Chesapeake Energy 1993 Annual Report Download - page 6

uring the past two years, Chesapeake
has focused its capital expenditures in
the Giddings Field of southern Texas
and the Golden Trend Field of southern
Oklahoma. These areas continue to be the emphasis
of Chesapeake's development strategy. In these
fields, the company has developed a proprietary land
and geological base and can add value by utilizing its
'expertise in horizontal drilling and seismic
interpretation. Additionally, by attracting major
companies to participate in Chesapeake's projects,
the company can reduce its financial risk and build
important long-term relationships with larger'
companies that have greater land and financial
resources.
'.GIDDINGS FIELD
Chesapeake's most important assets are located in
the G.iddings' Field of southern Texas, one of the
most active oil .apdgas.fields in the nation. Since
1991, Chesapeake, Union Pacific and others have
drilled more than 600 horizontal wells in Giddings
with a total capital investment of approximately
$800 million.
The primary producing zone in this field is the
Austin Chalk a formatioti' that has been maligned
during the last few years as a result of drilling
disappointments 200 miles away in the Pearsail
Field.. In Giddings, however, the Austin Chalk has
proven to be a prolific producer The results speak
for themselves; During the fourth fiscal quarter of'
1993 and the first fiscal quarter of 1994, the
Primary Operating Areas
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company operated or participated in 12 horizontal
Austin Chalj wells in Giddings. Ten of these wells
registered sustained flow rate for the first thirty days
of production in excess of five million cubic feet of
gas equivalent per day. All of these wells are expected'
to pay out within three years and seven of them
should pay out within 180 days from first
production. Chesapeake knows of no other onshore
field in the nation where economic returns from
drilling are better than'in Giddings.
There are three major reasons for the success of the
Austin Chalk play in Giddings. First, the geological
setting 'of the field has created more intense
fracturing than in other areas of Chalk production.
Second, continued technical advancements in
horizontai.,driiling have significantly lowered finding
costs. Third, operators are cOoperating.on weilbore
spacing patterns to minimize competitive drainage
problems..
UNION PA cIFIC AGREEMENT
In October 1993, Chesapeake and Union Pacific
reached an agreement to jointly develop a 20,000
acre block, in the Giddings Field. This agreement
provides Chesapeake with the option of limited
,recourse financing for Chesapeake's anticipated $15-,
20 million share of development costs. If
Chesapcake elects, the financing option, Union
Pacific will earn an 8% interest rate on the amounts
financed and 15%' of Chesapeake's production .after
project payout.
Chesapeake believes a financing arrangement of this
type is unprecedented in the industry. Additionally,.
'Union Pacific's confidence in project payout is an
important validation of Chesapeake's commitment
to the Giddings. Field.