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Spring 2012

​Executive profile:

Nick Dell’Osso

Growing up in the suburbs of Houston in the 1980s and 90s, Nick Dell’Osso did not expect to end up working in what was then an ailing oil and gas industry. Today that has all changed, and the Houston native is making his mark in the industry as Executive Vice President and Chief Financial Officer of Chesapeake Energy Corporation.

“I grew up very close to the refining and petrochemical complexes in Pasadena, Deer Park and Texas City. As a result, most of the people I knew that were involved in the energy industry were more downstream focused than exploration and production,” Dell’Osso said. “I never thought I’d be involved the way I am in the upstream part of this industry.”

 
Nick Dell’Osso
Executive Vice President and
Chief Financial Officer

After graduating from Boston College in 1998 with a degree in economics, a desire to be closer to home encouraged Dell’Osso to consider opportunities in the energy industry and led to enrollment in the School of Business at the University of Texas, where he earned an MBA degree in finance and accounting.

“At that time, in 2003, the energy industry had become an exciting place to focus,” Dell’Osso said. While working as an energy investment banker with Jefferies & Co., he was assigned to work on VPPs (volumetric production payments) for Chesapeake, meeting several of the company’s executives, including Aubrey McClendon, CEO; Marc Rowland, then CFO; and Doug Jacobson, Executive Vice President – Acquisitions and Divestitures.

“I thought it was great to get assigned to work with Chesapeake,” Dell’Osso recalled. “It was an exciting company – interesting, and very active, with a huge asset base that I believed would create value for years to come. I really enjoyed it.”

In August 2008, Dell’Osso came on board as Vice President – Finance of Chesapeake Energy Corporation and Chief Financial Officer of the company’s wholly owned midstream affiliate, Chesapeake Midstream Development (CMD).

“By the end of August when I arrived, our stock was headed down – along with gas prices and the rest of the market,” he said with a smile. “And by October, we were waist-deep in the crash of 2008. That was obviously a challenging beginning, but it has been a dream job for me.”

In November 2010, he moved into his current position as CFO where he has been an integral part of the company’s industry-changing transactions including joint venture partnerships and VPPs. He also has served on Chesapeake’s hedging team with Aubrey and Jeff Mobley, which has achieved realized gains of $8.4 billion since 2006 and $1.5 billion since he became CFO. In addition, Dell’Osso has led the initial public offerings of the company’s midstream affiliate, Chesapeake Midstream Partners, L. P. (CHKM), and Chesapeake’s Granite Wash Trust (CHKR). In June 2011, he was named to the board of directors of CHKM, the master limited partnership created by Chesapeake and Global Infrastructure Partners in 2009, in which Chesapeake owns an approximate 46% stake. Dell’Osso also serves on the boards of FTS International (30% Chesapeake owned), Twin Eagle Energy Management (30% Chesapeake owned) and Junior Achievement of Oklahoma City and has served on the advisory board of the Broach Foundation for Brain Cancer Research in Houston.

Dell’Osso is quick to explain that his responsibilities extend beyond the balance sheet. “My job is not just crunching numbers, sitting in the office doing historical reports,” he noted. “My job is proactive, focused on working with Aubrey, Steve Dixon and others in developing and executing our business strategies, such as deleveraging and switching our production focus from natural gas to liquids.”

The pace and variety of his Chesapeake activities keep Dell’Osso constantly on the move. He admits that he particularly enjoys the company’s commitment to growing demand for natural gas.

“I believe this will benefit us tremendously as a company,” he asserted. “But it will also make things better for the economy, our country and much of the world. I really enjoy the thought of working toward something that has such far-reaching benefits.”​​​​​​​​​

 
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​The Play: Wolfberry

Hot Spot in the Permian Basin
By Cheryl Hudak

It may not look like paradise to everyone, but to an oil man, the Permian Basin has been the Garden of Eden for almost a century. Holding to a long tradition of development, the Permian Basin of West Texas is the largest oil-producing basin in the U.S. – and today, arguably the hottest in the world. And the good times just keep coming, as the region is now home to one of the nation’s most active multizone plays, the Wolfberry. In the past 12 months more than 10,000 wells have been drilled in the Permian, with 3,500 of those in the Wolfberry play.

