rate = 15.5 Mmcf/d (9.5 days)
Last 24 hrs = 16.1 Mmcf/d (22/64ths choke)

Exco has leases on 92,000 acres in the Haynesville Shale with an estimated potential of 4.5 Tcfe. The company currently has six rigs running in the play (4 operated, 2 non-operated) and intends to add another 2-3 rigs by mid-year. Exco currently has three non-operated wells in completion phase and plans to drill a total of 34 horizontal wells this year.

Wednesday, March 18, 2009

Update from Louisiana DNR

The Shreveport Times published an article yesterday with some summary results from the Louisiana Department of Natural Resources. Highlights include a quote from a Petrohawk representative noting that while they are scaling back on capital expenditures in general, the company is spending most of its capex, 70-80%, in the Haynesville Play. This is not new news, but it’s always nice to hear.

Also, “There are 266 wells permitted to drill in the Haynesville Shale. Forty-four of them are active and producing… Of those 44, eight produced from 100 million to more than 700 million cubic feet of natural gas in December.” Petrohawk still has the big winner with a well pumping out 23 MMcfe/day. The article notes that the Haynesville wells pay out rapidly. This allows producers to recoup their investments quickly and reinvest in new wells at a fast pace.

Chesapeake, which has 25 of the 44 producing wells, is looking at companywide capex reductions of 7-10%, but is still committed to spending heavily in the Haynesville Play. It will have 30 rigs operating by the end of this year.

The article makes the point that the enormous volumes these wells produce make them profitable at low natural gas prices, but with continued demand weakness from industrial customers as the result of a slow economy, demand will continue to lag and prices will stay low.

Sludge and Cows

This is an interesting link to a post that shows cows drinking out of a sludge pit in the Barnett Shale. I’ve read posts by the author before and she is definitely a drilling gadfly. But she makes a good point about the collateral damage that can be caused by drilling.

As the Haynesville Play heats up, Louisiana and Texas need to get ahead of the negative surface impacts. We can’t let our thirst to drill lead to unintended and dangerous consequences. Best to think about this now when the problem can be prevented than later when it’s too late to clean up the mess.

Tuesday, March 17, 2009

Little Gypsy and Gas Marketing

I've been scratching a hole in my head over the past few weeks wondering about Entergy Corporation's proposal to convert its aging natural gas powered Little Gypsy power plant into a coal fired plant. Entergy is a major electric and gas utility for the LA/MS/AR region and Little Gypsy is located approximately 30 miles up the Mississippi River from New Orleans.

While I certainly encourage Entergy's investment in the plant, I can't help but wonder, WHY COAL? In a state with abundant natural gas resources, why in the hell would they want to build a coal plant? Entergy states that adding coal to the company's generating portfolio would be a hedge against rising gas prices. As an Entergy customer, I can look at my bill and realize that the price surcharges on my bill are their built-in hedges.

Coal? What are they thinking? The revised plan isn't even touting itself as that fictional "clean coal." It's just minimally less dirty coal. With the expected additional costs of mitigating the pollution from coal making the project economically infeasible, it doesn't look like Entergy will be able to convince the Public Service Commission to allow it to do the conversion.

The Little Gypsy conversion brings up another important issue. Why on earth would a power plant in easy reach of the Haynesville Shale (and Henry Hub, for that matter) want to switch to coal? Outside of Boone Pickens's Pickens Plan and Chesapeake Energy (and their various marketing campaigns, such as American Clean Skies Foundation and CNG Now), I don't hear enough PR and marketing about the pros of natural gas. As the price continues to sink to a point where drilling is no longer economically feasible, the industry should be out there marketing the living daylights out of its product. What's happening instead is the industry is idling drilling rigs, letting go of skilled workers (see interesting article) and opening itself up to be beaten to the punch by imported foreign LNG when prices and demand increase.

