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Permalink Reply by JHH on July 31, 2009 at 1:01

This is all very odd. I just read an article yesterday in which Chesapeake said it was increasing production! jhh

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Permalink Reply by JHH on July 31, 2009 at 1:04

From WSJ July 30, 2009
jhh

Chesapeake Continues Gas-Production Increase
By BEN CASSELMAN

Chesapeake Energy Corp. is continuing to increase its production of natural-gas, despite low prices and growing oversupplies.

The Oklahoma City company, the top U.S. independent gas producer, said Thursday that its production grew 5% in the second quarter compared to a year ago, well ahead of its own guidance and analysts' expectations. Production grew 4% from the first quarter of the year, and proved reserves grew 5.7% from a year ago.

The increase signals that Chesapeake is apparently abandoning the strategy it adopted earlier this spring of turning off some of its wells due to low prices. Prices haven't improved much since April, when the company said it was shutting down about 13% of its production, but the company has nonetheless turned those wells back on.

"It's an about-face, there's no doubt about it," said Subash Chandra, an analyst with Jefferies & Co. in New York.

Chesapeake spokesman Jim Gipson said in an email that prices and pipeline capacity improved enough to justify turning back on its production.

Chesapeake warned, however, that the industry may be forced to shut off some wells later this year as storage facilities and pipelines fill up, leaving no room for more gas. Earlier on Thursday, the Energy Information Administration reported that the amount of gas in storage had risen 71 billion cubic feet in the past week to more than 3 trillion cubic feet, 19% above normal.

Storage levels are rising because U.S. companies are continuing to produce more natural gas even as the recession has driven down demand for the fuel, which heats more than half of American homes and generates roughly a quarter of the nation's electricity. The glut of gas has driven the price down to under $4 per million British thermal units, from a high of more than $13 per million BTUs last year.

But in recent days, companies that have reported big production gains have seen their share prices rise, despite fears that increased supplies could keep prices low. Newfield Exploration Co., for example, saw its stock jump 11% Thursday after it reported unexpectedly large production growth.

"The market is responding to it," Mr. Chandra said.

Chesapeake saw some of its biggest production gains in the Haynesville Shale, a massive natural-gas field in northern Louisiana and East Texas that the company discovered last year. Chesapeake's production there grew 85% in the second quarter from the first quarter.

Recently discovered fields such as the Haynesville Shale have seen continued drilling activity in recent months, even as drilling has slowed in most other areas, because improved production techniques have made the newer wells profitable at low prices. Dan McSpirit, an analyst with BMO Capital Markets in Denver, said producers with assets in the Haynesville and similar fields have a big advantage over their competition.

"You either have assets that can survive in a chronically low price environment or you don't," Mr. McSpirit said.

Write to Ben Casselman at ben.casselman@wsj.com

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Permalink Reply by Bobi Carr ("parker") on July 31, 2009 at 6:01

JHH,

The article I posted was also dated July 30, 2009. It does say Chesapeake MAY further reduce production.

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Permalink Reply by Grillin' - MmmMmm on July 31, 2009 at 2:03

I think you are seeing two different things...one is past/present and one is future. Their production has been increasing hence the article you posted below. However, if you look at the rate of increase, they are not rocketing up like they were. Had they not stopped completing some wells and/or dropping rigs around the country, their production increase would be double what's quoted below.

The future part is what's going to happen in the next few months. As storage starts to fill, there is no place for the produced gas to go. It starts to "back up" in the pipeline system as there is no outlet for the gas (users or storage won't take as much as what's being put in the pipeline). When that happens, the overall pressure in the pipeline system starts to increase. This increase in pipeline pressure ultimately reduces the production rate of the wells. I have several wells that normally flow into a pipeline system at 500 psi. That pressure is starting to rise and is up near 650 psi. Two of my wells cannot buck that pressure and they are intermittently shutting themselves in. And the rates are down to a trickle. I have to let the pressure build then turn them back on once every 29 days or so. That way, I don't violate my lease's continuous production/shut in clauses. And this is happening on a very large scale right now around the country. What some companies do is to shut in a group of wells in an area, but leave one per lease on production to hold the lease. Then about every 20 days or so, you shut in the production well and turn on another well on that lease/unit. You rotate around like that so that overall pressure isn't jacked up and you keep your leases valid. Not the best thing for a mineral owner as their checks will be reduced. But right now, that's the way its going to work.

In the Barnett, there are loads of wells that are drilled and cased but not completed. Mostly infill wells so there are producing wells holding the leases but the new wells are just waiting on completion until prices go up and storage goes down.

Bad time to be in the gas industry. give it a year or so. things will get better.

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Permalink Reply by Les Bamburg on July 31, 2009 at 2:54

Mmmarkk, wait until that additional 1.0 - 1.5 Bcfd of LNG hits the US market in September or October.

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Permalink Reply by Les Bamburg on July 31, 2009 at 2:51

Parker, I suggest you revise the title to:

"Chesapeake may reduce production"

Their recent operations press release said they are not currently curtailing any production.

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Permalink Reply by Grillin' - MmmMmm on July 31, 2009 at 5:50

Les: I know CHK has some wells in OK shut in and a lot of wells in the Barnett that are drilled but not completed. Some in South Texas are shutting in due to pressures.

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Permalink Reply by Les Bamburg on July 31, 2009 at 6:23

Mmmarkkk, from Chesapeake press release.

"The company is not currently curtailing production, but may do so again later this summer or fall as market conditions dictate. The company also expects that rising pipeline and gathering system pressures during the next few months will likely result in involuntary natural gas production curtailments across the industry."

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Permalink Reply by Grillin' - MmmMmm on July 31, 2009 at 10:51

Maybe they've put them back on. The post a bit lower implies they were off and are now back on due to improving prices. Differentials have improved a little bit. I haven't bee in OK for a few weeks.

The Barnett wells have never been completed, so technically they aren't "curtailed"...just never produced.

Thanks for clearing that up. I won't be surprised to see things start back down; several traders are thinking gas starts to approach $3 in September. I hate it when that happens!

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Permalink Reply by Bobi Carr ("parker") on July 31, 2009 at 5:56

Les,

I changed it.

Sorry, the article doesn't say they will reduce HS production and I sure didn't mean to imply that they would cut HS production (as that doesn't seem to be the case). I just posted it to show that they are continuing to be proactive to improve prices.

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