Chesapeake Energy

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Chesapeake Energy Corporation (NYSE: CHK) is the number two driller of natural gas in the U.S. It is the most active driller in the Marcellus shale play as well as the largest leaseholder. Its headquarters is in the near-northwest side of Oklahoma City, Oklahoma.

Chesapeake has approximately 1.73 million net acres under lease in the Marcellus shale with total proved reserves of 265 Bcfe. It is the largest leaseholder in the Marcellus play and its most active driller. The company has projected its ultimately recoverable unrisked unproved reserves almost 70 Tcf.

Chesapeake well site, Susquehanna Co., PA
Photo credit - Dave Messersmith, Penn State Cooperative Extension

1 Latest Operating Results
2 2008 Development Timeline
3 2009 Development Timeline
4 2010 Development Timeline
5 2011 Development Timeline
6 Spotlight Issues
7 Executive contacts

Latest Operating Results

During the second quarter of 2010, Chesapeake's Marcellus shale production was 105 Mmcfe/d. At the close of first half (June 30), production had risen to 130 Mmcfe/d. The company expected to add another 60 Mmcfe/d from the West Virginia portion of the play in the second half of the year. The company was fielding 26 operated rigs and planned to add 2 more to drill a total of 150 net wells during 2010. Update: As of February, 2011 was up to 32 rigs.

A few of its most notable wells from the second quarter '10:
Well             Qtr.      Location               24  hr. peak rate Mmcf/d
----             ----      --------               ------------------------
Mowry 1H         2Q10     Bradford Co., PA                  9.9
Przybyszewski 4H 2Q10     Susquehanna Co., PA               9.7
White 2H         2Q10     Susquehanna Co., PA               9.0

2008 Development Timeline

Chesapeake pursued a very aggressive leasing program throughout the Marcellus shale formation during 2008.

Leasing and Drilling Activities

Typical activities during the year:

A September, 2008 report indicated that Chesapeake was drilling in the Elmira, N.Y area.

The company also had a large number of drilling permits either accepted or pending in Pennsylvania especially in Bradford, Susquehanna, and Wyoming Counties.

An October, 2008 report noted a great deal of leasing activity by Chesapeake Appalachia LLC in Bradford County, Pennsylvania. The Bradford County Registrar of Deeds stated that as of that date 2,018 gas leases had been signed with Chesapeake and recorded during 2008.

Also in late December, 2008 the company had taken out drilling permits in the Town of Hancock in Delaware County, New York. Five wells were proposed with drilling slated to begin in 2009.

Delaware Basin Water Withdrawals

In October, 2008 Chesapeake had applied for a permit to the Delaware River Basin Commission (DRBC) to withdraw roughly 100,000 gallons per day of water from the East Branch at Peas Eddy, Delaware County, New York. The water was for use use in drilling and fracing gas wells.

Statoil-Hydro Oil Joint Venture

In November, 2008 Statoil-Hydro Oil bought about a one-third share in Chesapeake's Marcellus leasehold for $3.4 billion. This sum consisted of $1.25 billion in cash and an agreement by Statoil-Hydro to fund $2.13 billion of Chesapeake's Marcellus drilling costs. As of February, 2010, Statoil-Hydro's leasehold position amounted to 590,000 net acres of Marcellus shale.

Update: A late March, 2010 press release mentioned that Statoil-Hydro had purchased another 9,000 acres of Chesapeake's Marcellus shale leasehold in Pennsylvania. The purchase price had been $253 million which amounted to $4,325 per acre. This increased Statoil's stake in its joint venture with Chesapeake to 42%.

2009 Development Timeline

During the first half of 2009 Chesapeake intensified its Marcellus exploration activities especially in northeastern Pennsylvania and northern West Virginia.

Much of the company's activity in the Marcellus shale formation has been conducted through a wholly-owned subsidiary, Chesapeake Appalachia LLC headquartered in Charleston, West Virginia. While still maintaining a presence in Charleston, the bulk of the personnel for the company's Eastern Division were transferred to Oklahoma City in early 2009.