The Wolfberry is a combination of several stacked formations that extend downward from the Spraberry through the Dean Sand and finally through the Wolfcamp, from 8,200 – 11,000 feet below the surface of the eastern Permian in an area called the Midland Basin. Estimates for the Wolfberry’s potential yield range as high as 2 billion barrels of oil, depending on well spacing and oil prices.

Chesapeake’s Wolfberry operations are focused in the Mabee/University development area about 20 miles north of Midland, Texas. The company currently has 172 Wolfberry wells producing more than 5,000 barrels of oil per day (bo/d) and 10,000 thousand cubic feet of natural gas per day (mcf/d). In 2011 Chesapeake drilled 50 Wolfberry wells, and now runs three rigs with the goal of drilling 60 additional wells this year.

“Most of our Wolfberry wells have initial production of about 120 bo/d, with typical estimated ultimate recovery (EUR) of around 110,000 barrels of oil equivalent (boe), producing over 20 to 30 years,” said Jay Stratton, District Manager – Permian. “They are not huge wells but they are steady, and they are repeatable. It’s definitely a manufacturing process in the Wolfberry, building facilities cheaper and keeping lease operation expenses lower.”

An interesting aspect of the development is the vertical well design that bores through as many as three distinct but comingled formations.

 
A rig drilling the Mabee K-5 is visible through
a pumpjack on its sister well, the Mabee K-3,
in Martin County, Texas.

“These are vertical wells,” said David Godsey, Geoscience Manager – Permian District, Western Division. “They are drilled through sands, shales and carbonates to produce. Altogether, we have resources in a thick sequence – about 2,500 feet – so verticals actually have greater contact than horizontals in this play.”

The wells are completed by hydraulic fracture stimulation, using up to 10-stage fracs. One of the Wolfberry team members likened them to horizontal wells standing on end. Brian Chenault, Asset Manager – Permian, said, “Our greatest challenge here is optimizing the fracs through the different layers, because each layer needs a customized process. So we have to vary our sand concentrations and proppant sizes.”

In the past, the company has purchased water for drilling and completions from privately owned shallow freshwater wells and hauled it in by truck, or purchased it from the city of Midland’s municipal water system. Now the company plans to begin tapping the Santa Rosa zone, about 1,500 feet deep, to access water.

“The Santa Rosa zone has naturally brackish water that is not suitable for drinking but is usable for industrial and agricultural use,” said Chenault. “We plan to convert some old played-out wellbores, recompleting them into the Santa Rosa to access that water. This project promotes environmental conservation and is an economic success.”

Well spacing is another key to success in the Wolfberry, and it often varies from one area to another, depending on reservoir properties and drilling and completion costs. Well spacing is determined by several factors, but it ultimately comes down to the combination of well performance (EUR) and capital required to drill and complete the wells.

“We started here in the Spraberry with 80-acre spacing,” Stratton noted. Now we are downsizing to 40 acres.”

Bruce Escovedo, Resource Development Manager - Western Reservoir Engineering, agrees that spacing is critical in this prolific play. “Going to 40-acre spacing will give us more than 200 additional locations. We probably will eventually get to 20-acre spacing, which will give us yet another 400-500 locations.”

Reservoir engineers like Escovedo study the EUR and monitor each well to see how to most effectively optimize profitability.

“We monitor the recovery and reservoir pressure at each incremental downspacing to judge to whether the incremental volumes we are recovering are unique to that wellbore or acceleration from surrounding wells,” Escovedo said. “We do this by monitoring the productivity and reservoir pressure of both the new and existing wells for signs of interference, by cross checking the volumetrics and fluid behavior of the reservoir, and by constantly monitoring how much each of these wells costs (currently about $2.4 million), because the more we are able to economize costs, the more recoverable volumes come into play at acceptable rates of return."

The vast number of oil and gas opportunities beneath its dusty surface make the Permian Basin unique.

What makes the Permian so special?

“It’s so large, prolific and complex,” Stratton answered with a thoughtful look, “more than any other area. There is so much data to absorb, analyzing everything to find the best use of your time and capital – to get that edge. We have the Wolfberry, Avalon, Bone Spring and other plays out here – some vertical, some horizontal, all different. And you want to understand each of those plays the way people in other operating areas have learned to know just one.”

