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The Play: Barnett Shale

First and Foremost
by Cheryl Hudak

Chesapeake achieves landmarks in the development of America’s number one natural gas producing field.

Any resource development the size of the Fort Worth Barnett Shale was bound to make waves. But in only five years, Chesapeake’s exploration and operations teams in the Barnett have created a tsunami, chalking up industry-leading successes while producing a trillion cubic feet (Tcf) of natural gas and stimulating decades of economic growth for North Texas.

Spanning 5,000 square miles across 20 North Texas counties, the Barnett holds 50 trillion cubic feet of natural gas, enough energy to supply all the gas-heated homes in the nation for more than five years. It became the first major shale gas play in the early 2000s, when advancements in seismic data gathering, horizontal drilling and hydraulic fracturing completion technologies made its development feasible and profitable.

Knowledge gathered through the development of the Barnett Shale by
employees like Nomac rig 111 Floorhand Jerry Powell, has played a
key role in the successful development of the company’s other big
shale plays.

“When I was recruited to take on the Barnett in 2005,” said Steve Turk, Vice President of Operations – Southern Division, “I felt it would be something special, but at least for the first few months I had no idea of the magnitude of the opportunity.” Turk recalled early estimates of running 12 rigs drilling in the play, which was revised immediately to 15, then to 20 and ultimately to more than 40.

Today Chesapeake is a key player in this granddaddy of all natural gas shale fields, producing 535 million cubic feet of net natural gas equivalent every day (mmcfe/d) and recently crossing the gross production milestone of 1 bcf/d. Entering the play in 2004, before it became national news, the company has built a powerful position as the largest leasehold owner, most active driller and largest producer in the Core and Tier 1 “sweet spot” of Tarrant and Johnson counties.

As Chesapeake drilled its way through the Barnett, the company’s exploration and production teams gained valuable information that has been critical to its success in other shale gas developments.

“The Barnett set the table for many of our other unconventional plays,” Turk said. “One of the most gratifying experiences in my career is to see how many of the exceptional technical and operational employees now play key roles in developing equally significant plays like the Haynesville, Marcellus, Fayetteville and the Permian and Eagle Ford.”

And if the Barnett is indeed the granddaddy of all shale plays, there is plenty of life in this granddaddy yet.

John Suter, Vice President of Operations – Western Division and former district manager of the Barnett Shale, said, “This is still an exciting play. The wells here are at least 50-year life wells. The size and quality of newly completed wells in the Barnett is unusual this far along in a play. Sometimes plays can lose their glamour, but not here. It’s still exciting,” he added. “You come to work knowing you can still make a difference.”

Innovative technologies have opened the door for less
invasive urban drilling in the Barnett.

The field is also being rejuvenated through experimentation with refracs, repeating the hydraulic fracture stimulation process on existing wells. “We are refracing some wells after four years to increase production,” Suter explained. “So far we’ve done 10 refracs, all of which have been very successful. We’re testing different methods, including one that utilizes a liner, and we’re always finding new uses for technology.”

Turk agreed that the Fort Worth-centered play continues to reveal new opportunities. “It is amazing, the future that the Barnett has,” he said. “Our acreage position is nowhere near being fully developed, and with spacing innovations and proven re-stimulation potential, I don’t expect the lights to go out in the Barnett for many decades to come.”

While drilling its way to success in the Barnett Shale, Chesapeake has achieved a number of industry-wide landmarks:

• First shale development in an urban, metropolitan environment

• First natural gas development on the grounds of a major airport

• Longest lateral wellbore in the Barnett, the Little Hoss 7B 3H, at 10,019 feet

• Two rigs utilizing bi-fuel technology and multiple electric-powered rigs

• Operation of six of the 10 highest first-month production wells ever drilled in the Barnett Shale by any operator

• Pumped a frac job at 200 BPM, nearly twice the normal rate

• Drilled and continue to operate the Day Kimball Hill, highest ranking well in the play with initial production of 16 mmcf/d, testing 30% over its nearest competitor

• Construction of a model wellsite for public education on the exploration and production process

• Creation of a Neighbor Relations team to work with landowners and groups

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The Play: Meteorology Division

An eye to the sky
By Cheryl Hudak

In December 2009, Chesapeake CEO Aubrey McClendon was asked what he wanted for Christmas. Smiling up at snow-laden skies, he replied, “I’m getting it.”