Robson Well

In January, 2009 the company was found taking out a drilling permit for the Robson Well on Foxhill Road near Brill Road in Oregon Township, about four miles north of Honesdale in Wayne County, Pennsylvania. According to one account, Chesapeake has approximately 100,000 acres leased in the county. The Robson well targeted the Oriskany Sandstone. Since considerably less fracing fluid is required for Oriskany wells, there was no review of the well permit by the Delaware River Basin Commission, nor did the Pennsylvania Department of Environmental Protection (DEP) need a Marcellus Addendum for it.

Robson well site shrouded in fog, Wayne Co., PA
Photo credit - Dave Messersmith, Penn State Cooperative Extension

Nevertheless, there was some concern expressed by environmental advocacy groups that once the well infrastructure, such as holding pit and gas pipelines, was in place that Chesapeake might then reapply to permit the well for drilling to the Marcellus formation. DEP approved clearing the well pad, and the drilling permit was issued in February. A late April, 2009 report found Ziegenfuss Drilling, casing the well point with reinforced steel. In July, 2009 there was a spectacular partial rig collapse as drilling was underway. No injuries were reported.

Towanda Field Office

In 2009, Chesapeake opened a field office in Towanda, Bradford County, Pennsylvania located on Fox Chase Road in a former Ames department store. This office coordinates Marcellus shale development for the company and outreach to residents, community groups and local governments.

West Virginia: Parks and Helicopters

A June, 2009 report found Chesapeake having proposed to the Wheeling, WV Park Commission to lease drilling rights near Oglebay and Wheeling parks in northern West Virginia. The lease was to be approximately 2,200 acres.

Update #1: The Park Commission approved the proposal in early October, and a similar motion was later approved by the Wheeling City Council on October 21, 2009.

Update #2: According to a June, 2010 report terms of the lease called for a 14% royalty and $386,629 signing bonus for each of the City of Wheeling and the Park Commission. The latter organization also received $100,133 to lease property at Wheeling Park. Drilling was to be located in the woods near Oglebay Stables. Chesapeake was to cut a road southwest of the stables to a point in between W.Va. 88 and GC&P Road. A 300 by 400 foot well pad was to be built there. The bridle horse trails close to the stables were to be temporarily closed during the work.

Another separate report, in June 2009, was made of Chesapeake using helicopters to conduct seismic testing in Wetzel County, West Virginia. Dawson Geophysical Co was contractor.

According to one September, 2009 account, Chesapeake was believed to own a large leasehold in Marion, Monongalia, and Preston counties.

Drilling in Bradford County

A late June, 2009 report identified one site where two wells had been drilled by Chesapeake in Bradford County, PA on the 80-acre Morris Otten farm in rural Asylum Township about 45 northwest of Scranton, PA. Another location was identified at year-end 2009 on the Eileen farm in Smithfield Township, PA. It was the site of the horizontal well, Eileen #5h. Smithfield Twp. is roughly 10 miles northwest of Towanda, PA.

Water issues in northeast Pennsylvania

A March, 2009 report indicated Chesapeake had applied to the DRBC to withdraw 1 million gallons of water per day for 30 days from the East Branch of the Delaware River, near Hancock, NY in Delaware County.

Also, in a June, 2009 report Chesapeake had applied for withdrawal of 499,000 gallon/day from Wyalusing Creek, in Rush Twp about twenty miles west of Montrose in Susquehanna County, PA. It was approved by the Susquehanna River Basin Commission for use on a well on the Venderfeltz farm.

July, 2009 found Chesapeake again applying to the DRBC for permission to withdraw one million gallons of water per day from the West Branch of the Delaware River in Buckingham Township, located in Wayne County, PA. In order to minimize the environmental impact on the neighboring communities, the company planned to remove the water using a pipeline system rather than with tanker trucks.