Regardless of which play they are developing, the men who work in Chesapeake’s West Texas team find the Permian Basin a never-ending challenge and delight.

Building win-win relationships

 
A roadside meeting brings together
Chesapeake Construction Superintendent
Superintendent, and Doc Weathers, Senior
Geologist and Energy Representative for
University Lands.

Shared respect for the land formed a basis for solid friendship between Michael “Doc” Weathers and Mark Mabe. Weathers is Senior Geologist and Energy Representative for University Lands for the University of Texas (UT) Systems. Mabe is Completions Superintendent in Chesapeake’s Midland, Texas, field office.

The University of Texas Systems owns mineral and surface rights to more than 2.1 million acres in 19 West Texas counties, and last year it earned almost $1 billion for the Permanent University Fund, which is the third-largest endowment in the U.S. and the nation’s largest public endowment fund. Money from the fund supports nine universities and six health institutions run by the UT systems, as well as a number of universities and institutions run by the Texas A&M systems.

“We carry a lot of clout on right-of-way and easements for gathering lines and roads,” Weathers said. “We’re hard bargainers but we’re not greedy. We have some great oil and gas operators out here, but I don’t have any company more responsive as a steward of state lands than Chesapeake. And we have found that Mark Mabe is a man of his word. That’s how it has to be in the oil patch.”

Mabe, who works almost daily with Weathers and his organization, agrees. “We pay a price to work with the University Lands people, but we get fair dealing with them, and they trust us to uphold our obligations and treat the land as if it were our own.”

Chesapeake’s Midland team has built and refurbished main roads through the University Lands area, as well as hundreds of miles of lease roads. It has installed speed bumps on the 20-mile-per-hour properties, replaced cattle guards to protect livestock and provided 5-day-a-week maintenance to even out ruts and wear to the caliche-based roads that carry heavy equipment and water through the field.

Weathers and Mabe have become fast friends because they have the same goal – to protect property while developing energy assets.

​​​​​
 
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​The Process: Streamlining Field Operations

Vertical Integration
By Cheryl Hudak

Turning unconventional reserves into economically viable production requires a full toolbox of high-tech drilling and production techniques such as horizontal drilling and hydraulic fracture stimulation.

Such technologies are capital intensive to develop – and service intensive to execute.

To manage its rapid-fire growth and control the capital demands of new technologies, Chesapeake started moving toward a vertically integrated structure in 2001 by owning many of the businesses that provide services or equipment needed to produce natural gas and oil. Today, Chesapeake owns one of the nation’s largest oilfield service companies while most of Chesapeake’s peer companies have to purchase 100% of those services or equipment from outside vendors.

 

“Chesapeake is the most vertically integrated independent exploration and production company in the nation,” said Steve Dixon, Executive Vice President – Operations and Geosciences and Chief Operating Officer. “Ultimately, it is the key to our superior performance – we’ve seen that over and over again.”

A company-owned chain of 12 service and supply affiliates operates upstream from the natural gas and oil Chesapeake produces, providing significant benefits in cost and quality control, timeliness and flexibility.

“When Chesapeake needs to quickly ramp up an area, as we did recently in the Utica Shale, our vertically integrated structure allows us to make and execute decisions very quickly – without broadcasting our moves to the competition. That keeps our edge on the next big deal,” said Jerry Winchester, Chief Executive Officer of Chesapeake Oilfield Services (COS).

Operating flexibility is equally important as the company refocuses on liquids-rich production.

“We can shift rigs from one place to another,” Winchester noted. “We just moved four rigs from the Barnett Shale straight into western Oklahoma as part of our natural gas to liquids strategy. Most independent operators would have to break, renegotiate or replace contracts to do that, as well as pay rig-moving fees. But since Chesapeake is vertically integrated, we can move rigs wherever they are needed.”

Dixon agreed that company-owned service and equipment providers have become key factors in the company’s operational excellence.

“Our vertically integrated structure allows us to be a first mover, to mobilize and ramp up activities in the shortest time possible,” Dixon explained. “Also, we have been able to maintain leadership in horizontal drilling and new technology, buying fit-for-purpose equipment required to launch new operations quickly and get the very best from our operations.