There has been much ink spilled about the decline in natural gas prices being a function of increased supply. But supply is an equal partner of demand. From what I read, demand has not actually tailed off more than about 5%. On top of that, with environmental restrictions on coal generating plants inevitable, the gas industry should be out loudly touting its product: it's the cleanest fuel around and its a domestic product. Hello! Is anyone listening? I see these weak-kneed campaigns featuring "the people of the oil and gas industry" (it's such a weak campaign that I can't find it on Google!). These ads beg for sympathy. That's the wrong approach. Play to your strengths, don't ask for handouts.

Monday, March 16, 2009

Is the "Great American Drilling Boom" Over?

The New York Times reported in a front page article in the widely read Sunday edition that, "The great American drilling boom is over." The article mostly focused on the price of oil and gas (mostly gas) and the impact on the Barnett Shale. The timing of the article coincided with the reduction of the U.S. rig count from 2,400 in summer 2008 to 1,200, a 50% decrease.

There was nothing particularly revealing in the article, but it does provide a good summary of what has been going on in the gas market. The article reiterates that it is a natural gas oversupply that is causing the sharp decrease in price. It makes the point that as rigs and crews are idled, the over-supply issue will turn into an under-supply issue and the time it will take to re-start the drilling will lag to the extent that the U.S. might have to import LNG from countries like Qatar to make up the difference. As absurd as it sounds (importing a resource that is abundant in our country), it makes sense that a tanker of liquified gas can arrive in the U.S. from the Persian Gulf a lot faster than a bunch of rigs can start drilling again.

What also drew my attention was the prominence of the article. Front page, above the fold in one of the most widely read periodicals in the country.

Also interesting was the chart that showed historical natural gas prices above another chart showing oil and gas rigs in operation (both reproduced below). The steep falloff in the number of rigs is rather unbelievable. But the charts show, although the article really doesn't mention, that the number of rigs being utilized this past summer was the highest ever, by far. There really was an overabundance of rigs out there. The previous peak was around 1,600 in 2001. In other words, there was a lot of room to fall. It's all a continuation of a boom/bust cycle that has characterized the oil and gas industry since its inception.

Monday, March 9, 2009

GMX Resources: Lower Capex, Haynesville Results

Today, GMX issued a news release noting changes to its capital expenditure (“capex”) budget and detailing results from recent Haynesville wells.

First, the bad news: GMXR has reduced its 2009 CAPEX budget by $70 million to $150 million. Under this modified budget, the Company expects to drill 14 and complete 16 net Haynesville horizontal wells, including the two completions that have already occurred in the first quarter. There are four rigs currently drilling with completions expected in April. Once these four rigs finish drilling, the Company will release the two rigs on well-to-well contracts and lay down the other two rigs which are owned by a subsidiary of the Company. This is pretty big news since Haynesville represents 98% of GMX’s 2009 capex.

Second, the not so bad news: a report on the company’s first three Haynesville Shale horizontal wells. The first full month average daily production for the Callison #9H and the Bosh #11H was 4.1 Mmcfe/day for each well. The 16-day average daily production for GMXR's most recent Haynesville well, the Baldwin#17H, is 6.0 Mmcfe/day. Those results don’t exactly make the top ten list, but they are still pretty strong.

GMX has continued to pick up acreage in east Texas, with contracts in place to lease an additional 3,900 acres (49 drilling locations). They have also obtained first right of refusal on another 5,000 acres (62 potential drill sites).

Friday, March 6, 2009

Petrohawk Pipeline Capacity

I’ve been waiting to hear what Petrohawk has to say about pipeline capacity from the Haynesville Play. They more or less have wagered the future of the company on the success of the Haynesville Shale and they are going to be one of the biggest producers in the play. In the company’s recent fourth quarter earnings call, there was a passing mention of pipeline capacity and plans for the future, but nothing of great significance or specificity was discussed.

CEO Floyd Wilson stated that Petrohawk has ample pipeline capacity in the Haynesville Play through early 2010, but the company is working on a new pipeline project on which Petrohawk will be the largest shipper. There were no other details on that project. He also mentioned that they are waiting on the completion of the expansion of Boardwalk’s Gulf South Pipeline (see separate post). While the first and by far the largest part of the project has been completed, Petrohawk is waiting on the completion of the second leg before it will be able to realize fully its capacity on the pipeline.

