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The Play: Eagle Ford Shale

Resource Ranching in South Texas
By Cheryl Hudak

As home to the Eagle Ford Shale, one of the hottest oil and wet gas plays in the nation, the landscape, economy and life‑style in South Texas are changing with the rapid pace of development. Where once the highest structure was a windmill, the arid landscape is now punctuated by drilling rigs. Last year’s sleepy towns are booming with activity. And residents of some of the lowest-income counties in the nation are enjoying royalty income and new employment opportunities.

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Although the region has seen natural gas production for decades, oil development is new. And the Eagle Ford Shale is a rare play because it contains several forms of resources: dry gas in its southern reaches, liquids-rich (wet gas) in the middle counties and oil in its northern tier.

Chesapeake focuses its operations in the oil and wet gas windows of the play, primarily in Webb, Dimmit, Zavala, LaSalle and McMullen counties and extending into neighboring Frio and Atascosa counties. In the past two years, the company has amassed more than 625,000 net acres of leasehold to secure a top 3 position in the play.

Chesapeake Senior Asset Manager - South Texas Wil Warren has been involved with the Eagle Ford since the play’s first days in 2009.

“We knew the geological promise, and our geology team did its homework,” Warren said. “They knew from the beginning that our first well, the PGE Browne 1H on the Petty Ranch, where we had a 24,000-acre leasehold, would be a good well. So we started picking up acreage position. Chesapeake had tons of experience in shale, so we knew what had worked and not worked for us and other companies in the past.”

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The PGE Browne 1H has now been online 18 months and produced in excess of 1.1 billion cubic feet equivalent (bcfe) of natural gas and 100,000 barrels of oil (mbo).

The Eagle Ford team’s efforts have been rewarded by success. Since completing its first well in 2009, Chesapeake’s production in the field has grown from zero to almost 18,000 barrels of oil per day (bo/d) as of September 30, 2011, and is expected to reach 30,000 bo/d by the end of October.

“This is a world-class asset where we economically produce a variety of different hydrocarbons,” said Joe Ketzner, District Manager - South Texas, Western Division. “In less than two years we have drilled more than 200 operated wells in the Eagle Ford Shale. Our gross operated production from this asset is approximately 20,000 barrels of oil (bo) and 60 million cubic feet (mmcf) of natural gas per day. We expect each of our wells will ultimately produce more than 500,000 barrels of oil equivalent (mboe) or 3.5 bcfe. That’s great performance.”

Today Chesapeake has 29 rigs in the Eagle Ford. Many of them are operating on multiwell pads, where drillers run well-bores vertically, then shift to directional drilling so each well can extend in a different direction from the pad, and finally kick off the wellbore horizontally to reach as much of the resource-bearing reservoir surrounding the location as possible.

​“Ultimately, we expect to drill more than 2,500 wells in this play,” said Ketzner, “which at present drilling and completion pricing equates to investing more than $15.20 billion to fully develop our leases.”

Completing Eagle Ford wells requires different techniques than the company uses in the dry gas-producing Haynesville and Barnett shales, where higher pressures push resources out of the ground and up the wellbore. Hydraulic fracturing, or fracking, in the Eagle Ford uses larger proppants to create better conductivity, and clusters are spaced more closely because liquids don’t flow the same way gas flows.

Completions in the play use cross-link fluid for fracture stimulation, making the job easier for fracking companies because it is less wearing on equipment than other options. The Chesapeake operations team likes that because fracture stimulation activities must be operating at top efficiency in such a busy play. The company currently runs five frack fleets and anticipates a total of seven by February 2012.

The size and resource diversity of the Eagle Ford Shale also require different techniques for lifting resources out of the ground, depending on whether a well is producing wet gas or oil. The more viscous the resource, the more help it needs to be lifted. Oil requires additional lifting procedures than the lighter dry natural gas produced in some of Chesapeake’s other shale plays.

