Oil & Gas Pro

CHESAPEAKE TO CUT NATGAS OUTPUT UNLESS PRICES RISE

By Jeanine Prezioso

NEW YORK | Wed Nov 3, 2010 6:45pm EDT


NEW YORK Nov 3 (Reuters) - Chesapeake Energy (CHK.N) will begin to ramp down natural gas production by mid-2011 in the Haynesville Shale in Louisiana unless prices firm up, said a company executive on Wednesday.

The company is keeping a "relatively level (drilling) program" in the Barnett and Marcellus shales, said Jeff Mobley, vice president of investor relations and research in Oklahoma
City, but will begin to ramp down its Haynesville production
sometime next year unless gas prices rise.

The company estimated daily production in the Haynesville at 560 million cubic feet equivalent in the second quarter of 2010, a 30 percent increase over the first quarter.

It plans to shift more of its spending to drilling for liquids, Mobley added, reflected in its third quarter guidance released late Wednesday afternoon.

By 2011, the company expects gas production to rise to around 1 trillion cubic feet but expects 80 percent of its production growth to come from liquids.

Natural gas has lost 31 percent of its value since the beginning of the year, according to the Reuters-Jefferies CRB index .CRB.

December futures on the New York Mercantile Exchange NGc1 settled 3.4 cents lower on Wednesday at $3.836 per million British thermal unit.

Chesapeake has production commitments to meet with pipeline companies in the Barnett and Marcellus shales, and is drilling to hold onto leases.

Expect to see some further decrease in dry gas activity once those leases are secured, said Biju Perincheril, an analyst with Jefferies & Co. in New York.

"You're seeing this (the move from gas to liquids) at the cusp of that transition," he said. "Going forward you should see a shift in growth coming from oil, but we won't see that
until 2012 and beyond. On a proportional basis you should see
the liquids volumes ramping up."

(Reporting by Jeanine Prezioso; Editing by David Gregorio)

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Permalink Reply by jffree1 on November 3, 2010 at 13:41
Same song... second verse. I heard this on the EOG call this morning. Dry gas is totally out of fashion at the moment.

landownerPermalink Reply by ken hatcher on November 3, 2010 at 13:58
Leases in the Eagleford are increasing at a fairly rapid rate so this kind of news bodes well for them.

Oil & Gas ProPermalink Reply by Skip Peel - Mineral Consultant on November 3, 2010 at 14:24
I agree however we must keep in mind that all the other "wet" shale plays still produce a lot of natural gas. And contribute to the over supply.

landownerPermalink Reply by adubu on November 3, 2010 at 14:51
skip-- once all the main operators get their leases drilled with one well to HBP the leases then rigs will drop like flys in the Haynesville/ Bossier play across La. and East TX. Then one day few years out if prices stay in $6-8 range they will be back drilling. Yep Oil and Liquids is the money now not dry gas

Oil & Gas ProPermalink Reply by Two Dogs, Pirate on November 3, 2010 at 14:59
Money In the Bank.

landownerPermalink Reply by DJG on November 3, 2010 at 15:39
Same story in Devon's Q3 call today as well. They said that they will not be allocating any funding to HA/BO and other dry gas prospects in the current NG price environment. Have pulled the plug for the immediate timeframe on HA/BO drilling, except possibly to secure some term acreage due to expire before end of 2011.

They did say that they are continuing to discuss JV possibilties regarding a farmout of their E.Texas acreage, but that they will not be allocating additional DVN funds to the area at this time.
Permalink Reply by jffree1 on November 3, 2010 at 15:43
Don't you think some of these statements are designed to keep shareholders happy?

Oil & Gas ProPermalink Reply by Skip Peel - Mineral Consultant on November 3, 2010 at 15:52
Yep, but even more so their bankers. A lot of shale players are carrying significant, long term debt obligations. And are unlikely to get extensions to continue to chase shale gas reserves.

landownerPermalink Reply by DJG on November 3, 2010 at 16:36
Except, after divesting their overseas and offshore assets last year, DVN now is debt-free and is actually buying back their own stock.

