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Chesapeake Drops Plans to Drill in Upstate New York

With more than enough drilling opportunities that await development in the Marcellus Shale and elsewhere, Chesapeake Energy Corp. on Wednesday confirmed that it has "no intention" to drill natural gas wells in upstate New York's watershed, which supplies water to nine million people, including New York City.

Chesapeake is the largest leaseholder in the Marcellus Shale, with an estimated 1.5 million net acres spread across northern West Virginia into Pennsylvania and across portions of the southern tier of New York. The voluntary decision to not drill in New York's southern tier, which is in Upstate New York, signaled that Chesapeake did not want to wage a battle with environmental groups that have called on the state to ban drilling in the watershed.

Despite criticism by some environmental groups, the New York Department of Environmental Conservation (DEC) recently issued a draft Supplemental Generic Environmental Impact Statement (SGEIS), which would allow drilling in the watershed as long as producers followed criteria that included disclosing the content of the hydraulic fracturing (fracing) chemicals they would use to drill wells (see NGI, Oct. 5).

Even with tentative approval to begin developing its New York leasehold, Chesapeake CEO Aubrey K. McClendon said "it has become increasingly clear to us over the past few months that the concern for drilling in the watershed has become a needless distraction from the larger issues of how we can safely and effectively develop the natural gas reserves that underlie various counties in the southern tier of New York and create high-quality green jobs in the southern tier and throughout the state."

According to McClendon, his company is "the only leasehold owner in the New York City watershed, and so Chesapeake is uniquely positioned to take this issue off the table and allow the discussion to proceed constructively on natural gas development in the southern tier. The small amount of acreage Chesapeake had acquired within the watershed region -- fewer than 5,000 acres -- was largely obtained as a result of leasing land outside the watershed from property owners who also had tracts within the watershed. This leasehold is immaterial to Chesapeake and also does not appear prospective for the Marcellus Shale."

The Oklahoma City-based independent "believes it can drill safely in any watershed, including New York City," said the CEO, who pointed to the findings in the SGEIS. However, "we have chosen to focus our efforts on more promising areas for gas development in the state. We fully support setting high environmental standards for the extraction of natural gas from the Marcellus Shale and we look forward to continuing that process with the state."

McClendon in September had called on his peers to disclose data about chemicals used in fracing fluids (see NGI, Sept. 28), and he said last week his company supports DEC's decision to have all frac vendors register their products and reveal the chemicals used in them. "We applaud the process they have undertaken and believe it to be a good model for other states." The chemicals used in Chesapeake's frac operations are available on its website and at www.hydraulicfracturing.com.

"We've said all along that drilling in the New York City watershed is a terrible idea," said Earth Justice spokesperson Deborah Goldberg. "We're glad to hear that Chesapeake Energy understands the risk and has promised not to drill in this area."

Chesapeake last Thursday also issued its 3Q2009 operations report; the earnings are to be issued late Monday (Nov. 2). The company said total output averaged 2.48 Bcfe/d in 3Q2009, up 7% from the 2.32 Bcf/d produced a year earlier. Average daily production consisted of 2.286 Bcf of natural gas and 32,902 b/d of oil and natural gas liquids.

Adjusted for divestitures, voluntary production curtailments because of low natural gas prices and involuntary production curtailments because of pipeline repairs -- which together totaled around 275 MMcfe/d -- Chesapeake said its sequential and year-over-year production growth rates would have been 2% and 14%, respectively. The company anticipates full-year production growth to be up 5-6% in 2009, 8-10% in 2010 and 12-14% in 2011, net of any property sales.

"While we expect natural gas prices to move higher in the months ahead, low natural gas prices at the end of the 2009 third quarter led to a 2.2 Tcfe reduction of our proved reserves," said McClendon. "Excluding these price-related revisions, Chesapeake would have reported 14.2 Tcfe of proved reserves for the quarter -- a level above that which we had previously targeted achieving by year-end 2009."

The CEO said the company's finding and net acquisition costs of less than 80 cents/Mcfe benefited from "strong drilling results, reduced drilling costs and approximately $960 million of drilling carries from our joint venture partners."

Chesapeake in 3Q2009 drilled 853 gross operated wells (624 net wells with an average working interest of 73%) and participated in another 864 gross wells operated by other companies (76 net wells with an average working interest of 9%). The company said it is currently using 105 operated drilling rigs to further develop its inventory of around 35,500 drill sites (net), which represents more than a 10-year inventory of drilling projects.

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