Leasing In Wyoming, Susquehanna, Bradford and Broome Counties

Chesapeake was in the news in September, 2009 when it had made nearly identical offers to two large landholder groups in northeastern Pennsylvania:

Wyoming County Landowners Group - 37,000 acres - 600-700 landowners.
The Friendsville Group in Susquehanna and Bradford Counties, PA and Broome County, NY - 30,000 acres - 600 landowners.

The terms of both offers were very similar - $5,750 signing bonus, 5 year lease, 20% royalties. The Friendsville offer had essentially been a counter-offer to one made earlier to the group by Fortuna Energy.

Well results from the 2nd and 3rd quarters

A few of its most notable wells from the second and third quarters '09:
Well          Qtr.      Location                   peak rate Mmcf/d
----          ----      --------                   -----------------
Vargson-1H     209     Bradford Co., PA                  4.6*
Evanchick-2H   209         "         "                   5.3*
Messenger-3H   209     Wetzel Co., WV                    3.5*
Clapper 2H     309     Susquehanna, Co., PA             10.1
Otten 2H       309     Bradford, Co., PA                 8.9
White 2H       409     Susquehanna Co., PA               8.7
White 5H       409     Susquehanna Co., PA               8.6
Benscoter 3H   409     Susquehanna Co., PA               8.4
_____________
* 30 day Mmcfe/d average only

Drilling in a Pittsburgh's suburb

In late December, 2009 a news account appeared about Chesapeake proposing to drill two Marcellus shale wells in Allegheny County's North Fayette, an outer suburb of Pittsburgh, PA. The wells were to be drilled on a property owned by Champion Processing Inc. that had been used as a strip mine. Chesapeake had leased 143 acres for the wells located in an industrial zone bordered by State Route 980, Steubenville Pike, Beech Hollow Road and Candor Road very close to the Washington County line. As of December 15, the wells were conditionally approved by the North Fayette Planning Commission pending final approval. The wells were to be drilled vertically to a depth of 7,000 feet with a horizontal leg extending out 4,000 to 5,000 feet. The drilling was expected to last about 3 months. Chesapeake planned to drill additional wells on Champion Processing's adjacent land in Washington County.

Update: In March, 2010 a follow-up article mentioned that Chesapeake's proposal had been approved by the township supervisors of North Fayette and Robinson. Chesapeake had finalized plans to drill five wells on the formerly strip-mined Champion Processing Inc. property. Three wells were to be drilled in Robinson and two in North Fayette.

In July, 2010 Chesapeake was also reported as having made agreements with landowners in Lincoln Place, a distant suburb southeast of Pittsburgh.

New Pipeline Facility

In December, 2009, a press release appeared noting that Chesapeake and Spectra Energy had teamed up to expand two pipelines bringing natural gas from the Marcellus shale into New York City. The expansion was to include Spectra Energy's Texas Eastern pipeline as well as its Algonquin system. There was also to be included in the expansion a 16-mile, 30 inch pipeline segment connecting Staten Island to Manhattan. The expansion was expected to be complete by the end of 2013 and to give Chesapeake 800 Mmcf/d of additional pipeline capacity.

2009 Year-end Results

Chesapeake's production at the end of the fourth quarter, 2009 (45 Mmcfe/d) represented a 26% increase from the third quarter of 2009. As of the end of the fourth quarter, Chesapeake had 56 company-owned horizontal wells in the Marcellus shale. The company was fielding 24 rigs.

2010 Development Timeline

As of February 16, 2010 Chesapeake had a record average net production from the Marcellus shale formation of approximately 65 Mmcfe/d. The number of rigs deployed was expected to grow from 24 at the end of 2009 to 32 during 2010 to drill 175 net wells.