Boardwalk Pipeline Gulf South Expansion

Boardwalk Pipeline Partners, LP is nearing completion of a significant expansion of its Gulf South Pipeline to serve the Haynesville Shale. Boardwalk serves the gulf south region through a number of pipelines (map of full system). The expansion is in two phases:

- East Texas to Mississippi: a 242 mile, 42” pipeline from DeSoto Parish, LA to Harrisville, MS; 1.7 Bcf/day peak transmission capacity; placed in service mid-2008.

- Southeast Expansion: a 111 mile, 42” pipeline from Harrisville, MS to Butler, AL; 1.9 Bcf/day peak transmission capacity; expected to be fully in service soon

Snapshots of the routes are below.

Wednesday, March 4, 2009

More on Regency Pipeline Expansion

The presentation Regency Energy Partners put together to explain the proposed expansion of their existing RIGS pipeline to serve the Haynesville Shale had lots of interesting information. I provided a link to the presentation in a previous post, but I thought I'd post some of the interesting graphics related to the project.

The first image below shows the layout for the pipeline with some details about capacity at different points. The second image details the pipeline's interconnections. The third image is particularly interesting because it presents longer term projections about gas production in the Haynesville Play and at what point the existing and proposed pipeline capacity will be exceeded. Based on these projections, pipeline capacity will be exceeded almost immediately (no surprise) unless new projects are constructed.

Summary of Headlines

I put a link to the Regency Energy Partners presentation in a previous post, but since they did a good job of summarizing some of the highlights for a few notable companies, I thought I'd post their summary separately:

- Estimated Ultimate Recovery (EUR) of 7.5 Bcfe per well
- Recently announced IP results on six new wells averaging 14.5 MMcfe/d, including two wells that experienced mechanical difficulties
- Current Haynesville gross operated production 160 MMcfe/d
- Expect to complete approximately 6 wells/month
- 75-80 gross operated wells will be completed in 2009
- Plans to average 12 Haynesville rigs in 2009
- $690 million budgeted in 2009 for investment in the Haynesville Shale

Exco Resources
- Completed first horizontal well in Q4 2008 with IP of 22.9 MMcfe/d; produced 1 Bcf/d in 64 days; currently producing in excess of 12 MMcfe/d
- Completed first horizontal well in Q1 2009 with IP of 24.2 MMcfe/d; producing 20 MMcfe/d in Q4 2008 and Q1 2009
- Producing 35 MMcfe/d from the play
- $313 million 2009 capital budget
- Plan to drill 34 wells in 2009; 27 operated
- EXCO is currently participating in 4 operated rigs and three non-operated rigs

- Approximately $825 million budget for 2009 (~50% funded by JV partner PXP)
- Two recent wells tested at greater than 22 MMcf/day
- Current operated rig count is 22
- Current production of 70 MMcfe/d
- Will average 26 operated rigs in 2009

- $305 million Haynesville budget for 2009
- Plan to drill 35 gross, 21.5 net wells in 2009
- First two horizontal wells flowed at initial two-day rates of 8 and 15 MMcfe/d

- $216 million budgeted toward Haynesville/Bossier 2009 capex
- Second Haynesville/Bossier well completed in January 2009 with IP rate of 7.6 MMcf/d
- Third Haynesville/Bossier well had IP rate of 8.7 MMcf/d
- Expect to announce completion results of three more wells in late April and one in late May

- 7 operated rigs in North Louisiana
- Plan to drill or participate in 35 Haynesville wells in 2009
- Third well flowed to an initial rate of about 23 MMcf/d and averaged 18 MMcf/d in the first three weeks on production
- Fourth well flowed to an initial rate of over 20 MMcf/d
- 4 wells currently being drilled

CenterPoint Energy Expands Pipeline Capacity to Serve Haynesville Play

CenterPoint Energy Gas Transmission Company, a wholly owned subsidiary of CenterPoint Energy, announced yesterday that it is expanding capacity on its existing pipeline running from Carthage, TX to Perryville, LA to transport gas from the Haynesville Play. Chesapeake Energy is the "anchor tenant," taking the bulk of the new capacity (500 Mmcf/day), but there is a small amount (44 Mmcf/day) that is still available. The agreement with Chesapeake runs for 27 months and transport should commence on April 1, 2009.