“Another advantage of vertical integration is that it allows us to set our own very high safety and environmental standards,” he continued. “That actually reduces our liability, because we have more control over our own companies than we have over third-party vendors. We can control procedures and training more efficiently and consistently, so we can ensure we are meeting regulations.”

 

Although vertical integration can be expensive to implement, it offers financial advantages by reducing the uncertainty of using outside vendors and services, and by gaining higher public market valuation for assets. Chesapeake Midstream Partners L.P. (NYSE:CHKM), which IPO’d in August 2010, contains valuable natural gas gathering, compression, processing and treatment assets that had not been not fully reflected in Chesapeake’s stock price. By placing them into a master limited partnership with Chesapeake as a sponsoring partner owning 46%, Chesapeake was able to monetize those assets, gain higher market valuation for midstream cash flows, reduce infrastructure delays and capture midstream profits – all while providing an attractive investment opportunity for CHKM unit-holders and Chesapeake’s shareholders.

“The ramp-up speed afforded by our vertical integration has also been a key element in completing our numerous joint venture partnerships,” said Dixon. “Joint ventures require a rapid rate of return based on how fast we can convert our partner’s investment into production and cash flow. Because they know we can come through and execute these aggressive activity ramp-ups, companies are comfortable partnering with Chesapeake in these historic joint ventures.”

The success a company achieves through vertical integration is predicated by its scale, utilization and organization.

“It is hard to make vertical integration work in a small company running 10 to 15 rigs,” Winchester said. “But when you run more than 150 like Chesapeake, you have the critical mass necessary to make it work – and we’re committed to do two-thirds of our field services in-house.”

Dixon agreed, adding, “We’ve been so successful with vertical integration because of the size of our operations and our high activity level. Our vertically integrated units are nearly 100% utilized.”

Strong management teams and effective communications are also prerequisites for vertical integration success, according to Dixon.

 

“We have excellent management teams in all our service affiliates,” he said. “They are also good communicators, which leads to operational effectiveness and continual process improvements.” The groups hold weekly meetings between the drilling team, Chesapeake Oilfield Services and Chesapeake’s operating leadership teams.

Chesapeake plans to take the concept of vertical integration even further.

“Our integrated systems ensure better training and cross-training, but we can up the game,” Dixon asserted. “One of our goals is to professionalize the rigsite. That will make the future better for employees of the integrated units, because we can offer our service employees better opportunities and a career path they’ve never had before.”

Many of those employees will soon be part of a new entity: COS, which is currently building its management team while readying for an IPO in 2012. As its new CEO, Winchester has confidence in Chesapeake’s vertically integrated structure and the future of COS.

“You learn to succeed by a combination of experience and necessity – and our service units have both of those,” he said.

What is...

...an “independent” oil and gas company?

 

An exploration and production company that receives nearly all of its revenues from natural gas and/or oil production at the wellhead, with no significant refining or retail operations. (Examples: Chesapeake Energy Corporation, SandRidge Energy Inc., Anadarko Petroleum Corporation, Devon Energy Corporation)

...a Major Oil Company?

A company engaged in the exploration and production of oil and gas that also has significant activity in oil refining, retail marketing and transportation. (Examples: Exxon Mobil Corporation, ConocoPhillips, Royal Dutch Shell, BP)​​​

Chesapeake affiliates work together from spud to first sales

Producing oil and natural gas requires many steps between drillsite construction and selling production down the pipeline. Chesapeake’s field service affiliates provide the company control over the entire process. We have listed them below and included the year in which we founded or acquired them:

Chesapeake Energy Marketing, Inc. (CEMI) (1995) handles oil, natural gas liquids and natural gas marketing, price structuring and nomination services

Chesapeake Midstream Development (2002) provides gathering and compression services to move the product into pipelines

*MidCon Compression (2008) provides gas compressor equipment and related services

*Compass Manufacturing (2008) supplies gas compressor packages and related equipment to MidCon Compression and Chesapeake

*Nomac Drilling (2001) provides drilling services to Chesapeake and third-party clients

*Nomac Services (2011) delivers integrated directional drilling, mud logging, geosteering and geotechnical services

*Performance Technologies Limited (PTL) (2011) provides pressure pumping for hydraulic fracturing completions