Susquehanna County Joint Venture

In January, 2010 a press release surfaced regarding a planned joint venture between Chesapeake and Epsilon Energy regarding the latter's Highway 706 acreage and several producing Marcellus shale wells located roughly 8 miles southwest of the Borough of Montrose in Susquehanna County, PA. According to the agreement, Chesapeake was to earn a 50% interest in Epsilon's project assets in exchange for $5 million up front as well as a $95 million carry, spread over 30 months, for Epsilon's 50% of drilling and other expenses in the joint venture. Epsilon's leasehold consisted of 11,500 acres located in close proximity to acreage already controlled by Chesapeake. Epsilon's management estimated that at least 120 wells could successfully be drilled on the property. The existing wells there already produced in excess of 10 Mmcf/d. Update: The deal closed on February 1, 2010. All told, Chesapeake planned to invest $195 million in developing the Highway 706 Project. The $95 million carry requirement was to be met by by August 1, 2012.

West Viginia Northern Panhandle Leasehold

As of August, 2010 Chesapeake had in excess of 100,000 acres leased in West Virginia's northern panhandle including the aforementioned acreage in Wheeling's Oglebay Park.

Marshall Co., WV Leasing Activity

Chesapeake was in the news in June, 2010 when it offered to lease a 53 acre parcel from the City of Moundsville located along the Ohio River in the Wheeling, WV metro area. The terms offered were $2,800 an acre and 18.75% royalty. The company wanted to drill under the Valley Fork ball fields on 12th Street. The article mentioned that the City of Wheeling and the Marshall Co. school district had also recently signed leases. At the end of August, the city apparently turned down this offer and had proposed, as an alternative for leasing, a site located about 1 mile away from the ball fields.

Also in August, 2010, Chesapeake was reported clearing a drilling site near the town of Fish Creek, WV in Marshall Co. A few local residents had criticized this site as it was located in a potential flood plain. A company spokesman promised to contact them to address any concerns.

Well fire on Pleasants Ridge

In September, 2010 a Chesapeake well located on Pleasants Ridge close to the border of Wetzel and Marshall counties caught fire. West Virginia Department of Environmental Protection (WVDEP) reportedly cited Chesapeake, among other things, for an uncontrolled release of natural gas and shut down operation of the well site.

The Highlands

The company also had leased land near The Highlands development in neighboring Ohio County, WV. Signing bonuses for the leases had run between $750/acre to $3,600/acre with royalties ranging from 12.5% up to 18.75%. According to a September, 2010 news account, Chesapeake planned to drill private property on the south side of I-70, turn the well horizontally towards The Highlands on the north side of the freeway, and extract gas from under the county's land. It was to be known as the Gantzer well and scheduled for development in early 2011. Ohio County had leased its 2,180 acre parcel to Chesapeake for $3,600/acre and an 18.75% royalty on gas sold. The well was expected to have a total depth of approximately 8,000 feet before turning in a horizontal direction under I-70 and on to county land. Update: The well pad was complete as of year-end 2010 and awaiting the the availability of a drilling rig. The company had applied for 8 additional drilling permits in Ohio County and 5 in Brooke Co. Several of these were along I-70 close to the Pennsylvania border or else in West Liberty. One was on the Gantzer property south of I-70.

Wetzel Co. acquisition

Also, in September, 2010 the company was reported purchasing drilling rights to 22,000 acres in Wetzel County for $22 million ($1,000 per acre) from Ed Broome, owner of an oil and gas company in Glenville, WV. The land consisted of 250 separate parcels stretching from New Martinsville to Marion and Monongalia counties.

Wetzel Co. compressors

Chesapeake was in the news in October, 2010 when it obtain permits during September from DEP to install 18 compressor units in Wetzel Co. as part of the company's effort to deliver its Marcellus shale production to interstate pipelines and then on to market.

Ohio County drilling

In December, 2010, Chesapeake was found drilling a horizontal well on the Glenn Didriksen farm off Dement Road in Ohio County, WV approximately ten miles northeast of the City of Wheeling and close to the Town of West Liberty. The well was to reach a total depth of 6,578 feet.

