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Chesapeake Trimming Eastern Division

Weak commodity prices and tight credit markets, in part, have prompted Chesapeake Energy Corp. to pull employees from its Charleston, WV, eastern division regional headquarters for release or relocation to corporate headquarters in Oklahoma City. The move will consolidate talent as Chesapeake pursues development of the Marcellus Shale, the company said last Thursday.

The Charleston office will become a regional field office as about 215 of the 255 Charleston positions are either moved to Oklahoma City or eliminated, with about 40 positions remaining in Charleston, the company said. The change is consistent with the company's business model elsewhere in the United States, it said. A spokesman told NGI the company did not yet know how many positions would be eliminated as the transfer offer was being presented to employees last Thursday.

Chesapeake will consolidate the management of its eastern division land, legal, accounting, information technology, geoscience and engineering departments in Oklahoma City. Personnel representing corporate development, midstream and some human resources and land functions will remain in Charleston. Field operations will not be affected. "Severance packages and extensive employment outplacement services will be provided to the employees affected by the reorganization, which will be completed June 30," Chesapeake said.

"Moving key disciplines to Oklahoma City will allow us to...more quickly develop the tremendous potential of the Marcellus Shale," said COO Steven C. Dixon. "While this move will provide some cost savings over time, the most significant driver of the decision announced [Thursday] is to optimize our operational performance. The management structure utilized in our other major shale plays -- the Barnett, the Fayetteville and the Haynesville -- has proven to be very successful..This [move] is particularly important and timely because of our need to ramp up Marcellus Shale activity under our $3.375 billion joint-venture agreement with StatoilHydro" (see NGI, Nov. 17, 2008).

Martha A. Burger, senior vice president for human resources, said the company will still have combined employment of more than 400 in Charleston and various West Virginia field offices. This is about 160 more employees than when Chesapeake acquired Columbia Natural Resources (CNR) in late 2005 (see NGI, Nov. 21, 2005), she said. The company considered the reorganization "as tightening credit markets and declining energy prices have dictated a reduction in capital spending and the elimination of cost redundancies," she said.

Chesapeake CEO Aubrey K. McClendon said the move will spur development of the Marcellus Shale, but he also alluded to past litigation in West Virginia as an impetus for pulling back from the state.

Last year a West Virginia circuit court issued a final approval for a class action settlement with royalty owners under which NiSource Inc. was ordered to pay $338.8 million for underpayment of royalties by former exploration and production subsidiary CNR [Tawney, et al. v. Columbia Natural Resources]. NiSource retained primary responsibility in the case after CNR was sold to Chesapeake, whose share of the settlement was approximately $41 million (see NGI, Dec. 15, 2008).

"[T]he reduction in our employee base in West Virginia became inevitable when we decided last year not to build our $40 million regional headquarters office complex in Charleston [see NGI, Sept. 3, 2007] following the West Virginia Supreme Court's refusal to consider our appeal in the Tawney case," McClendon said. "At that time, we realized that until West Virginia's judicial system provides fair and unbiased access to its courts for everyone, a prudent company must be very cautious in committing further resources in the state. Even though the state Supreme Court's decision was not the primary reason for the reorganization, it did play a significant role in our decision."

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