Weather conditions have a major impact on natural gas demand and supply. Cold temperatures increase the need for space heating, which increases the demand for natural gas – and like most commodities, natural gas prices increase along with demand.

Chesapeake meteorologists Josh Darr, Mark Russo and Jon Davis
watch skies brighten over the Windy City. The company’s Meteorology
Division offices overlook downtown Chicago, home to major financial
and commodity exchanges.

During summer, hot temperatures call for space cooling with air conditioning. As a growing number of electrical utilities use natural gas to generate power, and as the nation’s population shifts toward the southern Sun Belt states, the summertime demand for natural gas is actually growing at a faster pace than winter demand.

Questions remain: how does a natural gas producer know how much of his precious resource will be needed, and where and when? What price will he get for it? Is there some way he can use the constantly changing price of natural gas to work for him, rather than against him?

Well, Bob Dylan was right when he said, “You don’t need a weatherman to know which way the wind blows.”

You need several.

Chesapeake is the only independent natural gas producer to have a fulltime meteorology staff. The group’s expert predictions do more than warn employees to pull out those distinctive Chesapeake umbrellas; they translate into energy demand data that is used in the company’s financial risk management process and the hedging of natural gas production.

Located on the 23rd floor of a Chicago high-rise, Chesapeake’s Meteorology Division looks down through the clouds at a bustling city. The heads of its staff, however, are anywhere but in the clouds. They are constantly attuned to the vagaries of weather trends around the globe.

“Mark Russo and I worked in the weather group at CitiGroup/Smith Barney in the early 2000s,” said Jon Davis, Chesapeake’s Senior Meteorologist. “Our weather wires went to virtually all the major energy and agricultural companies. Aubrey McClendon received those reports and felt that our expertise could help the company with energy projections and hedging activities. In 2003, he approached me about leaving Citi, and I accepted and that’s how Chesapeake’s Meteorology Division began.”

Today meteorologists Mark Russo and Josh Darr round out the Chesapeake group. A fourth member of the weather team is Jayson Stock, who does Geographic Information Systems (GIS) mapping and analysis from his office at the company’s Oklahoma City headquarters.

The team provides Chesapeake’s hedging group with extensive data, forecasts and other energy-related, weather-sensitive information on a daily basis with conference calls each week – daily in extraordinary circumstances. They also produce a CHK Operations Wire that provides outlooks to alert the company’s field operations across the U.S. for potential hazardous weather conditions.

As specialists in what is called “applied meteorology,” the team studies the impact of weather on a publicly traded commodity – in Chesapeake’s case, natural gas.

Radar is one of the most identifiable tools
used in weather forecasting.

“Weather changes rapidly,” Russo noted, “especially in natural gas. We may make a two- to three-week forecast that can potentially cause dramatic fluctuations in the natural gas market.”

“The key is forecasting it before others see it,” Davis noted. “We spend a huge amount of time on independent research, building our own weather models and tools to do both short- and long-term analysis. We measure temperature impacts – and therefore natural gas demand – by considering the number of cooling degree days versus heating degree days.”

One thing they don’t predict is commodity price. They leave that to the company’s hedging team – McClendon, Marc Rowland, Chesapeake’s Executive Vice President and Chief Financial Officer, and Jeff Mobley, Senior Vice President of Investor Relations and Research.

“We never talk about price, only demand,” Davis said. “I don’t think you can be a meteorologist and a trader. Others might disagree, but I think a trading position could bias your forecast.”

The company’s hedging team acknowledges the importance of the information provided by the meteorology group.

Surrounded by computer screens, the Chesapeake meteorology team
helps the company analyze weather trends that have a strong impact
on natural gas prices.

“We are price makers at Chesapeake,” Rowland said, “not price takers. We don’t just use hedging as a defense against price volatility – we use it for revenue creation. Since 2001 we have generated $4.8 billion for our company through hedging.”

Is it a bit daunting to make weather forecasts that affect the company’s profits? Heads nodded vigorously around the meteorology office, and the team agreed that missing a forecast is their greatest fear. “Of course you want to be right every time. You know the stakes are high. There are a few sleepless nights, but you learn your lessons and you don’t make the same mistake again.”

The Chesapeake weathermen find applied meteorology as exciting as tornado chasing. One series of memorable predictions took place in 2009. “Last summer was one of the coldest on record in the U.S., which the Chesapeake weather team forecast accurately months in advance,” Davis said. “Last fall, we thought our preliminary research indicated a likelihood for a colder than average period of time in early winter as well. So we made that forecast.”