“This play spans 200 miles from west to east and 50 miles north to south,” Warren noted. “That’s huge. In the eastern part of the Eagle Ford, McMullen County, we are bringing up 50 API oil from 11,000 feet beneath the surface. That is very light oil. In the middle section of the play, Webb County, we bring up wet gas condensate of 65 API – even lighter – which pretty much lifts itself. But in the Carrizo Springs and Crystal City region, we are producing 32 API oil from 5,000 feet. Those resources are very different, and we have to know how to most effectively lift each one.”

​Joe Craig, Senior Asset Manager - South Texas, and his team work with wells that have been drilled and completed, but are not yet producing. Their task is controlling each well’s initial flowback and establishing procedures for plug removals and artificial lifting prior to the time the well starts production, then monitoring production performance for the life of the well.

“We are responsible for dealing with simultaneous operations and pipeline timing,” Craig said. “It’s a very interesting job in the Eagle Ford due to the wide geographic area and rapid pace of this play. The Eagle Ford has various windows, and things quickly change here. The way Chesapeake deals with those challenges is unlike any other company.”

One of the greatest of those challenges is developing an infrastructure to transport the resources being brought up by the team.

“Gas is transported through pipelines, while oil is currently being trucked out,” said Craig. “Some leases in the Eagle Ford are huge and have strict restrictions on truck speeds. When a lease is 40 miles long and you’re going 20 miles per hour, transporting oil by truck is time consuming. It’s expensive too, since we build and maintain many of those roads.”

He cited the Faith Ranch lease as an example. “It’s about 38,000 acres, and on those acres we expect to find every type of resource – dry gas, wet gas and oil. That’s very different from other resource plays.”

A successful partnership with Chesapeake Midstream Development is critical to meet the transportation challenge, and oil pipelines are presently under construction. According to Ketzner, the company and Midstream have already installed more than 100 processing facilities and laid more than 190 miles of pipeline.

Production Superintendent Mike Laue and his team are involved in sustaining production and ensuring long-term performance in the Eagle Ford Shale.

“This is really a brand new area,” Laue pointed out. “But Chesapeake’s vertical integration gives us a strategic advantage. Owning Chesapeake Midstream, Nomac Drilling, MidCon Compression and Great Plains Oilfield Rental means we are the number one priority for those important service providers to take care of and get our product to market.

​“I guarantee you everyone here is still learning about this play,” Laue said. “I suspect people working in other liquids plays are learning too. Chesapeake moves knowledge from one play to another. Our centralized office synergy, combined with a unique local focus, help us make each specific play successful.”

Warren agreed, saying, “We’re in a part of the playground where no one else is, so we had to start building compression and transmission infrastructure from the ground up. We started with all hands on deck, working very closely with Chesapeake Midstream Development. But it’s faster to drill and complete wells than it is to build infrastructure. Drilling rigs are more mobile, and Midstream has to deal with more landowners, which can take time.

“In some ways, the Eagle Ford’s large lease sizes help expedite both drilling and transmission negotiations,” Warren added. “We are working with fewer individuals making decisions that will affect very large operations.”

Despite its challenges, the Eagle Ford Shale is a source of continual inspiration for the Chesapeake development team.

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​“The fun part here is the dynamic of dealing with all kinds of well types that need varied services at a rapid pace,” Ketzner said. “To keep up with this activity is a challenge, and we’ve done a great job of it. Horizontal drilling and fracking have revolutionized domestic energy production.”

About the only residents in the Eagle Ford Shale who appear uninterested in the activity are half a million cattle. And even their lives are affected by the boom: as one rancher said, “We’re making more money from minerals than from livestock. These oil and gas wells make pretty good nurse cows.”​

A Commodity Conundrum:

Not all BOEs are created equal

A barrel of oil equivalent (boe) is the amount of energy released by burning 1 barrel of oil – OR 6,000 cubic feet (6 mcf) of natural gas. Therefore, the energy ratio of oil to natural gas would be 1 to 6. That is an understandable fact. The facts get a bit murky, however, when one examines the disparity in a boe’s market dollar value, depending on whether that boe came from oil or natural gas.

