Chesapeake Going for Oil
Updates to add more quotes, analyst comment, details)
By Jason Womack
Of DOW JONES NEWSWIRES
HOUSTON (Dow Jones)--Chesapeake Energy Corp. (CHK), a leading U.S. natural gas producer, said Thursday it will dedicate more of its resources to finding oil.
The strategy represents a big shift for the company, which has gobbled up land in the nation's most promising onshore natural gas fields and pursued a breakneck drilling pace to bring those new gas supplies to market.
Chesapeake and other independent natural gas producers such as Southwestern Energy Co. (SWN), Petrohawk Energy Corp. (HK) and Devon Energy Corp (DVN), have pioneered drilling for gas from deeply buried onshore formations of shale rock. Once considered uneconomical to exploit, shale-gas production has boomed over the past couple of years. These fresh supplies, combined with the economic downturn, helped push gas prices to their lowest in more than seven years in September, though winter's cold has brought prices back up somewhat.
The market for oil has proved more resilient, with prices more than doubling over the last twelve months, making that commodity much more attractive to producers. Last week, EOG Resources Inc. (EOG) said it will invest more heavily in oil related projects in the future.
Aubrey McClendon, Chesapeake's chief executive, said during a conference call with investors that once the company has met the obligation on its shale gas leases, it will pare back its gas drilling in places like the Fayetteville Shale in Arkansas, the Haynesville Shale in Louisiana and the Barnett Shale in Texas. To secure acreage, producers must establish production before the lease expires.
"We will begin ramping down activity in those areas and allocating those rigs to the oil areas," McClendon said during a conference call with investors.
The company plans to cut its Fayetteville Shale drilling activity in half by the end of 2010, when its acreage there will be held by production.
Chesapeake has identified six oil fields, where it holds a combined 600,000 acres and plans to add 400,000 more acres over the next year. The company will use horizontal drilling, an innovation widely used to extract shale gas, to tap those oil resources.
"If you are a good shale player--and Chesapeake is a top-tier shale producer--it makes sense to look at oil," said David Pursell, an analyst with the Houston-based energy investment bank Tudor Pickering Holt & Co.
-By Jason Womack, Dow Jones Newswires; 713-547-9201; jason.womack@dowjones.com
Views: 287
Replies to This Discussion
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Permalink Reply by P.G. on
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A change in politics or government policy could make a big difference in market direction. Even a middle east war. I know I will be a lot tougher to lease next time around if they let my lease expire. This bottom of the market could go the other direction in a hurry under the right circumstances. Oil price aren't going to stay where they are forever.
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Permalink Reply by young land owner on
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PG where is ur land
ylo
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Permalink Reply by P.G. on
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In the Greenwood-Waskom field.. (west Shreveport)
The highest offers I saw come in the mailbox was $17500..
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Permalink Reply by Skip Peel - Mineral Consultant on -
P.G. I can think of no event or events including war that will change the nat gas supply/demand equation significantly. The only scenario that makes sense is to increase domestic consumption through incentives and regulations. Incentives that support nat gas use and regulations that reduce the use of coal. And even if that started tomorrow, it would take years for demand to catch up to supply. All of us are free to lease as we see fit and I have no problem with those who decide to hold out for what they think is the right deal. I am simply pointing out that current offers in general are surprisingly good considering the over all state of the domestic nat gas market. I do not see lease offers improving for all mineral estates in the Haynesville as more leasing and development capital is being dedicated to the new shale gas plays. And major nat gas operators are dealing with significant capital constraints and basically operating on cash flow.
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Permalink Reply by P.G. on
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I agree with you considering the current situation.
I'm just saying it could become dynamic quick if petroleum prices went crazy again.
Should it become a hot potato issue due to circumstances not yet seen, (but are lurking) I'm sure demand could become accelerated as a national security issue to get off petroleum.
Had the market not tanked and oil prices kept going like they were going, do you think NG prices would be where they are now? What would the drilling activity look like?
How many more billions would Aubrey be worth?
In such a situation, what would the speculation look like from the drillers?
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Permalink Reply by Aubrey C. Sanders, Jr. on
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Very well stated, Skip. I am in total agreement with you. Just a very few short years ago you seldom, if ever heard of leases for more than $500/acre and never more than 1/4 royalty.
I think we are on the verge of more fully utilizing our natural gas for transportation, etc. The city of Phoenix has done good job with that and there seems to be more interest in conversion nowadays.
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Permalink Reply by Les Bamburg on
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Skip, by definition supply and demand are in "balance" so demand does not need to "catch up" to supply. It is only a matter of price. I believe what you are trying to say is demand needs to increase to move up the marginal supply curve which results in an increased natural gas price. Recall that the US still imports ~ 8 Bcfd of natural gas so our produced supply is far short of demand.
Assessing a true emissions cost against coal would crank up natural gas demand immediately since their is significant natural gas fueled power generation capacity that is currently sitting idle.
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Permalink Reply by Skip Peel - Mineral Consultant on
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Les. Yes. If there is no sizable growth currently or projected in nat gas production and there is sufficient time to work through the politics on national energy policy then I guess I have been reading too many Internet articles. You are correct that my concern is price because that is the key element in the valuation of HS minerals not to mention the royalty income of mineral owners. And I agree with your closing statement above, I just don't see that assessment as imminent. Or even on the horizon if current political grid lock maintains. There are certainly other variables to the equation such as the future level of imports, decreases in domestic production from conventional reservoirs and the undeniable advantages of natural gas that support increased use. Lacking a national energy policy that emphasizes natural gas, I am concerned with the possibility of rising supplies and stagnant demand. And low prices.
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Permalink Reply by P.G. on
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Don't be so certain. NG could come back in fashion pretty quick if it became our next major transportation fuel. Instability in the world, especially watching what Iran is doing could send petroleum prices out of reach in a hurry, making NG very attractive. When that happens, drillers will likely be making some good offers on acreage.. Those big offers came from $13 NG. It could happen again quickly.
The steady demand from the transportation sector would also stabilize NG prices. No more yo yo-ing. I'd hate to be locked into today's prices and then watch the neighbors laughing all the way to the bank after the next coming price boom. I already know how that feels!
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Permalink Reply by Skip Peel - Mineral Consultant on
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The one thing I am certain of is that a national energy policy favoring nat gas will take years to ramp up demand sufficiently to impact price. And we do not have that national energy policy now nor does it appear to be imminent.
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Permalink Reply by P.G. on
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Yes!
But how fast would it become a major issue in congress if petroleum ran up to 2 or 3 hundred dollars or more a barrel?
Imagine the shock to our economy!
Things could get out of hand over night considering the tensions of Iran's nukes and a nervous Israel.
If the missiles ever started flying, god forbid, and the middle east oil got shut down, I'll bet life would change in a hurry for all of us.
Our government couldn't drag it's feet for long in a situation such as that.
NG is be ripe, considering supplies, to become THE source of energy for us as a fix.
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Permalink Reply by Les Bamburg on
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Skip, natural gas demand could be ramped up tomorrow if coal was pushed down the power stack.
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