Meteorologist Mark Russo studies a wall of weather
updates to prepare the CHK Operations Wire, which
alerts the company’s field operations to possible
hazardous weather conditions.

He added that a cold early winter means more gas is used early in the season. “That sort of raises the fear factor,” Davis explained. “Because December is actually early in the heating season – so you will still have 75% of the heating season left to go before winter’s over. That fear factor can definitely affect prices.”

The group admitted to being a bit anxious after making the forecast. As it turned out, the frigid weather did affect natural gas demand in key population centers, which impacted usage, and ultimately natural
gas prices.

“You have no idea how glad we were to see that cold December.”

So was Rowland, who said, “Last year our meteorologists were accurate in their predictions for an early, cold winter, and we used the resulting price run-up to enter into quite a few hedges for 2010.”

Weather forecasts help keep field operations productive and safe

Although Chesapeake’s Meteorology Division was originally launched to provide weather information to support hedging decisions, its expertise has become a valuable resource for the company’s field operations.

Field operations personnel, keenly aware that extreme weather conditions can impact employee safety, production, drilling activities and pipeline construction, began to consult Meteorology about specific weather situations shortly after the group’s startup.

The historic hurricane season of 2005 and 2008 were case studies in how the nation’s energy supply remains at the mercy of Mother Nature.

The Polar Vortex affects conditions
around the globe.

“In 2008 we were developing maps forecasting how tropical storms and hurricane force winds from Hurricane Ike could affect our operations in Louisiana and East Texas,” said Meteorologist Josh Darr. “Operations people received this type of analysis to determine whether wind speeds will be high enough to lay down rigs as a precaution. That happened several times in the hurricane season of ’08 and ‘05.”

Today, Chesapeake has expanded from its early-day southern operations into northern climates in the Eastern and Western divisions. Those regions face greater exposure to wintry weather, snowstorms and extreme cold that can result in freeze-offs, drilling delays and safety issues

They will count on the company’s meteorologists to be their eyes on the sky.

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The Environment: Compressed Natural Gas

Revving up the future with CNG
By Kevin Blankenship

Running a nationwide fleet is challenging in today’s economy. Although the current recession has forced businesses to cut costs in some areas, gasoline prices have stayed relatively high – and are positioned to march back above $3 per gallon this summer.

The race to find an alternative fuel is in full swing. As a result, more fleet owners are looking at a possible win with the cost-effective environmental advantage of converting to compressed natural gas (CNG) from gasoline or diesel fuel. As a proven transportation fuel since the Second World War, natural gas is gaining ground across the nation to provide leverage where fleets need it most – their budgets.

“The big companies are on board,” explained Taylor Shinn, Chesapeake’s Director – Corporate Development. “We’re looking at another summer of $3-plus gas, so a variety of companies are conducting pilot programs. Fleet managers are also watching what legislation will be passed to motivate them to make the switch. Either way, the scales are shifting and appear to be near a tipping point in favor of natural gas vehicles (NGVs).”

With U.S. automakers looking at the potential market for natural gas fleet users, new vehicles and conversion kits are becoming more readily available. Almost any vehicle can be converted to run on CNG; however, only a couple dozen models are certified through the U.S. Environmental Protection Agency.

The price is right

Why wouldn’t automakers jump at the opportunity to produce more vehicles that run on a cheaper, cleaner fuel? It is a business decision: most car builders want to ensure the demand and infrastructure are in place before making the investment required to manufacture CNG vehicles.

“Automakers are interested in creating these vehicles, but they want to be sure there is a steady demand for vehicles fueled by CNG. That’s why fleets are a critical part of spurring the CNG revolution. Most fleets purchase hundreds of vehicles at one time and have centralized CNG filling stations, so fueling infrastructure is not a significant problem,” said Shinn.

Some companies have known about the benefits of natural gas for years. UPS began experimenting with CNG in its delivery trucks in 1998. Today, it operates one of the largest CNG fleets in the nation with 1,100 package delivery vehicles running on CNG. In January, UPS deployed an additional 345 CNG vehicles on the nation’s highways. The company also operates CNG vehicles in Brazil, Chile, France and Germany.

UPS isn’t the only large corporation taking advantage of the benefits of CNG. AT&T announced in 2009 that it would spend $350 million to purchase 8,000 CNG vehicles. This investment represents the largest U.S. corporate commitment to CNG vehicles to date. When completed, this will bring AT&T’s alternative fuel fleet to more than 15,000 vehicles by 2019.

