Thursday, April 16, 2009

Chesapeake to Curtail Production... Again

Because of the low natural gas price environment, Chesapeake Energy announced today that it is going to curtail an additional 200 Mmcf/day of gas production in addition to the reduction of 200 Mmcf/day announced on March 2, 2009. This 400 Mmcf/day reduction represents 13% of Chesapeake's gross operated gas capacity. The gas wells that have been curtailed are in the Mid-Continent and Barnett Shale regions.

Additionally, the new wells they are drilling will be flow constrained: "Until natural gas prices strengthen, the company plans to limit production from most newly completed wells in the Barnett and Fayetteville shales to 2 Mmcf per day and in the Marcellus and Haynesville shales to 5 and 10 Mmcf per day, respectively, in addition to the approximate 400 Mmcf per day curtailment."

Yikes. Chesapeake looks at this curtailment as a deferral, which is technically correct. This action accomplishes two things for them: 1) the company can continue to drill new leases to hold them by production and 2) it doesn't have to sell gas at an unprofitable price (which will also help staunch U.S. supply, which should help improve price).

More on Chesapeake's thinking: "The company is able to make this decision because of its strong financial condition and extensive natural gas hedging positions. In addition, because of the steeply declining production profile of new natural gas wells and the upward trending slope of the NYMEX natural gas futures curve, Chesapeake believes deferring production and revenue to future periods with higher natural gas prices creates greater shareholder value than selling production into the current unusually low priced natural gas market."

Chesapeake has resumed 7,000 barrels per day of oil production from previously curtailed oil wells, so I guess it's not all doom and gloom for them. Check out the press release because it has good graphic data on the economics behind deferring production.

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