Monday, January 23, 2012

Chesapeake Cutting Back Gas Operations

In response to record low natural gas prices, Chesapeake Energy is altering its operating strategy to cut back its gas operations.  First, it will slash gas rig counts.  Chesapeake currently operates 47 gas rigs (down from an average of 75 in 2011), and the reduction to 24 rigs should happen in the second quarter.  The Haynesville rig count should drop to six at that point, with the remainder being split between the Barnett (6) and Marcellus (12) Shales.

Dropping rigs leads to lower production in the future, but to get a more immediate impact, the company will postpone some completions and hold off on connecting completed wells to pipelines.  To make the most immediate impact, Chesapeake will curtail production by 0.5 Bcf/day (currently 6.3 Bcf/day, gross) and might decide to up that curtailment to 1.0 Bcf/day.  Most of this curtailment will take place in the Haynesville and Barnett, so the company expects to report production declines in both plays this year.

As one would expect, the savings will be channeled to the company's oil and liquids production, blah, blah, blah. You can fill in the rest of that.

Chesapeake also announced that it would spend only $1.4 (net) on undeveloped leasehold expenditures.  It spent $3.4 billion in 2011 and $5.8 billion in 2010 on leases, so this is a big drop. But perhaps the biggest change is that all of the money will be spent in existing plays, so don't look for the next big shale play to come from CHK in 2012.  At least that's what they say now.

While this is a hard pill to swallow for folks in the Haynesville, at least it is action to address the overflow gas supply situation that will hold prices down for the foreseeable future.  Unfortunately, redirecting capital to liquids production will lead to the production of an unknown quantity of associated gas, so I'm not sure what the net impact to gas production will be from these actions other than less money flowing into LA and TX.

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