Bradford County Road Work

The company was in the news in late August, 2010 when it paid for upgrading two roads in Bradford County which had received excessive wear related to Marcellus drilling in the area. At the time of the article, work had already begun on Routes 1008 (Crow Hill Road) and 2017 (Marshview Road). Traffic was detoured from Crow Hill Rd. to Route 706, Turkey Path Rd. and Spring Hill Rd. while road work was underway. Crow Hill Road was to be rebuilt and resurfaced with black top all the way from Route 706 beginning in Camptown (Wyalusing Twp.) and extending 2.7 miles to Spring Hill Rd. in Tuscarora Twp. Similar work was to take places for 3.2 miles along Marshview Road going from the North St. intersection in Terry Twp. to the Liberty Corners Rd. intersection in Asylum Twp. Traffic was to be detoured to North St., Rt. 187, and Liberty Corners Rd. All work was scheduled for completion by October 26, 2010.

Later in October another news article appeared that mentioned a contractor working for Chesapeake was in the process of upgrading 5.9 miles of Litchfield Road (state Route 1058) in Litchfield Township, also located in Bradford Co. The road was to be improved so it could handle heavy truck traffic. The repairs were to take place between the Front Street intersection on up to the New York State line. Traffic was to be detoured on to Front Street, Cottons Hollow Road (state Route 1056) and Macafee Road.

Drilling northeast of Pittsburgh

In late October, 2010, according to a news account, Chesapeake had prepared a preliminary site plan for drilling northeast of the City of Pittsburgh in Harmar Twp., Allegheny Co., PA. The drilling site selected appeared to be on a 300 acre tract off Rich Hill Road. A Chesapeake spokesman stated that it had no immediate plans to commence drilling. The horizontal segment of the planned well was expected to extend beyond the township border line. The Harmar Board of Supervisors had approved an ordinance restricting drilling in the township to the aforementioned 300 acre tract.

Anschutz acreage acquisition

According to an early-November, 2010 news account, Chesapeake had been the previously undisclosed buyer of 500,000 acres from Anschutz Exploration Corp first reported in October, 2010. The total amount of the transaction was $850 million. The leased land was prospective for Marcellus and Utica shale as well as Trenton-Black River and located in New York, Ohio and Pennsylvania. It included producing oil and gas wells. Chesapeake was expected to resell approximately 25% of the acreage once the deal closed later in November.

Worker housing in Bradford Co.

A press release appeared in late November regarding completion of a dormitory-like structure called the Nomac Eastern Training and Housing Facility in Bradford County. Nomac Drilling is a Chesapeake subsidiary. The facility was to house 276 residents. ATCO Structures & Logistics was contractor on the project.

2011 Development Timeline

Drilling east of the Marcellus fairway in WV

In January, 2011, Chesapeake was found preparing to drill a Marcellus shale well on the Orville and Irene Broadwater farm in Mineral County, WV near Keyser. This area is generally east of what is considered the Marcellus shale fairway in West Virginia. However, it is immediately south of Garrett County, Maryland where Marcellus drilling has recently taken place.

Fire and explosion in Washington Co.

During late February, 2011, Chesapeake was in the news in Washington Co. when there was a flash fire and explosion at its Powers' well site located off Meadowcroft Rd, in Independence Township, immediately west of the village of Avella along the southwestern Pennsylvania-Ohio border. The Powers family, owners of the 300 acre property, operate a salvage facility on a neighboring tract of land. The fire was attributed to the combustion of fumes escaping from five 500 bbl condensate holding tanks on the site. Three workers were seriously burned, and two had to be airlifted out and hospitalized. Three wells had been drilled on the site, testing was underway, and all three were in the process of being flared when the accident occurred.