So they certainly have the cash on hand to be drilling HA/BO prospects if they felt it favorable at the time. Instead, they seem to be choosing to spend their cash elsewhere and said they were considering farmout options to potentially JV their term acreage in E.TX.

landownerPermalink Reply by ALongview on November 3, 2010 at 18:21
just a few highlights/lowlights of the DVN call. Any ideas who would be be looking for some acreage in the Haynesville/Bossier?

Moving to the Haynesville Shale. After derisking much of our held-by production acreage in the Carthage area during 2009, our 2010 activity has focused on our term acreage in the southern area. However, given the rising service cost environment in the Haynesville, and a deep inventory of other attractive opportunities in our portfolio, our term acreage in the Haynesville does not directly attract capital within our portfolio. Therefore, we are continuing to bring in industry partners that are interested in developing this acreage. Keep in mind, the Haynesville drilling we did in 2009 in the Carthage area confirmed that we have a repeatable, economically attractive play under a more normalized gas price environment. Since this acreage is held by production, we have the luxury of pursuing this resource when the gas price and the cost environment is most favorable.
Then in our southern division, down in Haynesville, we mentioned that we are really going down to essentially no activity there.

I guess, my follow-up is really related to your comments around the Haynesville, but I guess that are priced to the way their portfolio – we haven't seen Devon participate or try to participate in bringing joint venture partners in to pursue some development in the areas that might not be top of the list for your capital right now. Can you give us some thoughts on why perhaps Devon hasn't chosen to go down that road? What your outlook maybe for divesting some acreage that doesn't fit the portfolio as you go forward in order to get there?
I would comment that we have actually brought in some farming partners in the Haynesville on our term acreage, and we really have a focus on managing our overall inventory. So we think that rather than being focused on just maximum acreage capture that we need to manage our inventory to optimize present value, so we are considering outright sales farm-ins, JVs, anything that we're not going to get in the next few years. We're looking at a way to bring value forward.

The only area we've have had much of a problem with delays on frac dates I'd say would be in the Haynesville where we are not a large player compared to others. We don't want to become a large player because we think the economics are not attractive there compared to other areas of our portfolio.

Dave, can you give us an idea what kind of lease exploration picture you are looking at in East Texas Haynesville, Bossier play in a term acreage?
Mark, where we think we have the large repeatable play identified that is – economic under a more normalized gas price environment, we're talking there probably around $5.50 to $6 type prices – would be in Panola County and that's all held by production. We have about 110,000 acres held by production there. We have about 47,000 acres or so just to the south in Shelby and San Augustine counties that we do not think, again, are meeting our return requirements for investment. That's why we're dropping our rigs. We are talking to some people – they might be attractive to someone else, and so we're talking to some companies to see if they are interested in pursuing that. That's around 47,000 acres or so with expirations throughout 2011, 2012.

landownerPermalink Reply by DJG on November 4, 2010 at 3:24
Currently hoping that they do come through with a JV partner for their E.Texas HA/BO prospects as our own families minerals are included in that 47K of term acres mentioned in the last sentance.

6 months ago we were being hounded to secure a lease with DVN and it looked as if we were on slate to be within 2 units to be drilled before the end of 2010. Low NG price environment has those plans now appears to have those plans delayed/shelved.

Oh well, at least the lease was secured and maybe something more may still come of this if a JV partner is secured before expiration looms in 2011/2012.

Time will tell.

landownerPermalink Reply by ALongview on November 4, 2010 at 6:46
This is a little more specific than the entire 47,000 acres in the southern part of the shale. Devon has acreage in the southern part of Sabine Parish that they include in their acreage so maybe some of the proposed acreage is there. Thoughts on the scaled down number and its possible location?

Devon may sell all or part of 17,000 acres in the Haynesville Shale region of east Texas that won't be as profitable as other holdings, David Hager, executive vice president for exploration, said on the call. It has locked in drilling rights on 110,000 acres in the gas-rich region that will generate sufficient profit at prices of $5.50 to $6 per million British thermal units, Hager said.

Read more from this Tulsa World article at http://www.tulsaworld.com/news/article.aspx?subjectid=49&articl...

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