Is Chesapeake Energy abandoning the Marcellus shale region?
Hydr...@aol.com
Since 2007 Chesapeake Energy has been the most aggressive of promoters of shale gas development in the nation. Now with almost 5 years of Chesapeake’s claims and estimates slowly turning into real financials, things are far worse than the company ever imagined including the possibility of their running out of operating cash. Last week at its pressure packed shareholder’s meeting it declared, “Liquids Growth Will Provide The Liftoff” which means ‘wet oil infused shale gases as opposed to ‘dry shale gas’ drilling. This is leaving upset shareholders, puzzled government officials and skeptical landowners now scratching their heads in confusion.
Natural gas just like oil comes out of the ground in a variety of hydrocarbon mixes. It can be ‘dry’ as in not having any oil in it or ‘wet’ where by the gas contains varying amounts of oil particles and density which can be separated out to produce barrels of oil. With natural gas currently selling at $2.28 per million British thermal units (Btu), oil is selling at the significantly higher price of more than $90.00 a barrel. So wet gas is now where Chesapeake Energy is claiming to investors its growth and profits will come from.
Its June 2012 investor presentation boldly states, “CHK’s (Chesapeake Energy) Projected Future Growth Is 100% Liquids” along with, “substantially reduced drilling on dry gas plays and is further reducing in 2012”. There is virtually no mention of the Marcellus region in its latest messaging. In the northeast U.S., this means Chesapeake is in effect saying the real value is now in the Utica Shale formation and not in the Marcellus shale formation. So the race is now on to drill for “wet gas” in Ohio and the far southwest corner of Pennsylvania which trumps drilling in the main Marcellus dry shale gas areas.
Back in Chesapeake’s 2008 investor presentation they claimed the Marcellus shale region as one of, “CHK’s Four Major Shale Plays”. In 2009, they devoted an entire slide to the positives of the Marcellus region. By 2010, they were claiming the Marcellus region as having a , “66% pre-carry estimated internal rate of return". In 2011, they claimed, “#1 in Marcellus Shale” with 30 operating Marcellus dry gas wells. Over the years they stated having land under control allowing them to drill an estimated additional 5,500 to 7,000 Marcellus wells.
However by January 2012, the company was already proclaiming a move away from dry shale gas drilling to wet shale gas as their stock priced plunged and investor's anger grew. In January 2012 they reduced their Marcellus operating dry gas wells from 30 to 12. By the June 2012 investor presentation, no mention of the Marcellus shale formation other than in some page footnotes.
Other shale gas development companies have been quietly decreasing drilling operations in the Marcellus. According to GoMarcellusshale.com as of May 5, 2012 the rig count in Pennsylvania was 96 but by June 1, 2012, had declined to 85 rigs. Tailsman Energy has reduced its Marcellus drilling and there have been scattered reports Rex Energy has been delaying and postponing signing leases in the Marcellus.
While New York State and New Jersey took a wait and see approach regarding hydraulic shale gas fracking, Pennsylvania, with a past history in oil and coal, embraced the industry with open arms. The Corbett Administration has been fully supportative of the industry as a means to develop economic growth. Back in 2007, the state struggled to bring environmental enforcements and standards up to strength to handle the onslaught of drillers even as the industry’s front group, the Marcellus Shale Coalition, became an in-state media public relations juggarnaut with a constant story line shale gas drilling was all for the good and caused no environmental issues.
Two Penn State professors, one current and one former in Terry Engelder and Timothy Considine became literal one man cottage industries writing a blizzard of geology and economic development papers/presentations while appearing everywhere in the press preaching all good news about drilling in the Marcellus. Engelder preached record trillions of non-proved shale gas reserves while Considine preached the creation of more than 100,000 jobs within the Marcellus region of Pennsylvania.
In the background, the Marcellus Shale Coalition funded by Chesapeake Energy, along with other shale gas companies often funded Considine’s research. Then in January of this year, the Energy Information Agency decreased its estimates of unproved shale gas reserves in the Marcellus by more than 60% while Chesapeake itself began its incredible financial meltdown. Then the dry to wet shale gas transition began. Over the last 8 to 9 months, other shale gas companies began quietly decreasing their Marcellus region operations and moving into the Utica shale formation.
While many will believe all this results from natural gas selling too cheaply, industry insiders will see what most will not. This is the strange pattern of rapid consolidation to the ‘best drilling areas with the best gas liquids” which now follows the pattern of a relatively few drilling sweet spots for shale gas despite the prior claims, now proven wrong, shale gas production is equal throughout an entire shale region.
Chesapeake Energy's finanical trouble and the actions of other drillers in moving to wet gas production may also be a sign the armies of men, machinery, equipement and the miles and miles of steel pipe on and in the ground along with the billions of gallons water needing to be trucked in and then trucked out for disposal make the economics of shale gas extremely difficult at best. Or is the rapid shale gas per well depletion rates upsetting the economics needed to continue operations in a given area? Perhaps a combination of both?
Today there are a lot of Pennsylvanians who have signed drilling leases for Marcellus shale gas production wondering about the value of those leasing arrangements. State officials who assured their voters the industry jobs would be forthcoming. Now it seems many would have appreciated knowing the difference between ‘wet shale gas’ to ‘dry shale gas’ before they ever got involved with the shale gas industry.
Disclaimer: The writer does not hold Cheaspeake Energy or any other U.S. securities in shale gas development companies nor holds any financial arrangements with any person or entity listed in this article.
To see the Cheaspeake Energy series of investor reports, go to: http://www.chk.com/Investors/Pages/Default.aspx
To learn more about local details within Pennsylvania regarding the Marcellus, go to: http://gomarcellusshale.com/