If a barrel of oil sells for $100, then 1 mcf of natural gas should be worth about a sixth of that amount: $16.66. Today, however, that’s not the case. One mcf of natural gas may sell for around $4 – less than a quarter of its boe value of $16.66.

This discrepancy makes a big difference when estimating the value of a well’s resource production, if that well produces a combination of oil and natural gas.

Here’s a real-world example:
The Price USA 1-10H well started production last July in the Colony Granite Wash.

The Price had initial production of 1,500 barrels of oil per day and 9,000 mcf of natural gas per day. Dividing that 9,000 mcf of natural gas by 6, to determine its energy equivalence to a barrel of oil, one finds it has exactly the same amount of energy potential – 1,500 barrels of oil equivalent. Those figures mean the Price has daily production of about 3,000 barrels of oil equivalent per day (boe/d). At $100 per barrel that sounds like a whopping $300,000 of revenue per day. But not so.

Today, natural gas sells at a significantly lower price than oil. So:

1,500 barrels of oil per day (at $100@ barrel = $150,000 per day)

9,000 MCF of natural gas per day (at $4@ mcf = $36,000 per day)

For a total daily production value of $186,000.

Because of this price disparity, production reports are often divided into two elements: oil and natural gas, even for the same well.

API gravity (American Petroleum Institute gravity):

A measure of how heavy or light a petroleum liquid is compared to water. Because the API index is an inverse measurement, the higher the rating, the lighter or less viscous the petroleum liquid.​​

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How America Can Regain Its Swagger

By Aubrey K. McClendon

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The current shocks to the U.S. financial markets reflect the prevailing pessimism about our nation’s economic prospects. We’ve lost some of our swagger at home and abroad. How to best regain it? Become energy independent and invest the saved trillions in the American economy.

A major problem in the current budget debates is that no one is betting on game-changing economic growth. Over the next 10 years, America will export at least $5-7 trillion of American wealth to import foreign oil. This is unaffordable and unsustainable.

Imagine the mood swing if we took a portion of that $5-7 trillion and invested it developing American oil and natural gas resources. Instead of importing $100 per barrel oil from foreign countries, we can find American oil at less than $20 per barrel and American natural gas at the equivalent of $12 per barrel and pocket the difference.

We can supply all of America’s future energy needs from domestic resources. Production of oil and shale natural gas from 32 of our 50 states now provides fuel sources of revolutionary abundance, allowing us in the years ahead to stand tall again without the weight of exporting trillions of dollars to the world’s oil producers.

This new U.S. source of energy is so enormous that American manufacturers now enjoy natural gas costs that are the envy of the world. Since 2008, natural gas prices have dropped 67%, providing a national economic stimulus of $250 million per day. This cost advantage is already attracting industry back into the U.S.; witness announcements of new plants and jobs in the American steel industry, for example. In the next few years, rising production of American natural gas and new jobs will help revitalize America.

If we use natural gas as a primary transportation fuel, we can save businesses and consumers about $2 per gallon. All we need to do is invest about $2 billion in building compressed natural gas (CNG) and liquefied natural gas (LNG) pumps along our interstate highways. This will give manufacturers and consumers the confidence to build and buy CNG/LNG vehicles. Chesapeake is taking the first step with a $150 million investment in Clean Energy Fuels Corp. to underwrite about 150 LNG fueling stations at truck stops along major commercial goods transport corridors. Other investors are following our lead, including a second $150 million investment in Clean Fuels from several investment funds with close ties to Chesapeake.

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​The energy sector is one of the few bright spots on the domestic jobs front and remains one of the few American industries that still lead the world in technology and performance. American natural gas and oil producers are adding tens of thousands of jobs and generating tenfold more jobs for contractor, supplier and service industries. This year, Chesapeake Energy alone has hired 3,000 Americans.

But other industries win as well. According to a recent American Chemistry Council study, increased production of shale gas would produce nearly 400,000 new jobs in the chemical sector and among suppliers. This will not only ease taxpayer spending on unemployment benefits and add to federal, state and local tax revenues, but will also stimulate the economy through improved balance of trade and increased consumer confidence. In fact, it’s already happening: In 2010, U.S. chemical industry exports increased 17%, moving the industry from a balance of trade deficit to a $3.7 billion surplus.

