Chesapeake Energy Corp. made a new unconventional natural gas discovery in the Haynesville Shale near Shreveport, LA, which could have a larger impact on the company than any other play to date — including the Barnett and Fayetteville shales, CEO Aubrey McClendon said Tuesday. Chesapeake now controls about 7.5 Tcfe in the Haynesville Shale and with additional leases, it could control “as much as 20 Tcfe over time.”

McClendon provided few details about flow rates or costs to drill in the new play during a conference call with energy analysts and investors. In fact, he said the company was forced to announce the new gas discovery because more competitors are entering the play, which in turn is pushing up leasehold prices. Chesapeake, he said, has been keeping the results secret for the past two years to examine the Louisiana shale through its internal geoscientific, petrophysical and engineering research department.

So far the drilling results from three horizontal and four vertical wells are promising, said McClendon. What the company now wants to do is add to the more than 200,000 net acres it is leasing in the shale, with a goal to capture 500,000 net acres by the end of 2009.

“We tried hard to keep our work a secret, and we were successful until the last two months,” McClendon said. “We would have preferred to stay under wraps for the next few months to get more acreage cheaply, but now we need to escalate and we need to move accordingly…It is my personal belief that this is likely the most important operational announcement in Chesapeake’s history…It’s a great new play, and it has a chance of the being the most significant play in the company’s history. We believe we control 7.5 Tcfe on 200,000 acres in the Haynesville, and it could be worth 20 Tcfe net to Chesapeake if we obtain 500,000 acres.”

The CEO said, “It’s a tall order to say that Haynesville could be bigger than the Barnett or Fayetteville shales, but the math clearly supports it.”

“When you find a play this big right under everybody’s noses, what does that say about the potential for the U.S. natural gas supply?” a financial analyst asked McClendon during the conference call.

“From the future of natural gas production and pricing in North America, I think this says we don’t need a lot of LNG [liquefied natural gas] down the road,” McClendon said. “It’s my view we won’t import a lot of LNG in the years ahead. Demand growth will soak up any additional gas supplies that we and others can bring into the market…We probably need to be building liquefaction rather than more regasification. I don’t see a glut developing. We see what the best deepwater is doing. The best of what Canada can give us. The time frame over the next five years, there will be pretty strong growth in gas demand from electric generation. This is a great story. Gas prices are trading at a Btu discount to oil, and they are generating very attractive returns for natural gas producers such as ourselves…natural gas consumers are able to buy clean burning Btus at a 40-60% discount to oil Btus.

“This is great news for the country, for the industry,” he said. “On a specific basis, people would recognize something special here. We do have an unconventional shale franchise that is second to none. We’ve been more focused on acquiring acreage than in publicity, and it’s sometimes frustrating to see other people get the benefit from the things we are working on. We have developed a team of people here with more shale…experience than anyone in the industry. And we have a proprietary advantage, evaluating our own cores. That gives us a leg up on other folks.”

McClendon added, “Other companies could have found this; there have been multiple penetrations of this zone in Louisiana. One of our competitors had taken a core sample in the last couple of years, but they failed to appreciate what we saw…We are talking about significant production, up to 3-5 Bcf/d out of Haynesville…We think we know a big play when we see it.”

Finding information about how much gas the first Haynesville Shale wells are producing is sketchy. However, John Gerdes, an analyst with SunTrust Robinson Humphrey/the Gerdes Group, said “industry sources suggest recent horizontal Bossier/Haynesville Shale wells have commenced production at 5 MMcfe/d, which suggest 3 Bcfe of reserve recovery for a drill/complete cost of $7-8 million.”

The Haynesville Shale became a headliner this week, but it has been in the news in the past few months. XTO Energy Inc. late last year announced it would pour most of its capital budget into emerging gas plays in East Texas and Louisiana, including the Haynesville Shale (see Daily GPI, Nov. 16, 2007). Junior explorer Cubic Energy Inc., based in Dallas, recently reported positive results from three deep wells it drilled in the play, and GMX Resources Inc. also is testing some wells in the shale. Earlier this month Goodrich Petroleum Corp. said electric and mud log results were encouraging in one of its Haynesville Shale wells. Goodrich now has about 28,000 net acres in the play.

East Texas and northwestern Louisiana gas discoveries have been on the radar of a lot of big and small producers in recent months. The Haynesville Shale is on a trend that extends from the Deep Bossier and Austin Chalk plays, which run across Central and East Texas into northwestern Louisiana. Besides XTO’s expansion into the region, EnCana Corp. is a major player. EnCana agreed last year to buy out its closely held partner in the Amoruso Field of the Deep Bossier, a field that CEO Randy Ereseman called “the best emerging unconventional gas play in North America” (see Daily GPI, Nov. 6, 2007). ConocoPhillips also has upped its spending to develop a program in the Bossier trend (see Daily GPI, Dec. 10, 2007). Anadarko Petroleum Corp. is one of the largest producers in the Austin Chalk (see Daily GPI, April 17, 2007).

Chesapeake also unveiled two other new unconventional gas discoveries in the Granite Wash of the Anadarko Basin, as well as five new unconventional oil projects — a departure for a producer that is 92% weighted to gas.

Developed internally two years ago, Chesapeake’s Colony Granite Wash discovery in Oklahoma’s Washita and Custer counties is now producing 40 MMcfe/d net from 12 horizontal wells. Chesapeake is using four rigs to develop its 60,000-net-acre leasehold, and the company believes the play will accommodate about 250 additional net horizontal wells over time. Nearby in the Mountain Front area of the Granite Wash, which is located in southwestern Oklahoma and the Texas Panhandle, Chesapeake has drilled three horizontal wells in the past three months. Chesapeake now controls about 75,000 net acres in the Mountain Front leasehold, and it is expected to accommodate about 400 additional net horizontal wells over time.

Chesapeake also is stepping up plans to build its oil business, which McClendon said was vital with today’s commodity prices. Although McClendon offered few specifics, he said Chesapeake has identified five new unconventional oil projects, four of which have been developed on a proprietary basis. The projects, located in four different states, range in size from 100,000 acres to one million acres. Chesapeake has begun production in two of the projects, and initial drilling in the other projects is scheduled over the next 12 months.

In addition to the new discoveries and projects, Chesapeake intends to expand its drilling and leasing activities in the Barnett Shale of Texas, particularly in the core and Tier 1 sweet spot of Tarrant, Johnson and western Dallas counties. The company’s net natural gas production in the Barnett Shale is now about 450 MMcfe/d, and it plans to increase its drilling activity to 45 rigs from the current 40 by year’s end. In the Fayetteville Shale of Arkansas, Chesapeake’s net gas production is now about 130 MMcfe/d, and the company plans to more than double its drilling activity there to 25 rigs from the current 12 by early 2009. Chesapeake also owns a leasehold position of 1.6 million net acres in the Marcellus and Lower Huron shale plays in the Appalachian Basin. The company has drilled 26 vertical and horizontal Marcellus and Lower Huron shale wells to date and plans to drill 165 vertical and horizontal wells through 2009.

As a result of the Haynesville Shale discovery and its other new discoveries and projects, the company plans to spend an additional $275 million this year and $675 million more in 2009 for drilling and leasehold acreage.

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