With other recognizable companies like Verizon Wireless, Waste Management and Disneyland Resorts joining the fold, more fleets are making the shift to natural gas. Cities and states are also getting on board, converting their sanitation fleets and airport shuttle systems to CNG. In addition, natural gas-powered trolleys and buses are becoming a cost-effective alternative for municipal budgets that would normally pay more for diesel fuel to power their fleets.

Fleet operators are finding new ways to fight the recession with the economical and environmental benefits of using natural gas, with more CNG refueling stations taking shape, natural gas legislation routing through Congress, and recognized automotive manufacturing brands moving toward NGV fleets.

Chesapeake leads the way with its Fueling the Future Initiative

Chesapeake is taking a leadership role in communicating the CNG message through its new Fueling the Future Initiative. The company has been first in showcasing CNG efficiency and effectiveness to fleet owners with a series of NGV seminars held nationwide. It continues to work closely with the country’s top automakers to show that a buyer’s market exists in America’s fleets for CNG vehicles. The company is also making congressional leaders aware of natural gas legislation, such as the NAT GAS Act or American Power Act, which take a stand to support market growth and develop economies of scale over the next 10 years.

Another sign of the growing infra-
structure for natural gas vehicles,
natural gas filling stations are
appearing along major U.S.
interstates.

The program is working, as Chesapeake was recently honored by the NAFA Fleet Management Association with the 2010 Sustainable Fleet Award for its environmental leadership. The award recognizes Chesapeake’s program to convert its light-duty truck fleet to operate on clean-burning natural gas. Spearheaded by Anthony Foster, Chesapeake’s Manager of Fleet Administrative Services, the company’s objective is to convert its entire fleet of 3,300 vehicles over the next three to four years. This move will enable local fuel retailers to add CNG pumps to existing facilities or build new facilities for public use.

“Our country is desperate for change when it comes to energy and our dependence on foreign oil,” said Taylor Shinn. “This change isn’t going to happen if someone doesn’t take a leadership role in using NGVs, educating the public and national leaders, facilitating partnerships, developing alliances and encouraging our automakers.”

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The Play: The Bossier Shale

Adding a new layer of opportunity in Louisiana:

The Bossier Shale
By Brandi Wessel

When Chesapeake announced its discovery of the Haynesville Shale in East Texas and Louisiana in early 2008, the company predicted the reservoir would likely become the nation’s largest natural gas producer and perhaps even one of the world’s premier gas fields. With the added discovery of the formation’s accompanying Bossier Shale, this Bold projection is quickly becoming a certainty.

“In order to drill our Haynesville Shale wells, we had to go through the Bossier formation,” said Chuck Duginski, District Manager – Haynesville. “As we did so, we gathered core and data from the Bossier. The more data we saw, the more and more interested we became.”

Backlit by a brilliant sunrise, Nomac rig 19 gathers invaluable
information about the Bossier Shale, while drilling a Haynesville Shale
well in Caddo Parish, Louisiana. Located less than 1,000 feet above
portions of the Haynesville Shale, this additional reserve is a unique
discovery.

Located a mere 580 to 800 feet (less than one lap around a standard track) above a substantial portion of the Haynesville Shale, the Bossier Shale is proving to be the icing on the cake for Chesapeake and local residents.

“It’s unusual for two opportunities this good to be found together,” said Duginski. “But, with two giant fields like these sitting one right on top of another, the production potential in this area is tremendous. Not only has the potential essentially doubled in the area of the Bossier, but with the high pressure found in both formations, the amount of recoverable natural gas is exceptional.”

Similar to the process that occurs when you blow up a balloon, the higher pressure present in each of the shales allows for an unusually high number of natural gas molecules to be compressed into the productive formation. In fact, conservative estimates suggest that the Haynesville Shale has 52 billion cubic feet of natural gas equivalent (bcfe) reserves per square mile, while the overlaying Bossier Shale offers an additional 44 bcfe in the same square mile. With a total per-square-mile reserve of 96 bcfe, the area where they overlap contains more than three times the amount of recoverable natural gas per area than the country’s current largest natural gas play, the Barnett Shale.

The Bossier’s location also provides a unique leasing advantage. Because lease agreements with mineral owners are historically set to include the area from the surface to a predetermined depth, in this case through the Haynesville Shale, Chesapeake has already established itself as the largest Bossier Shale leaseholder. In addition, the company’s mineral owner partners will enjoy larger royalty payments from increased, longer-lasting production rates.