These new opportunities are real and should be embraced by our political leaders and the public. This new American oil and natural gas supply revolution is not dependent on government subsidies. All it needs is appropriate regulatory restraint and certainty. America’s shale energy treasure can be safely developed by Americans and for Americans. In the process, we can break foreign oil’s four-decade stranglehold on our economy and our foreign policy. Let’s regain our swagger and create value and jobs right here at home – we have the resources, now let’s use them!​​​​​

The Community: Operation Blue

Sea of Blue

Many communities are struggling with weak economies, and the hardships often extend to nonprofits and local organizations as funding dries up and volunteers dwindle. Chesapeake has earned a reputation as a generous community partner in cities and towns where it operates. But the company believes that sometimes writing a check isn’t enough.

For the third consecutive summer, Chesapeake gave its employees four hours of company time to work with the organization of their choice in their communities. This company-wide volunteer initiative – Operation Blue – put employees to work in their own backyards. This year’s service hours totaled 31,736, as 5,626 employees volunteered with 444 organizations in 122 communities across the country.

“By allowing employees to choose the nonprofit they want to volunteer for, they can serve where they see the greatest need in the community,” said Chesapeake Director – Community Relations Teresa Rose.

Operation Blue is Chesapeake’s summer volunteer initiative and part of the company’s H.E.L.P. (Helping Energize Local Progress) Initiative, which offers year-round volunteer opportunities for employees. Over the last three years, employees have logged nearly 89,000 volunteer hours.

“I love being outdoors, and I want to keep our country beautiful for future generations. We made a heavily traveled route look beautiful! Hopefully drivers will notice what we are doing and think twice next time they want to throw trash out the window.” Shannon Brooks, Field Representative

“I drive by that school every day and it’s good to know I made it a safer place to play.” MidCon Shop Mechanic Clint Mullis

“Anything and everything can be used to help people. This couple took their love of horses and combined it with people in need to create a wonderful program. It was inspiring.” Administrative Assistant Kelsi Pritchard

A group of Oklahoma City employees partnered with Rebuilding Together to update a senior citizen’s home.	Eighteen Pennsylvania employees dedicated 72 volunteer hours to cleaning up roadways in LeRoy Township and Athens. Their litter blitz covered four miles.
Volunteers washed trailers, mucked stalls and bathed horses at the Equine Therapy Center in Guthrie, Oklahoma. The center helps at-risk children develop skills necessary to make positive choices in life.	Twenty-four Borger, Texas, employees volunteered with the Pampa Soccer Association. The group overhauled the organization’s bleachers – welding and painting them to look new.
Internal Audit employees volunteered with the Urban League in Oklahoma City. They stuffed back-to-school backpacks.	More than 30 Chesapeake volunteers played ball with The Miracle League in Edmond, Oklahoma.
Great Plains Oilfield Rental employees worked at the Lord’s Harvest Food Pantry in El Reno, Oklahoma. The group unloaded food trucks, organized food pantry shelves and prepared sandwiches. In New York, employees spruced up Sperr Memorial Park with litter cleanup, landscaping and planting flowers.​​​​	Employees helped serve as guides at the Oklahoma City National Memorial Museum, a special area that remembers the victims of the Oklahoma City bombing.
The Elk City, Oklahoma, field office cleaned up a park and softball field in the nearby city of Canute. In addition to litter cleanup, they completed various landscaping tasks.	Eleven employees from the Arkoma, Oklahoma, MidCon office donated nearly 50 volunteer hours to the Arkoma Public Schools district. The group put together PVC pipe around the elementary school’s playground to ensure the play area is state compliant.

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The Play: Tonkawa Play

Playing to win
By Cheryl Hudak

Layered formations stack the deck for success

Many of today’s hottest oil and natural gas plays are in areas where two potential producing formations are stacked one on top of the other: The Bossier atop the Haynesville Shale in Louisiana, the Pearsall over the Eagle Ford Shale in Texas, the Tonkawa Sand above the Cleveland Sand in Western Oklahoma.

