Drill Here, Drill Now – The disconnect between the industry and its flacks



Andrew Bush sends this along

Dear reporter/editor:

Given today’s announcement that Congress will allow the offshore drilling ban to expire—opening many more acres to drilling—we thought you would be interested in the story below from yesterday’s business wire, “Chesapeake Energy (CHK) Plans To Reduce Drilling Budget.” In a nutshell, before the dust has settled on the oil and natural gas industry’s “drill, baby, drill” multi-million dollar advertising campaign, the country’s largest independent natural gas producer has announced that it is curtailing – or “shutting in” — its near-term natural gas production, and slashing its drilling budget by 17%. All because the price of gas to consumers has apparently drifted “too low” for consumers, in the company’s view.

“ Chesapeake ’s actions and attitude typify the ‘public be damned’ manner in which the oil and gas industry in this country operates,” said Wilderness Society Senior Policy Advisor Dave Alberswerth . “American consumers and Congress were convinced by the industry’s ‘drill baby drill’ campaign that the key to lowering energy prices was “more drilling”, at the same time that one of our nation’s largest gas producers was apparently laying plans to curtail its own drilling and production operations for fear that their profits weren’t high enough. American consumers should take note of Chesapeake’s actions, because this company is among those that have promoted the notion that American has abundant natural gas supplies, that all we have to do is drill for it, and has even urged Congress to subsidize greater use of natural gas to fuel our vehicle fleet.” Alberswerth noted that although most of Chesapeake ’s operations are on non-federal lands, it is likely that other natural gas producers who do have operations on federal lands will follow suit.

“ Chesapeake ’s action is another good example of why increasing domestic drilling is an inefficient solution for reducing energy prices,” said Wilderness Society Economist Pete Morton , who also noted that after eight years of the Bush drilling boom and more than 170,000 new natural gas wells, energy prices are still high. “Whether Chesapeake ’s action is driven by high extraction costs or a profit-maximizing desire to keep prices high for consumers, it reinforces the need for a thorough economic analysis of proposals to increase domestic drilling.”

Contact:  Dave Alberswerth (202/429-2695) and Dr. Pete Morton (303/650-5818, ext 105), The Wilderness Society


Chesapeake Energy (CHK) Plans To Reduce Drilling Budget 

September 22, 2008

Chesapeake Energy Corporation (NYSE: CHK) announced plans to reduce its drilling capital expenditure (capex) budget during the second half of 2008 through year-end 2010 by approximately $3.2 billion, or 17%, in response to an approximate 50% decrease in natural gas prices since June 30, 2008 and concerns about the possibility of an emerging U.S. natural gas surplus in advance of increased demand from the U.S. transportation sector. Of the $3.2 billion drilling capex reduction, $0.8 billion is attributable to the drilling capex carry associated with the company’s recently closed Fayetteville Shale joint venture with BP America (NYSE: BP), $0.5 billion is attributable to the drilling capex carry anticipated in a Marcellus Shale joint venture and $1.9 billion is attributable to reduced drilling activity. The company plans to reduce its current operated drilling rig count of 157 rigs to approximately 140 rigs by year-end 2008 and expects to keep its rig count relatively flat through 2009 and 2010.

In addition to reducing drilling capex, Chesapeake has elected to temporarily curtail a portion of its unhedged natural gas production in the Mid-Continent region due to unusually weak wellhead natural gas prices that are substantially below industry breakeven costs. The company has curtailed approximately 100 million cubic feet (mmcf) per day of net natural gas production (approximately 125-150 mmcf per day gross) and plans to restore this production once natural gas prices recover from recently depressed wellhead price levels of $3.00 – 5.00 per thousand cubic feet (mcf). This curtailment represents approximately 4% of the company’s current net natural gas and oil production capacity of over 2.3 billion cubic feet of natural gas equivalent per day (92% natural gas).

The company has also reduced its full-year 2008 production growth estimate to 18% from 21% to account for the temporary curtailment discussed above, the sale of 45 million cubic feet of natural gas equivalent (mmcfe) per day of production associated with its Fayetteville Shale joint venture with BP, the anticipated sale of 60 mmcfe per day of production in the 2008 fourth quarter associated with the company’s fourth volumetric production payment (VPP) and shut-ins in the 2008 third quarter of onshore production associated with natural gas processing plant limitations as a result of damage by Hurricane Ike.

Additionally, as a result of reduced drilling activity levels announced today, the company has lowered its anticipated production growth forecasts in 2009 and 2010 to 16% per year from 19% per year. At these levels, Chesapeake believes its production growth will still remain at or near the top of its large-cap peer group, particularly in light of continued strong drilling results from its shale plays. Notably, during the month of September, Chesapeake completed three additional horizontal Haynesville Shale wells with average per well initial production rates exceeding 10 mmcfe per day bringing its total horizontal Haynesville Shale wells on production to 14.[SM]

Drew F. Bush

Communications Associate

The Wilderness Society


Phone: (202)-429-7441

Fax: (202)-429-3945

The Wilderness Society’s mission is to protect wilderness

and inspire Americans to care for our wild places.

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