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The Play:

The Barnett Machine
By Jack Douglas

After being around for 350 million years, the Barnett Shale has only in recent decades become a “rock star” among the nation’s major natural gas plays. The Barnett was the first of the nation’s great shale gas plays, developed after its discovery in the early 1990s by George Mitchell of Mitchell Energy. It holds an estimated 50 trillion cubic feet of natural gas resources.

As the largest and most prolific
unconventional natural gas play in the
U.S., crews in the Barnett Shale work
24/7 to keep the gas flowing.

Spanning 5,000 square miles through 20 North and North-Central Texas counties, the massive natural gas field is considered the granddaddy of shales, and Chesapeake has become a top-tier player in the Barnett’s “sweet spot” counties of Tarrant and Johnson.

The company recognized the potential significance of the Barnett in 2004, before the gas play became national news, acquiring several hundred  wells from Hallwood Energy, which was drilling near Cleburne, Texas.

“After seeing success from the Hallwood wells, Chesapeake CEO Aubrey McClendon decided to buy them and try to make a play,” said Steve Turk, Vice President of Operations for the Southern Division, who guided its development in his former position as District Manager of the Barnett. “The purchase of Hallwood’s assets in late 2004 and 2005 cemented our position in the Barnett and provided a springboard for our success.”

Chesapeake formally organized the Barnett District in early 2006, after drilling 90 wells in the play to date. Turk, who joined the company during that time, said, “I think that on my first day, Chesapeake was producing only 100 million net cubic feet per day (mmcf/d).”

Safety in numbers: the Nomac #102 Texas crew completed
three years without a safety incident.

Currently, Chesapeake is the Barnett Shale’s second-largest producer, most active driller and largest leasehold owner in Tarrant and Johnson counties. The company has 310,000 net acres of leasehold upon which it has drilled 1,505 wells and has an additional 2,800 net risk wells in its drilling inventory. Chesapeake operates 20 rigs in the Barnett, down from a high of 43 rigs in 2008. The company’s net production rate of 630 million cubic feet of equivalent (mmcfe) per day is expected to keep increasing during 2009.

“In my entire career, I’ve never seen anything quite like this, with so many rigs compacted in one area,” said Drilling Superintendent Bob Stowe, a 33-year industry veteran who has worked around the world. Now that low natural gas prices have caused producers like Chesapeake to concentrate on only the best-performing wells, it is ironic to Stowe that the company is “drilling holes faster now than we were before.”

As new neighborhoods emerge in Fort Worth, natural gas is pulled
from the earth a few hundred feet away. Chesapeake’s ability to drill
successfully in urban areas allows the company to tap into an
abundance of resources.

Jeff Miller, Chesapeake’s Geoscience Manager of Unconventional Resources, was working for Devon Energy when the industry began to realize that the best reservoir of the Barnett ran through the middle of Tarrant County, home of Fort Worth. Other companies backed off from the inherent challenges of exploring for and producing natural gas beneath a metroplex of 2 million people. If the Barnett Shale were a gamble, Chesapeake has won the bet with a hard-charging approach to the play.

“One of the reasons I came to work for Chesapeake was I knew that if I’d come up with an idea, they would pursue it,” Miller said. Such perseverance has paid off, through Chesapeake’s unconventional research in its core lab and petrophysical group, which determined the “best reservoir” lies under Fort Worth and the rest of Tarrant County.

Mastering urban operations, a Chesapeake-operated rig
drills just south of downtown Fort Worth.

Technology has been the key to every aspect of the successful development of the Barnett Shale. The play has served as Chesapeake’s field laboratory for advancements in 3-D seismic data gathering and analysis; for innovative drilling techniques such as horizontal drilling and the implementation of multiwell padsites; and for constantly refined completion methods and fracture stimulation.

The knowledge gained in the Barnett Shale doesn’t end at the Texas border. The company’s ability to leverage its expertise has provided a cornerstone for Chesapeake’s success in other major shale gas plays such as the Haynesville in Louisiana, the Fayetteville in Arkansas and the Marcellus in West Virginia, Pennsylvania and New York.