This project is an expansion of capacity of the existing pipeline, so there is no new pipe being run. Instead, CenterPoint will add new compressors to existing compression stations in Westdale and Vernon. The 172 mile pipeline currently moves 1.55 Bcf/day and should run just over 2 Bcf/day after the expansion.

This is good news for Chesapeake and the Haynesville Play. On its quarterly conference call, CEO Aubrey McClendon mentioned that Chesapeake has committed to four transport projects, including this one, the Tiger Pipeline and the Regency expansion. As noted before, transportation is a huge piece of the infrastructure puzzle. You can drill as much gas as you want, but if you can't get your gas to market you can't sell it.

Tuesday, March 3, 2009

Regency Announces Haynesville Pipeline

At the end of last week, Regency Energy Partners announced that it has secured financing for a project to double the size of its north Louisiana pipeline and specifically serve the Haynesville Shale area.

The $653 million expansion to the Regency Interstate Gas System ("RIGS") will be a 1.1 Bcf/day, 128 mile link of 36" and 42" pipe across north Louisiana with four major interconnections along the way. The pipeline should be in service by the end of 2009. Regency indicated that the company has received commitments for 84% of the capacity and is in negotiation for the rest.

This new pipeline is good news for many reasons. First, it's nice to see something get funded in this economy! I think that speaks to the promise that the Haynesville Play offers. Second, adding "takeaway capacity" to the play is very good news. It validates the concept that one of the advantages of the Haynesville Play is that it there was already existing E&P infrastructure in place. This project is an extension of an existing pipeline and not an entirely new structure. It is going to get built in less than one year, which would not be possible in other parts of the country that don't have the infrastructure Louisiana has.

Below is a good image from Regency's quarterly presentation showing the course of the proposed pipeline (three segments) and activity in the Haynesville Play. In spot checking the map, I noticed that some of the well locations are not perfect, but it is a good summary.

Monday, March 2, 2009

Chesapeake Trims Production

Chesapeake Energy announced today that it will reduce its production by approximately 7% because of low commodity prices. This business decision is a natural reaction to a poor price environment. If you can control the outflow of oil and gas, you might as well not produce more than you need to keep your company's doors open and lights on when prices are low. Once commodity prices increase, companies will increase production and see greater profits.

CEO Aubrey McClendon had a frightening statement as part of the announcement, "During March 2009, most Mid-Continent natural gas prices at major interstate pipeline delivery points will average around $2.70 per thousand cubic feet, a price at which most natural gas production is unprofitable." Zoikes! You hate to hear that. Of course, he's been wrong a lot lately, but usually because he's too optimistic. Maybe since he lost most of his Chesapeake stock to margin calls in 2008 he now is more pessimistic (or realistic). McClendon said that he expects further cuts in drilling that should lead to a re-balancing of supply and demand toward the end of 2009.

The low price environment has the potential for great gains for a company that is willing to continue to invest in new properties and drilling operations. Investing now will allow a company to be in position to really turn on the spigot when prices increase. Of course, such a company would need lots of capital, a visionary leader and board of directors, and b*lls of steel. Unfortunately, all of the oil and gas companies of any size in this market are publicly traded and are slaves to the stock market and the analysts, which makes them prone to short-term (and often short-sighted) decision making.

Chesapeake also announced that it is willing to change the terms of the joint venture agreement with Plains to allow them to forgo the upcoming $800 million payment. Doing so would change the ownership terms of the JV property in Chesapeake's favor, so it's no gimme that Plains will accept this deal.