Such a “stacked play” is virtually a field over a field – greatly increasing the opportunity to find and produce resources from two different reservoirs in the same well-explored area. Another advantage of such a play is the fact that leases on the shallower formation can be held by production when the lower formation is drilled first. In addition, a great deal of useful data can be gathered on the shallower target while exploiting the deeper horizon. In many cases, the same wellbore can be used to produce the shallower zone, amounting to a significant cost savings and minimizing the footprint of our operations.

And that’s why the deck is stacked for success in western Oklahoma and the Texas Panhandle, where the Tonkawa play rests less than 1,000 feet above the Cleveland.

“We were drilling in the Cleveland, and it was so good that we decided to look at the Tonkawa above it,” said Ted Campbell, District Manager – Northern Mid-Continent District. “The Tonkawa had been drilled as a vertical play, but we moved to an area where the wells are more oil producing, and we’re drilling horizontally. This play contains oil and natural gas, but we’re definitely after liquids, both oil and wet gas.”

Horizontal development of the Tonkawa was initiated by Chesapeake in late 2009 in Roger Mills County, Oklahoma. More recently in Dewey County, two great wells kicked off to a promising start: the Marshall Murphy 1-12H and Lauder 1-11H were completed at rates of 1,200 to 1,300 barrels of oil (bo) plus 1.2 million cubic feet (mmcf) of gas per day. Together, they have estimated ultimate recovery (EUR) of 600,000 barrels of oil over their lifetimes. Including gas, their EUR is between 800,000 and 1 million boe.

“We have drilled some good Tonkawa horizontal wells since then, confirmed oil was present there and that horizontal drilling was the answer to producing commercial quantities,” said Bob Campbell, Manager, Geological District, Geoscience. “We were drilling Tonkawa wells slightly south of the area where we historically produced from the Cleveland,” he noted, “and as we occasionally explored, we discovered that the Cleveland play did extend farther south, emerging underneath the Tonkawa zone.”

​The positioning of the two plays was important, as Bob Woodside, Land Manager – Northern Mid-Continent District, explained. “Because the Cleveland was a deeper zone, we turned our focus to drilling it, because that will hold our leases in the shallower Tonkawa.”

Despite the lower number of Tonkawa wells on Chesapeake’s current drilling reports, Tonkawa’s time will come. Of the 42 horizontally drilled Tonkawa wells, 34 are currently producing with average IPs of 222 bo and 278 mcf.

The company has an estimated 125,000 net acres leased in the play, located primarily in Oklahoma’s Roger Mills, Ellis and Dewey counties, and across the nearby state line in Lipscomb County, Texas.

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“Both the Cleveland and Tonkawa plays are very successful,” Bob Campbell said. “The main difference between the two is that the gas to oil ratio is higher in the Cleveland. That means the typical Tonkawa will produce more oil than a typical Cleveland well. However, the Cleveland also produces natural gas liquids and has more energy, so it has slightly lower lifting costs than the more oil-laden Tonkawa.”

Like wells in the Cleveland beneath it, Tonkawa wells are completed by 10-14 stage hydraulic fracturing with similar plug and perf techniques, using about 80,000 barrels of slick water and 4 million pounds of sand with cemented liners. The plug and perf method creates more fractures in the formation and generates a greater volume of reserves by accessing more rock.

Western Oklahoma is bustling with oil and natural gas activity, and is considered one of the hottest and most profitable plays in the state. Even with the wells being drilled on 640-acre spacing, rigs appear almost side-by-side in the broad landscape, with one rig drilling in the 8,400-foot-deep Tonkawa while its neighbor might target the 9,400-foot-deep Cleveland.

That’s stacking the deck for success!​​​​

Inside CHK

A closer look at Chesapeake's people and progress

Heavy-duty help for northern Pennsylvania

When disaster struck northern Pennsylvania, Chesapeake employees brought out the heavy equipment to help their neighbors. Then they organized some of their key contractors to join in their efforts. Together, they donated more than 4,500 man hours of help to flood-stricken Bradford, Sullivan, Susquehanna and Wyoming counties.