“By drilling our Haynesville Shale assets first, we are securing our lease agreements with mineral owners for production in both the Haynesville and Bossier shales,” explained Duginski. “It’s an exciting time knowing that the success and knowledge we gain with our Haynesville wells are laying the blueprints for future Bossier Shale development.”

Duginski is quick to point out that the advantages of the Bossier don’t end there.

“Because we have to drill through it to get to the Haynesville, we will save on production costs,” said Duginski. “Ultimately the wells cost about the same to drill, but the cost for necessary surface facilities, such as pipelines and compressor stations, will be dramatically less because they will already be in place.”

Furthermore, the company’s environmental footprint is significantly smaller, as wells for both the Haynesville and Bossier shales can be drilled from the same super padsites. These sites will have the potential to contain production for 16 separate natural gas wells on a single location.

Due to its tremendous potential, Chesapeake’s drilling forecast for the Bossier and Haynesville shales projects drilling for new wells and production increases through 2020.

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Inside CHK

A closer look at Chesapeake’s people and progress

Chesapeake staffers going green – and digging it!

Laden with bountiful greens, Kat Goodwin, Chesapeake
Coordinator – Employee Garden, is guiding employees
toward sustainable gardening.

Corporate headquarters employees are going green at the Chesapeake Employee Garden. The garden, which takes up a full city block near the company’s Oklahoma City campus, contains 65 raised bed plots to accommodate gardening teams totaling approximately 380 employees.

In addition to the team gardens, seven common plots have beds for berries, asparagus, cut flowers and herbs. The centerpiece of the garden is a patio/gathering space surrounded by perennial flowerbeds designed to attract beneficial insects, butterflies and hummingbirds. The common area includes produce rinsing and cleaning areas as well as a demonstration garden, produce from which will benefit local food banks.

All gardeners are members of the company’s Green Thumb Club, which provides educational resources on a broad range of sustainable gardening subjects through special interest classes and through hands-on training in the garden.

Contribution supports water wells in Africa

Oklahoma City-based Water4 Foundation, headed by Dick Greenly, is working to provide clean, safe drinking water for up to 30,000 people per year in the rural community of Gulu, Uganda. With financial support from Chesapeake, the foundation successfully drilled one water well and trained five teams to continue drilling water wells in Gulu. The Water4 team of experts traveled to Gulu in conjunction with Pros for Africa, a philanthropic mission of NFL players Adrian Peterson, Tommie Harris, Roy Williams and Mark Clayton, to provide food supplies and medical clinics to needy children in Africa.

SHALEPLAY rocks!

SHALEPLAY gets amplified at the regional
championships. Band members are Greg Singleton,
Technical Director – Creative Services; Chris Royse,
Supervisor – Field Training; Katy Igarta, Fitness Center
Coordinator – Membership; Dan Wright, Audio Visual
Technician; and Blayne Cook, Senior Applications
Developer/Analyst.

As one of the nation’s leading producers of shale natural gas, it is only reasonable that Chesapeake’s entry in the 10th Annual FORTUNE Battle of the Corporate Bands would be called “SHALEPLAY.”

SHALEPLAY was formed specifically for the 2010 Battle of the Corporate Bands project and its first public performance was at the regional competition in Las Vegas, Nevada. There the five-person group was selected as one of four bands to compete in the national finals in October at – where else – the Rock and Roll Hall of Fame and Museum in Cleveland, Ohio.

The annual event benefits the Rock and Roll Hall of Fame and Museum’s educational fund. Other sponsors include the International Music Products Association, Gibson Guitar Corporation, Continental Airlines, Air Products and Chemicals, KeyBank and LavaWORLD International.

Oklahoma City Mayor
Mick Cornett greets
conference attendees.

Oklahoma City Hosts U.S. Conference of Mayors

Chesapeake recently served as a sponsor when Oklahoma City hosted the annual meeting of the U.S. Conference of Mayors (USCOM). More than 140 mayors and representatives from 38 states across the country attended the meeting.

With more than 1,200 members, the organization has the capacity to influence national policies. During the annual meeting, the group discussed public policy issues impacting residents of cities large and small, including policy resolutions that could shape future federal legislation. Energy efficiency also was a hot topic on the group’s agenda. The use of natural gas as an alternative to gasoline creates jobs, reduces carbon and other pollutants and makes America less dependent on foreign oil – all major benefits for U.S.