Study predicts long-term economic impact of Barnett Shale development

Natural gas exploration and production in the Barnett Shale has provided an economic boon to North-Central Texas. Even during the current drilling slowdown, production activity in the Barnett is providing 70,000 jobs that would otherwise not exist, according to a recent report by The Perryman Group, led by economist Ray Perryman.

“Predictions call for 20 to 30 more years of activity and decades more production, though the ultimate development will depend on factors such as the pace of technological advancement, gas prices and geology,” the report said.  “Assuming a modest recovery (of gas prices) occurs as anticipated over the next few years, the aggregate benefits over the 2001-2015 period will exceed $100 billion.

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The Technology:

Compression Power
By Laura Bauer

Compass Manufacturing provides the right tools to keep the gas flowing

Having the right equipment and services available when needed is critical to success in the oil and natural gas industry.  Creating unique partnerships to secure these tools is a Chesapeake specialty.  Such partnerships allow the company to acquire necessary equipment and services quickly, so operations are not forced to wait on third parties or suppliers.

For example, by owning its own drilling company, Nomac, and acquiring trucking companies like Hodges and Diamond Y in areas with trucking needs, there is seamless interface between the two subsidiary companies. When Chesapeake is ready to move, the equipment is available – giving the company a strong competitive advantage over its peers.

Randy McKee, MidCon Compressor Mechanic, provides routine
maintenance on several compressor units around Cleburne, Texas.

Chesapeake’s latest company creation is Compass Manufacturing, which fabricates compressor packages for MidCon Compression. As a subsidiary of Chesapeake, MidCon is a rental compression company that provides Chesapeake with gas compressor equipment and related services including compression sizing, field operations and compressor fleet management.

“In early 2007, when planning for its 2008 compression package needs, MidCon realized they were going to be about 150 units short for some gas-lift compressors needed in the Barnett Shale area,” explained Don Mosher, District Manager, Compass Manufacturing.  “There was greater demand for these units than industry suppliers could keep up with.”

 In order to meet this immediate need and  accommodate future growth, Chesapeake decided to create a new subsidiary:  Compass Manufacturing, LLC. 

“Several factors were considered when deciding whether to form the compressor fabrication company,” said Al Lavenue, MidCon President. “Determining factors included MidCon’s need for an additional 150, almost identical units for the Barnett Shale area, as well as repetitive and significant cost increases from the component manufacturers and compressor packagers that we bought our units from.”

Chesapeake’s leadership didn’t waste any time.  By January 2008, Compass was up and running: fabricating and assembling compressor packages for MidCon.  In its first 11 months, Compass manufactured 155 units.

Compressors are an integral part of moving gas from the wellhead to the end user. Whether field gathering, returning the gas down hole in a gas-lift operation or transporting gas from gathering systems to intrastate pipelines, compressors propel gas from thousands of feet underground to its ultimate consumer.

Chesapeake Pumper Dana Newman adjusts the pressure on a unit.

With a 93,500-square-foot facility in Oklahoma City and 65 employees, Compass currently provides approximately 50% of MidCon’s compressor packages on a per-unit basis. For most of 2008, Compass focused on assembling small horsepower/high-demand packages. Compass now assembles larger packages, up to 675 horsepower, with much larger units planned in the future. With more than 2,050 compressor packages in 11 states, MidCon’s horsepower needs vary from 26 to 3,500 horsepower. Compass plans to complete approximately 300 units in 2009 – double its first year’s production.

“As MidCon continues to expand its rental fleet, it will continue to use multiple suppliers to package the larger compressor units needed to rent to Chesapeake and other operators,” explained Lavenue.  “Our plans are to continue to grow Compass’ capacity so that they are providing the bulk of our purchased compressor needs.

“Having the right tools available when we need them is something we work on every day,” Lavenue said. “The Compass shop is fully dedicated to working with MidCon to meet our specific compression needs. This ultimately allows us to keep more gas flowing and improves Chesapeake’s bottom line.”

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The Environment:

Right Place / Right Time
By Brandi Wessel

Anyone who has ever owned a home or operated a business knows that success is all about location. The same holds true when selecting a spot for a natural gas well. While most people may think wellsite selection is as simple as placing a well above a natural gas reservoir, the decision actually is A Complicated one which requires careful consideration of a variety of elements.

