Chesapeake Energy 2011 Annual Report Download - page 8

followed its Haynesville/Bossier discovery with
the discovery of the Mississippi Lime carbon-
ate play in 2007, the Colony Granite Wash tight
sand play in 2007, the Tonkawa tight sand play
in 2008 and the Utica Shale play in 2010. Having
discovered six unconventional plays in the past
five years, we can find no other company that has
discovered more than two.
BOLD VERTICAL INTEGRATION STRATEGIES
As we grew and delineated our unconventional
resource base, we recognized that our reinvest-
ment risks had been reduced to minimal levels.
We had helped transform the E&P business from
a high-risk wildcatting business into a manufac-
turing style business with
decades of low-risk drill-
ing opportunities in our
inventory. So in 2006, we
made the bold decision to
expand the vertical integration of our business —
just as many manufacturers do — into a broader
range of oilfield services and midstream opera-
tions to help eliminate bottlenecks and to allow
for more rapid development of our upstream as-
sets. We knew this decision would not only help
protect us from rising oilfield service costs and
high midstream costs, but also improve our over-
all eciencies and safety.
This vertical integration strategy has enabled
us to create even more value for our sharehold-
ers through our unique ability to accelerate de-
velopment drilling and advance the present value
of our unconventional resource base. This ability
is extremely valuable not only to us, but also to
our joint venture (JV) partners who are willing to
pay a higher price for leasehold acreage if it can
be developed faster. Unlike our competitors, we
control our own destiny by providing the critical
oilfield services we need to grow our business.
Our general goal is to own or control about
two-thirds of the oilfield services and equipment
we use. Today, Chesapeake’s oilfield services op-
erations include the nation’s fourth-largest drill-
ing rig fleet, one of the largest oilfield trucking
fleets and what we anticipate will become one
of the largest hydraulic fracturing companies in
the U.S. Additionally, through our ownership in
Chesapeake Midstream Development, L.P. and
investment in Chesapeake Midstream Partners,
L.P. we own the largest natural gas gathering
business in the industry.
BOLD SHIFT FROM NATURAL GAS
TO LIQUIDS
Beginning in 2008, Chesapeake recog-
nized the large number of U.S. unconven-
tional shale gas discoveries could lead to
a glut of natural gas in the U.S., likely re-
sulting in lower prices — while the relent-
less growth of Asian economies pointed
to a very tight worldwide oil market,
likely resulting in higher oil prices. We
responded with the bold move of begin-
ning to explore for unconventional formations in
liquids-prone U.S. basins that could benefit from
the transfer of the knowledge and expertise that
we had developed discovering and producing
shale gas resources in the U.S. We mobilized
our technical teams to redirect their eorts from
finding more gas shales to finding more liquids-
rich plays.
This redirection of focus by our company (and
others) in late 2008 closed the shale gas “Land
Rush” chapter of our industry’s history that be-
gan in 2005. During that time, Chesapeake estab-
lished the #2 position in the Barnett and Fayette-
ville natural gas shale plays and the #1 position
in the Haynesville, Bossier and Marcellus natural
gas shale plays. No other company has a #1 or #2
position in more than one of these plays, and we
knew this would put Chesapeake in a competi-
tively advantaged position for decades to come.
In 2009, we accelerated the next bold move
of our company’s history and began aggres-
sively acquiring leading positions in almost all of
the nation’s big liquids-rich plays, during the
6 | Letter to Shareholders
We mobilized
our technical
teams to redirect
their efforts from
finding more gas
shales to finding
more liquids-
rich plays.