*Thunder Oilfield Services (2011) formed to hold Chesapeake’s trucking, tool rental and excavating service businesses

*Hodges Oilfield Trucking (founded in 1932, acquired in 2006) offers heavy hauling and rig transportation

Oilfield Trucking Solutions (2010) provides water transfer services in the Marcellus and Utica shales and hauls crude oil in the Eagle Ford Shale

*Great Plains Oilfield Rental (2006) supplies tools and services, including drill pipe, drill collars, tubing, BOPs and frac tanks

*Keystone Rock and Excavation (2010) supplies gravel and aggregate

*Included in Chesapeake Oilfield Services, L.L.C. (COS)

​​​​​​​
 
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​The Play: Marcellus Shale

Wet Gas
By Laura Bauer

Liquids-rich natural gas is driving activity in the Marcellus South District

The Marcellus Shale is a natural gas-rich rock formation that runs below parts of the Appalachian Mountains in the Eastern U.S. Some areas of the Marcellus gas play produce dry gas that is primarily methane. However, the natural gas under Ohio, Marshall, Brooke and Hancock counties in West Virginia is rich with valuable Natural gas liquids.

Even though Chesapeake started operations in West Virginia in 2005 through its $2.2 billion acquisition of Columbia Natural Resources (CNR), it wasn’t until the company drilled Marcellus wells in the West Virginia panhandle and southwest Pennsylvania in 2007 that it discovered the land was rich in wet gas. At the time, the company was primarily looking to develop the assets recently acquired from CNR with its first operations focusing on the Victory Field in Wetzel County. With the initial success of wet-gas development in the Victory Field, Chesapeake began strategically pursuing leasing opportunities beyond the Victory Field and set its targets in the surrounding area.

 
Ron Fletcher, Dave Clark and Doug Fortney, left to
right, are pictured on Nomac Rig #290, as they drill for
liquids-rich wet gas in the West Virginia Panhandle.

One such opportunity was an October 2010 acreage trade with Range Resources in the West Virginia panhandle through which Chesapeake acquired approximately 47,000 acres ripe with natural gas liquids in Ohio, Marshall, Brooke and Hancock counties. But time was not on Chesapeake’s side, because many of the leases on the newly acquired acreage were on the verge of expiration. It took a concerted team effort to save them.

“We were in a serious time crunch,” explained Chesapeake District Landman Bryan Lohoff. “Approximately 50% of the Range leases were going to expire in 2011 with roughly 25% expiring in the first half of the year. We essentially had a few months to start operations and save the leases.”

It wasn’t as simple as setting up shop. There were many challenges including diverse topography, navigating around coal mine operations, obtaining state permits and complying with atypical lease provisions, in addition to constructing drilling pads. Meanwhile, other energy companies began circling like vultures, negotiating top leases with landowners whose contracts were approaching expiration.

Chesapeake employees managed to start operations in late December on the Esther Weeks and Glenn Didriksen pads – just in time to save these valuable leases. Once these properties were held by production (HBP), the competition dwindled.

Chesapeake could focus on operations and securing acreage with less concern about other operators driving up prices for leases. These first wells also helped convince mineral owners that Chesapeake would actually drill and produce wells, which would secure royalty income for them.

 
Driller Jesse Bailey on Nomac Rig #290.

“We worked at it from every angle to save these leases. It was teamwork and planning at its finest,” explained Mike Cervantes, Chesapeake Geoscience Manager – Marcellus South District. “Getting these two wells drilled was a huge lift to the extended team in Oklahoma City as well as in West Virginia.”

In December 2010, Chesapeake also signed the Dale Sampson Landowner Group and acquired an additional 9,000 acres in Ohio and Brooke counties. Then in January 2011, Chesapeake signed the Donegal Landowner Group, which included approximately 13,000 net acres in Washington County, Pennsylvania, adjacent to Ohio and Brooke counties. These additions further solidified the company’s acreage block. The Range acreage trade and these two large landowner groups made the entire region more valuable to Chesapeake.

“When you have a large contiguous block of acreage, you are able to plan development more efficiently, eliminating the potential for waste. The team was successful in saving so many leases from expiration because the acreage blocks were largely intact,” Lohoff explained.