At Chesapeake, the process of site selection begins long before a drillbit ever scratches the surface. Regulatory technicians in the field select prospective locations by examining factors such as topography, local environment and any water or right-of-way issues that may be present. Once a technician identifies a potential location, the area is surveyed and staked off before being reviewed by experts from the company’s Geology Department.  These employees take a close look to determine the pros and cons of the location from the standpoints of resource potential, cost and environment.

Just six short weeks after construction commenced on the Kump
626618 in the Marcellus Shale, the site recorded its first natural gas
sale. More amazing still, the landscape surrounding the wellsite was
fully restored eight months after construction began.

“We try to evaluate a site from every angle right up front,” said Kevin Patterson, Eastern Division Environmental Coordinator II. “We want to determine any possible operational or environmental issues right off the bat. In the long run, it’s better for everyone involved, and it saves a lot of costly delays in terms of time, people and equipment.”

Once the company has selected a location, permitting paperwork must be submitted to state regulatory agencies for approval. Requirements vary broadly from state to state.  Drilling on federally owned property has even more stringent regulations.

In West Virginia, the office of Oil and Gas in the Department of Environmental Protection reviews all permitting requests and sends a representative to meet one-on-one with the regulatory tech.  Together, they evaluate the area, often walking through it to examine any potential environmental concerns such as a planned road or culvert construction project, naturally occurring drainage or stream or river crossings. Once approved, a permit is issued and construction on the site begins. The approval process can take anywhere from a few days in Oklahoma to three weeks in West Virginia. In fact, permitting approvals for the company’s Ozark National Forest drillsites in Arkansas can take more than a year.

“Regulations and permitting processes vary widely from one state to another and can, in fact, vary from district to district within a state, so it’s vital for us to work hand-in-hand with the appropriate agencies to make sure we are doing everything we can to protect and preserve the environment,” said Eddy Grey, Director – Regulatory Compliance, Eastern Division.

Nestled among the meadows of the Appalachian Basin, construction
begins on the Kump 626618 wellsite in Upshur County, West Virginia.

But the challenge doesn’t end there. Each operating area’s unique terrain holds its own challenges. The remote, rural mountains of West Virginia present a number of topographic obstacles that must be addressed before a wellsite can be finalized. Every wellsite in the region requires an individual driveway, an access road to provide entry for drilling crews, completion foremen and pumpers. These roads are simple to construct when wellsites are located in the region’s deep valleys or rolling meadows, but the process becomes much more difficult as forests thicken and elevations rise. Isolated sites high in the mountains may require the construction of miles of roadways, as well as pipelines in order to intersect existing right-of-ways.

In an effort to limit the amount of construction necessary and the company’s environmental impact in these rugged locations, Chesapeake utilizes multiwell locations, or padsites, whenever possible.

“Padsites for multiwell sites are slightly larger and may take a little longer to build than the average Marcellus Shale locations, which are 250 x 300 feet and take between 10 to 20 days to construct,” explained Patterson. “But they enable us to drill two to four natural gas wells from a single location. What would have taken earlier generations of oil and gas developers four separate locations and access roads to produce, can now be accomplished from a single padsite.”

The process also reduces the amount of land and materials needed for wellsite construction and significantly decreases overall industry traffic in the area.

“We are trying to please a lot of people when it comes to wellsite location and sizes,” said Patterson. “The ultimate goal for us is to accommodate the size and scope of the drilling project and the equipment necessary to get to the job done, while still making as small an impact as possible on the environment.”

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The Play:

Oklahoma Dewatering Project
Cheryl Hudak

Chesapeake is noted for its expertise in finding and producing unconventional natural gas: gas that is trapped in shales or tight sandstone reservoirs requiring technologically advanced drilling and completion techniques. Today the company is raising the definition of unconventional to a new level as it removes tens of thousands of barrels of water each day from naturally water flooded oil and natural gas reservoirs in order to unlock gas reserves trapped in remote, highly permeable rocks previously believed to contain too much water to produce.

As the pressure is lowered, the dissolved gas
is released – a process similar to opening a
can of soda and allowing the carbon dioxide
dissolved in the soda to bubble up and out of
the can.

