January 23, 2012

Chesapeake Energy to slash natural gas drilling in Barnett Shale

Low gas prices prompt the driller to cut production; others are expected to follow suit.

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Chesapeake Energy plans to cut its Barnett Shale drilling by half and curtail production because of the lowest natural gas prices in a decade.

The Oklahoma City-based company said Monday that in the second quarter it will pare back its drilling operations to six rigs each in the Barnett, in North Texas, and the Haynesville Shale, in Louisiana and East Texas.

Chesapeake has recently operated 12 rigs in the Barnett, primarily in Tarrant County, the highest-producing county in Texas.

Companywide, Chesapeake plans to "immediately curtail" a half-billion cubic feet of gas production per day -- 8 percent of current production -- and could slash output by 1 billion cubic feet a day "if conditions warrant."

Chesapeake plans only $900 million in capital expenditures this year for areas that produce only natural gas, 70 percent less than its $3.1 billion outlay last year.

The announcement by Chesapeake, the nation's second-largest natural gas producer, propelled its stock and natural gas futures sharply upward.

The stock (ticker: CHK) rose $1.32, or 6.3 percent, to $22.28, with nearly 32 million shares traded.

Gas futures for February delivery jumped 18 cents, or 7.8 percent, to $2.53 per million British thermal units, in trading in New York.

Analysts said Chesapeake's move is likely to nudge other energy producers toward cutbacks in pure natural gas plays.

"Chesapeake is a big player," said Scott Hanold of RBC Capital Markets. "It's going to be a collective effort by the industry to right the market, and you'll see more announcements this quarter."

Chesapeake's cutbacks will be focused on "dry gas" fields, such as the Barnett, which produce only natural gas. Like other energy companies, Chesapeake is shifting to areas where it can recover substantial volumes of oil and natural gas liquids such as propane and butane, which have much more attractive prices than dry gas.

Gas prices have crashed since 2008 as a result of a shale-gas drilling boom that created a nationwide glut amid a weak U.S. economy. A mild winter has further depressed demand this month.

Chesapeake said it plans to "wherever possible ... defer completions of dry-gas wells that have been drilled but not yet completed, and also plans to defer pipeline completions of dry-gas wells that have already been completed."

Julie Wilson, vice president for urban development for Chesapeake in Fort Worth, said the company has more than 1,000 employees in North Texas. Cutbacks will only minimally affect employment levels here, she said.

"It won't be a substantial number. ... It would be a very small minority," she said. "Obviously, the folks who travel with the drilling rigs will go where the drilling rigs go."

Wilson said she expects a slowdown in drilling and completion of Barnett wells, along with curtailment of some production.

"It just makes sense to defer that until prices are better for everybody," she said. "That's good for our royalty owners as well."

Wilson said Texas, the nation's leading natural gas producer, can boost gas demand and clean its air by "converting more coal-fired plants to natural gas and converting more vehicles to natural gas."

All-time high production

Meanwhile, production from the formation beneath more than 20 North Texas counties is reaching new heights.

The Powell Shale Digest reported Monday that Barnett production hit an all-time high of nearly 5.9 billion cubic feet per day in October, the most recent data available. The digest said it compiled the production figures from Texas Railroad Commission data. The October production was slightly higher than in May, the previous peak.

Powell said that "improved technology in new wells," coupled with longer horizontal lines employing more hydraulic fracturing stages, have enabled production to rise despite a deep decline in drilling activity.

"When one considers we are drilling two-thirds less wells but still very gradually increasing daily production, it shows there are more trillions of cubic feet of gas" in the Barnett "than about anyone could ever imagine," Powell said.

Fifty-eight rigs were drilling Friday in the Barnett, according to RigData. That's less than one-third of the all-time high, 203 on Sept. 5, 2008, a year when natural gas futures briefly surpassed $13 per million Btu.

Oklahoma City-based Devon Energy, the leading Barnett producer, said Monday that it has no plans to cut drilling activity in the play because its wells are performing ably from an economic standpoint.

"Devon is fortunate to have a very strong position in areas of the Barnett where we have found natural gas liquids. As a result, we have no plans to reduce our drilling in the Barnett," spokesman Chip Minty said.

Devon and Chesapeake are the most active drillers in the Barnett. Each had 12 rigs active Friday.

This report includes information from Bloomberg News.

Jack Z. Smith, 817-390-7724

Twitter: @startelegram

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