Since December 2010, the Marcellus South team has HBP’d approximately 47,000 net acres by drilling 64 wells using six rigs in Marshall, Ohio and Brooke counties. Chesapeake currently has six rigs operating in the West Virginia Panhandle, which includes the Victory Field and acreage extending north into Brooke County. By June, the company plans to have at least six rigs drilling in this region as development continues to be driven by expiring leases and the value of wet gas.

“As we shift our focus away from dry gas assets, we’ll keep trying to grow production in liquids-rich plays. The increase in rate of return can be significant,” Cervantes added.

The Value of Wet Gas

 
Focused on the job, Floorman Nick Hartley on Nomac
Rig #25.

Wet gas, also known as liquids-rich gas, contains heavier hydrocarbons referred to as natural gas liquids (NGLs). Wet gas is produced the same way as dry gas, but its end products and byproducts have a wide range of uses beyond heating and power generation. At current natural gas and oil prices, wet gas is a much more valuable product than dry gas for these reasons:

■ Currently, domestically produced dry natural gas can only be sold in the U.S., while natural gas liquids may be converted into products that trade in the global market.

■ NGL byproducts compete directly with crude oil byproducts in the production of many everyday products including plastics, cosmetics and motor fuels.

■ Because NGLs compete in crude oil markets, their price tends to be tied more closely to the price of crude. For example, a barrel of propane sells for 60-75% of the price of a barrel of West Texas Intermediate crude.

Higher oil rates produced at the wellhead and higher NGL rates produced from gas plants can significantly increase total daily revenue from a single well.

In early 2012 Chesapeake announced its intention to reduce its dry gas operations in response to the low price of natural gas. This means allocating approximately 85% of its 2012 total net operated drilling capital expenditure to liquids-rich plays.

Expanding Pipeline and Processing Infrastructure

It’s one thing to secure assets and produce them, but being able to transport them to market and secure the valuable liquids upgrade is a critical step in the process and a big part of an area’s value. According to Adam Wilson, Manager – Gas Sales for Chesapeake Energy Marketing, Inc. (CEMI), there are a lot more logistics and economic considerations when producing wet gas versus dry gas.

“The pipeline and processing infrastructure in the area didn’t exist a few years ago to handle the current volume of wet gas, so we had to work with various service providers to find ways to get our gas gathered and delivered to a processing plant,” Wilson explained. “With more and more operators moving into the area, capacity in processing plants has been scarce, but Chesapeake has continued to drive the development of more pipelines and plants, and the infrastructure is finally taking off.”

CEMI and Chesapeake Midstream (CMD) have been aggressively pursuing development by securing contracts for processing, fractionation and natural gas liquid (NGL) transportation as well as pursuing rights of way and permits for pipeline infrastructure. Additionally, CMD is working on three compressor stations that will come on line over the next year.

The first station, the Sand Hill, is expected to be up and running in June and able to move 50 million cubic feet/day (mmcf/d). The second station, Battle Run, is slated for October and will be capable of 90 mmcf/d. The Buffalo station will come on line in the first quarter 2013 with 90 mmcf/d of capacity.

“Over the next year Chesapeake will be able to move more than 200 million cubic feet a day from the panhandle, in addition to 225 million cubic feet per day from Victory,” said Wilson. “This should end any curtailments and allow midstream and marketing to stay in sync with the rate of upstream operations.”​​​​​​​​​​​

 
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​The Technology: Business End of The Drillstring

Tools of The Trade
By Brandi Wessel

Ask any craftsman what the most important first step is for a job and he or she will tell you it’s selecting the right tools. Drilling natural gas and oil wells is no different. And no tool is more important than the drillbit.

“It is a lot like wood-carving tools,” said Rene St. Pierre, Vice President – Drilling in Chesapeake’s Northern Division. “The principal is the same – to turn a block of wood into a finished product, to bring natural gas or oil to the surface – but, you’re not going to use the same tool to carve a baseball bat that you would a table leg. And we don’t use the same type of drillbit to get gas out of the Marcellus Shale in Pennsylvania that we would use to get oil out of the Anadarko Basin in Oklahoma.”

 

To make sure a drillbit can address the unique challenges presented by each formation, manufacturers not only create bits out of various materials, but they also offer a wide range of models that can be tweaked to fit a client’s specifications. With so many choices and factors, picking the right drillbit takes a team effort.