Called dewatering, this recovery concept was developed during the past 10 years by a group of independents in Oklahoma who had prospected for years in the Hunton formation. As they attempted to produce a well, they observed that reservoirs with trapped oil would see increased gas production as long as they continued to produce large volumes of water. Early dewatering projects by other operators took place in Lincoln County, Oklahoma, recovering primarily gas and sometimes additional oil. 

Chesapeake started drilling its initial dewatering project in 2007, with first production of natural gas in March 2007 at the Davis pad northwest of Enid, Oklahoma. Today, the company has drilled eleven additional wells and is one of the more active players in the Hunton dewatering play.  Chesapeake is also the dominant dewatering operator in the Simpson-Dolomite formation, a similar type rock, but with trapped gas in the reservoir instead of trapped oil like the Hunton.

Stretching east to west across the state, the Hunton lies between 5,000 - 15,000 feet below the ground and may be 500 feet or more thick at its southern edge.  Farther north, the Hunton gets closer to the surface and thins out to as little as five feet thick. At a certain point in northern Oklahoma, it disappears altogether.

“We call that the “Hunton pinchout,” said David Craycraft, District Manager, Northwest Oklahoma. “And that’s where we are drilling – where the pinchout moves west into Alfalfa and Woods County – that’s the point along the line where some geologic process enhances permeability and allows us to bring up gas.”

Dewatering plays such as the Hunton and the Simpson-Dolomite require a specific geological environment, according to Bob Campbell, Sahara District Geoscience Manager. “For a dewatering play to work, the play usually has to be a carbonate formation of limestone and dolomite.  That means the rock has to have high porosity and permeability in some places and low porosity and permeability in others.”

Chesapeake is one of the most active players
along the Hunton pinchout in northwestern
Oklahoma.

Eons ago, the larger pore spaces and natural fractures in the formation contained hydrocarbons. Then an ancient geologic event caused water to sweep through the reservoir and flood the larger, more porous parts of the rock, leaving oil and gas in the smallest, least porous parts of the formation.  Both types of porosity have to be in place for the dewatering process to work.
Moving the gas to the wellbore is not easy.

Dewatering involves a “pod approach.” First a high-capacity saltwater disposal well is drilled down into the deeper Arbuckle formation, which can hold tremendous volumes of water. Then satellite producing wells are drilled into the Hunton formation in four adjoining sections. Some of these may be horizontal, others vertical or directional. Horizontals are usually around 12,000 feet in total measured depth while vertical and directional wells are around 7,000 feet deep. Flexibility is critical in the northern part of the pinchout, where the pay zone may be extremely small – ranging from five to 15 feet thick.  In some places the pinchout is also the high point on the structure.  So accumulations of oil and gas can be found up against the pinchout as well. 

In the dewatering areas, water is pumped from the Hunton formation, up to the surface and then down into the disposal well.  The trapped oil contains dissolved natural gas.  As the pressure is lowered, the dissolved gas is released – a process similar to opening a can of soda and allowing the carbon dioxide dissolved in the soda to bubble up and out of the can.  Continuing to lower pressure causes the gas to expand and it begins to flow through the reservoir with the water and up into the natural gas wellheads.

The distinction of a dewatering play from a typical, high water cut oil and gas field is this: in a dewatering play, as water is produced the reservoir pressure is also reduced, but at the same time the gas production and any associated oil increase initially.  In a high water cut field, the water, pressure and gas deplete proportionately.

“Twenty years ago it wouldn’t have crossed our minds to produce these particular formations in this manner,” said Campbell. “Back then, when we found water in a project, we just moved on to something else. That is no longer the case. We shot 3-D seismic to mitigate risks and help define the geology.”

Challenges are part of the job, according to Campbell.

“It’s fun trying new things. If something doesn’t work, we learn from it and apply what we have learned to the next project. We get the resources and support we need and we have highly responsible people in the field who observe closely and help us find new ways to succeed.”

Dewatering plays are time-consuming, expensive operations. High-capacity pumps for water extraction are expensive, costly to operate and require additional power. Chesapeake works closely with local companies such as the Alfalfa County Electric Cooperative to upgrade the power systems.

The results are worth the cost and effort.

