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McClendon: Costs to Favor Shale Plays

The emergence of gas shale plays has been a game-changer for the industry and the outlook for gas supply. The scale of the shales is so great that it threatens the survival of the "individual wildcatter," who with only a half-dozen employees drilling a few dozen wells a year will find it difficult to compete, Chesapeake Energy Corp. CEO Aubrey K. McClendon said last Thursday.

McClendon, speaking at the Barclays Capital 2009 CEO Energy/Power Conference in New York City, said he believes the industry will "consolidate greatly" over the next year or so.

That won't happen through transactions, though, but rather as smaller producers "produce out" and find themselves at a disadvantage to larger independents, Chesapeake among them. About 40% of American gas assets are owned by private companies, and their role will shrink in the future as better capitalized and more technologically savvy firms ply the shales, McClendon said.

"I would say that for the greater part of my career the cost curve has been relatively flat," McClendon said. "That is, the difference in quality among properties, among various companies, was not that different at the end of the day. And within companies your best 25% of your assets was not that much better than your worst 25%."

However, things are different these days -- the era of the "shale haves" and the "shale have-nots." The former will enjoy low finding and development (F&D) costs of less than $2/Mcfe "for decades to come," while the latter will have F&D costs north of $3/Mcfe "and increasing over time as most drilling will be increased-density, rate-acceleration wells in existing fields rather than new discoveries.

"Those that missed the...shale land rush of 2004-2008 will pay the price for years, if not decades to come..."

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