“When selecting a drillbit, it’s really important to get a good idea of how it should perform,” said St. Pierre. “To do this, we look at existing bit records, which are like a performance history. Who else has used the bit and where? How has it been done in the past under similar conditions? Were there any issues or problems that slowed drilling?”

Manufacturers can take this information along with open hole logs of offset wells in the area, and enter it into custom software programs to determine rock compressive strength and ultimately predict what type of bit should work best. This high-tech process also allows manufacturers and operators to work together to make modifications before a bit is created to optimize performance.

Thanks to these efforts, Chesapeake has enjoyed tremendous success with hybrid polycrystalline diamond compact (PDC) bits. Designed with industrial diamonds to provide a continuous scraping motion, the bits can cut through much stronger rock, such as that found in shale formations.

“At one time PDC bits were considered unique, but they’re much more widely used now. As a result, they have come down in price and aren’t much more expensive than the traditional tungsten carbide bits,” said St. Pierre. “Not to mention that they are reparable so you get a much longer life out of a single bit.”

 
Turning to the right – Hybrid PDC bits
allow Chesapeake and other operators to
chew through rock at record rates as the
industry works to produce America’s
​energy resources.

Saving on replacement expenses isn’t the only way PDC bits are helping Chesapeake stay in the black. When paired with the right downhole motor, these bits can reach what is known as the optimal rate of penetration and stay in the hole much longer, allowing for a quicker lateral kick-off. The quicker the kick-off, the quicker drilling crews can reach the well’s total depth and ultimately, the sooner the well can begin producing.

“If you pair the right bit with the right motor, drilling is as smooth as churning butter,” said Dave Bert, Vice President – Drilling in Chesapeake’s Eastern Division. “When it’s like that, you don’t have to worry about tripping pipe as much because you need to repair or replace the bit so it really speeds up the process. Not to mention it’s safer for the crew because fewer men are needed on the floor when the drillbit is running.”

Bert is quick to add that no matter how efficient you think you are, thanks to new technology there is always room for improvement.

“What was considered perfection in terms of efficiency and speed 10 or even five years ago wouldn’t be considered very good now,” he said. “The science and technology behind drillbits have come a long way, and as the most active driller in the nation, we’re helping to take it ever further.”

With almost three times as many drilling rigs running as its closest competitor and a reputation as an industry pioneer, Chesapeake is the ideal testing ground for manufacturers to fine-tune their tools. The company is currently working on projects such as developing a self-sharpening bit and a proprietary design to allow even deeper and faster drilling.

 
 

What is a drillbit?

A drillbit is the piece of equipment located at the tip of the drillstring below the drill collar and pipe. Designed with sharp teeth made out of various materials, the bit rotates to cut through underground rock and sediment layers.

In the early 1900s, the drillbit was spun using livestock and a wooden wheel. Now, a motorized rotary table is connected to a square-shaped hollow stem called the “kelly.” The kelly is connected to the drill collar, which puts pressure and weight on the bit to turn it at a high rate of speed.

Drilling mud then flows down through the pipe and out of the bit to lubricate the process and remove cuttings (pieces of crushed rock and soil) from the wellbore.

A single drillbit can be used to drill a well or multiple bits can be used due to variations in rock formations.​​​​​

 
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Inside CHK

A closer look at Chesapeake’s people and progress

Outstanding career opportunities and top benefits propel Chesapeake to a new high ranking in Fortune® Best Companies To Work For list.

 
Aubrey McClendon and Martha Burger
salute the company’s 13,000 employees.

For the fifth consecutive year, FORTUNE magazine named Chesapeake to its list of “100 Best Companies to Work For®.” The company moved up 14 spots on the 2012 list to be ranked #18, the highest listed Oklahoma-based employer and the top ranked natural gas and oil producer. In addition, among companies with more than 10,000 employees, Chesapeake moved up to the #5 spot. FORTUNE specifically noted Chesapeake’s high-paying career opportunities and employee perks and benefits as reasons for the company’s strong showing in the annual list.