“When you find an ideal situation, you get very high production rates and large reservoirs of natural gas,” Craycraft said. “One of our dewatering wells is bringing up 5 million cubic feet per day (mmcf/d) from a 7,000-foot wellbore. We have greatly improved the concept and process and have a great acreage position,” he added. “We are poised for new development when the price of natural gas goes up.”

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Inside CHK

A closer look at Chesapeake’s people and progress

Chesapeake hosts Natural Gas STAR workshop

Chesapeake’s Blue Room Theater provided the setting for a Producers Technology Transfer Workshop held under the auspices of the Environmental Protection Agency (EPA) Natural Gas STAR Program.  More than 130 industry participants from companies across the U.S. attended the workshop, which facilitates information exchange on innovative, cost-effective methane emissions reduction technologies.

Bryan Brewster, ONG, and Paul Munding,
Chesapeake Asset Manager, learn about
the Horizon chemical pump from Dale
Liske of Plainsman Manufacturing.

Hosts for the event were Chesapeake and Devon. Those in attendance heard presentations from both companies on their experiences in methane emissions reduction.  EPA representatives also provided updates on EPA reporting rules and Natural Gas STAR Producer Best Management practices.  In addition, an exhibitor area featured new technology and applications for emissions reduction.

Larry Ross, Chesapeake EH&S Field Representative, discusses the
company’s infrared camera inspection program.

___________________________________________________________________

Chesapeake was recently honored for its commitment to excellence in safety and health, receiving the Governor’s Pinnacle Award from the Oklahoma Safety Council.  Receiving the award on behalf of Chesapeake is Paul Hagemeier, Vice President – Regulatory Compliance. Presenting the award are (at left) Dave Koeneke, Executive Director of the Oklahoma Safety Council, and Lt. Governor of the State of Oklahoma, Jari Askins.

Marc Rowland, Executive Vice President and
Chief Financial Officer, accepts the Best
Corporate Citizen Award from Leslie Haines,
Editor of “Oil and Gas Investor.”

Chesapeake wins Best Corporate Citizen honors from “Oil and Gas Investor”

Chesapeake was recognized as the industry’s Best Corporate Citizen in 2008 by “Oil and Gas Investor” magazine. Nominations for the honor were received from readers and the award was presented at the magazine’s Energy Capital Week conference held in Houston on June 2.

The award stated that Chesapeake has long been in the forefront of promoting increased use of clean-burning, abundant and domestic natural gas. It also cited the company’s 2007 launch and support of the American Clean Skies Foundation, a Washington, D.C.-based think tank to promote greater use and public education on the benefits of natural gas as the fuel of America’s 21st century.

 _______________________________________

“We didn’t miss a lick!” said crews drilling the Herber 1-6H, who got a chilling surprise March 29, when a spring storm dropped a foot of snow on northwestern Oklahoma. Contractor Bruce Daniel’s prior planning helped the crews of Nomac #2 weather the storm: a dozer at each rigsite to keep roads open, stockpiling a five-day supply of diesel fuel to keep rigs running without a hitch, and plenty of hot coffee. Crews of Nomac Drilling, a wholly owned subsidiary of Chesapeake, work 24/7 rain or shine, to bring up natural gas at drillsites from Pennsylvania to New Mexico.

________________________________________

Production curtailment protects against unusually low natural gas prices

In response to a continued climate of low natural gas prices, Chesapeake recently curtailed approximately 400 million cubic feet (mmcf) per day of its gross natural gas production, which represents approximately 13% of Chesapeake’s current gross operated natural gas production capacity. The wells that were curtailed are primarily located in the Mid-Continent and Barnett Shale regions. In addition to the approximate 400 mmcf per day curtailment, the company limited production from most newly completed wells in the Barnett and Fayetteville shales to 2 mmcf per day and in the Marcellus and Haynesville shales to 5 and 10 mmcf per day, respectively.

The company was able to make this decision because of its strong financial condition and extensive natural gas hedging positions. In addition, because of the steeply declining production profile of new natural gas wells and the upward trending slope of the NYMEX natural gas futures curve, Chesapeake believes deferring production and revenue to future periods with higher natural gas prices creates greater shareholder value than selling production into the current unusually low priced natural gas market.