​Working in coordination with local emergency management officials, employees of Chesapeake and its wholly owned subsidiaries Oilfield Trucking Solutions (formerly Hawg Hauling), Nomac Drilling and Great Plains Oilfield Rental began providing equipment, supplies and manpower at the onset of the storm. Then they continued to serve by helping communities in the aftermath: a massive cleanup challenge. Employees also coordinated the assistance of some of the company’s key contractors: Latona Trucking, Meshoppen Stone, Rauscher, Pelton Trucking, TAW and Brad Robinson all stepped in to help.

​Oilfield Trucking Solutions provided six vacuum trucks to the city of Athens; Nomac donated and distributed water to workers; Great Plains lent several pumps to Athens, Sayre and Wyalusing; and fed hundreds of people who were assisting with the cleanup. Massive equipment such as trucks, loaders, refuse containers, dump trucks and even a trackhoe were diverted from the natural gas field to communities in need of help. Equipment and services were also rushed to the towns of Rome, Sugar Run, Athens, Ulster, Milan, Laceyville and Terry Township.

One Chesapeake employee said, “It’s too bad we don’t have a Chesapeake ark! We could have used it.”

New Chesapeake parking garage going green from the top down – and up!​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​

​Calling Chesapeake’s new parking garage “green” is more than a metaphor, it’s a fact. The recently completed car park contains 475 spaces in a three-level underground structure topped by a grass-covered roof that will provide outdoor space for employees to gather and enjoy intramural sports, concerts or a lunchtime walk.

Known as Central Park, the field sits in the heart of the company’s Oklahoma City corporate headquarters and encompasses 75,000 square feet of Patriot Bermuda grass.

This ultimate green-roofed garage was designed to reduce the heat island effect of its urban setting, and to capture storm water while retaining suitable moisture to conserve water.

Environmentally, a green roof adds significantly to the LEED Point system in all five major areas: sustainable site development, water savings, energy efficiency, materials selection and indoor environmental quality.​​​​​​​​​​​​​​​​​​​

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Applying vegetation on the surface of a structure is called a green roof. It reduces hot temperatures and glare while it preserves open space. Chesapeake is taking advantage of the benefits of a green roof, while creating an athletic field that will withstand Oklahoma weather and the company’s many employee activities.

The roof incorporates AirDrain Geogrid technology comprised of thousands of inter-locking grids to provide a perched water table 10 inches below the turf. A sand and peat moss-based root zone was installed on top of the geogrid system to provide a perfect foundation for the unique Bermuda grass hybrid that was developed to withstand extreme temperatures and extensive foot traffic.

Buffalo Creek well hits rare production milestone

Some wells are just special. One of those is Chesapeake’s Buffalo Creek 1-17 well in Beckham County, Oklahoma, which in July surpassed cumulative gross production of more than 60 billion cubic feet of natural gas (bcf). The company believes the Buffalo Creek well is only the sixth well in the state’s history to reach that remarkable milestone. Chesapeake operates the well with an 82.6% working interest and a 65.8% net revenue interest.

​The company spud the 21,000-foot Deep Springer well in May 2002, with first sales commencing in December 2002. The well averaged approximately 41 million cubic feet of natural gas (mmcf) per day for the first two years of production and is still producing approximately 8 mmcf per day. Chesapeake now operates four of the six most prolific natural gas wells ever drilled in Oklahoma.

Total gross capital expenditures to drill and complete the well were $8.5 million and subsequent operating expenses have been $1.4 million, or $0.024 per thousand cubic feet of natural gas equivalent (mcfe). Total gross revenue has been approximately $320 million, which includes approximately $65 million paid to royalty owners and approximately $15 million paid in severance tax to the state of Oklahoma. Total net cash flow from the well to the working interest owners has been approximately $230 million, or a multiple of 27 times the original cost of drilling and completing the well, and the realized price per mcfe has averaged $5.35. ​​