“It is Chesapeake’s goal to be the most competitive employer in both our industry and the country,” said Martha Burger, Chesapeake Senior Vice President - Human & Corporate Resources. “The benefits we offer, in addition to our outstanding career opportunities, allow us to recruit and retain top talent. Chesapeake’s employees are the driving force behind the success of our company.”

 
Celebrating success, Chesapeake
employees congratulate each other with
a party.

In 2011, Chesapeake added new benefits for its employees, including a state-of the-art, 63,000-square-foot child development facility in Oklahoma City, three full-time chaplains available to all employees and a comprehensive pregnancy wellness program for expectant mothers in all of the company’s operating areas.

FORTUNE chooses the 100 Best Companies to Work For® by partnering with the Great Place to Work Institute® to conduct the most extensive employee survey in corporate America . Entrants also submit a culture audit, explaining the company’s benefits, incentive programs and other perks.

Chesapeake, 3M join forces to develop lower-cost, higher-performance CNG fuel tanks

 
 

Increased political support and private investment have made natural gas a viable automotive fuel alternative with large growth potential. With more than a 100-year supply of natural gas in the United States and an average price per gasoline gallon equivalent of $1.00 to $2.00, the fuel is plentiful, affordable and domestic.

Currently the fuel tank on a compressed natural gas (CNG) vehicle is its most expensive single component. To reduce costs while increasing performance, Chesapeake is joining forces with 3M to design, manufacture and market a broad portfolio of CNG tanks for use in the United States transportation market. Less expensive tanks will facilitate greater market adoption of CNG as an alternative automotive fuel source.

3M will manufacture the tanks, which will be designed and certified by Hyper-comp Engineering, Inc. of Utah. 3M expects the tanks to be available for sale during the fourth quarter of 2012.

Chesapeake has pledged an initial $10 million toward design and certification services, market development support and a commitment to use the new tanks for its corporate fleet conversion to CNG. The company’s investment will be provided by Chesapeake NG Ventures Corporation (CNGV), which has committed $1 billion over the next 10 years to help fund various initiatives to increase demand for natural gas.

“This partnership brings together two leading companies from different sectors, both committed to advancing the natural gas transportation fuel market,” said Aubrey K. McClendon, CEO of Chesapeake.

Utica Shale Development Presents Job Opportunities

 
Job creation in action at the Performance
Technologies open house.

More than 100 Ohioans went home with job offers after attending a Chesapeake open house in January. More than 300 people attended the event in Canton, Ohio, to apply for jobs with the company’s affiliates Oilfield Trucking Solutions, Great Plains Oilfield Rental and Hodges Trucking Company.

“To make 102 job offers during a five-hour event speaks volumes about the opportunity here in Ohio,” said Keith Fuller, Chesapeake Director – Corporate Development.

The event followed a similar open house held by another Chesapeake affiliate, Performance Technologies, which expects to hire between 100 and 150 people this spring.

Henry Latimer is honored as a good scout – and a lifelong champion of leadership

 
A family tradition, Kevin, Kyle, Henry
and Hank Latimer, from left, wear Eagle
Scout regalia.

Henry Latimer, Supervisor in Chesapeake’s Land Department, has been honored with Chesapeake’s H.E.L.P. Champion award for his dedication to the Boy Scouts of America’s Last Frontier Council.

Last year Latimer logged 877 volunteer hours with the scouts, but his involvement in the organization began long before 2011. He became a Cub Scout at 7 years old, a Boy Scout at 11 and attained the rank of Eagle Scout at 15. His three sons followed in his footsteps, all earning scouting’s highest honor – Eagle Scout. As a volunteer, Latimer has served as a den leader, assistant scoutmaster, scoutmaster, and associate advisor for the Eagle Chapter of the Order of the Arrow.

“I have been fortunate to have been involved in scouting for more than 20 years,” said Latimer. “I have had the chance to see young boys develop lifelong skills and become true leaders in our community.”

Chesapeake’s H.E.L.P. Champion award recognizes an employee or group who embodies a sincere spirit of volunteerism and inspires others to embrace the company’s culture of building better and stronger communities. The winner is selected by a company-wide employee committee.

Along with a H.E.L.P. Champion trophy, Latimer received $1,000 to donate to the charity of his choice. Not surprisingly, Latimer’s donation went to the Boy Scouts of America Eagle Chapter of the Order of the Arrow.​​​​​​

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