Bronco Drilling acquisition

In April, 2011 an agreement was announced to purchase Bronco Drilling for $315 million in cash. Its 22 rigs were to be absorbed into Chesapeake's subsidiary Nomac Drilling LLC, which already owned 95 rigs--90 of these were under contract to the company. At the time Chesapeake was fielding 160 drilling rigs overall and planned to expand the total to 200 by year-end 2012. These were deployed in several different areas around the country including the Marcellus shale region.

Leasing Activity in WV Northern Panhandle

A news account appeared in April, 2011 about two leases that Chesapeake had negotiated in two Northern West Virginia Panhandle counties, Ohio and Brooke. The former one was with West Liberty University in the Ohio County town of West Liberty where the organization received $962,000 up front for approximately 227 net acres ($4237/acre) with an 18% royalty on future production. The latter one was for a portion of 250 acres in Brooke Hills Park in Brooke County. The park district received a $5,000/acre signing bonus for approximately 75 net acres, or about $375,000 in total.

Spotlight Issues

Water disposal issues became a key concern throughout the Marcellus shale play industry during the second half of 2009. While water remained very plentiful, the disposal of flowback water from hydraulic fracturing gas wells became the focus of much public debate. Chesapeake sought to avoid most of the controversy by placing its emphasis on frequent recycling and reuse of water from fracing operations.
Chesapeake continued to ramp up its acquisition of 3-D seismic data with 70 square miles in its database. According to an October, 2009 update it was in the process of shooting 400 miles of 3-D seismic and planned to grow this total up to 900 square miles by the end of the first quarter of 2010.
The July, 2009 Chesapeake operations update indicated a very high investment return on wells in the Marcellus shale--as estimated at a long run price of $7 for gas and $70 for oil. At 71%, it is more than twice the IRR for Chesapeake's Barnett shale wells. IRR, or "internal rate of return", is a measure often used for comparing rates of return on alternative investments.
In the same report the company increased its estimated ultimately recoverable (EUR) gas from 3.75 to 4.2 Bcfe per Marcellus well and indicated that decline rates on their wells were lower than expected. This is in line with the experience reported by at least one other major company that has been extensively drilling the Marcellus shale formation. Chesapeake later advanced this in July, 2010 even further to 5.2 Bcfe per Marcellus well.

Executive contacts

Aubrey McClendon is Chesapeake's Chairman, CEO and co-founder.
Jeffrey A. Fisher is Senior Vice President—Production.
Martha A. Burger is Senior Vice President for Human and Corporate Resources.
Scott Rotruck is Vice President of Corporate Development and spokesman on Marcellus shale drilling.
Yvonne E. Marciano is an Albany, NY-based attorney who represents Chesapeake Energy in New York State.
Mike John is Vice President of Corporate Development for Chesapeake’s Eastern Division, headquartered in Charleston, West Virginia.
Tom Layman is Vice President of Geoscience-Eastern Division.
Dave Spigelmyer is Vice President of Government Relations for the Eastern Division
Steve Turk is Vice President of Operations–Southern Division.
Paul Hagemeier is Vice President of Regulatory Compliance.
Bill Wince is Vice President of Transportation.
B.J. Carney is a Senior Geophysicist-Appalachia.
Matt Sheppard is Senior Director of Corporate Development.
J. Kevin McCotter is Director of Corporate Development.
Brian L. Grove is Director of Corporate Development in Chesapeake's northeastern Pennsylvania field office located in Towanda, Bradford County.
Maribeth Anderson is one of Chesapeake's Corporate Development Managers.
Stacey Brodak is also a Manager of Corporate Development.
Ryan Dean is Senior Coordinator of Corporate Development.
Amy Dobkin is another Senior Coordinator of Corporate Development.
Dave McDougal is a Chesapeake representative in Allegheny County, PA.
Tom Price, Jim Gipson, and Michael Brownell are Chesapeake spokesmen.
Jacque Bland is a Chesapeake spokesperson.

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