Chesapeake Energy 1997 Annual Report Download - page 25

Periodically, CEMI enters into various hedging transactions designed to hedge against physical purchase
commitments made by CEMI. Gains or losses on these transactions are recorded as adjustments to Oil and
Gas Marketing Sales in the consolidated statements of operations and are not considered by management to
be material.
Competition
The oil and gas industry is highly competitive. The Company competes with major and independent oil
and gas companies for the acquisition of leasehold, proven oil and gas properties, as well as for the services and
labor required to explore, develop and produce such properties. Many of these competitors have financial,
technical and other resources substantially greater than those of the Company.
Seasonal Nature of Business
Historically the demand for natural gas decreases during the summer months and increases during the
winter months. However, pipelines, utilities, local distribution companies and industrial users may more
effectively utilize natural gas storage capacity by purchasing some of the winter load in the summer at reduced
prices.
Regulation
General
Numerous departments and agencies, federal, state and local, issue rules and regulations binding on the
oil and gas industry, some of which carry substantial penalties for failure to comply. The regulatory burden on
the oil and gas industry increases the Company's cost of doing business and, consequently, affects its
profitability.
Exploration and Production
The Company's operations are subject to various types of regulation at the federal, state and local levels.
Such regulation includes requiring permits for the drilling of wells, maintaining bonding requirements in order
to drill or operate wells and regulating the location of wells, the method of drilling and casing wells, the surface
use and restoration of properties upon which wells are drilled, the plugging and abandoning of wells and the
disposal of fluids used or obtained in connection with operations. The Company's operations are also subject to
various conservation regulations. These include the regulation of the size of drilling and spacing units and the
density of wells which may be drilled and the unitization or pooling of oil and gas properties. In this regard,
some states (such as Oklahoma) allow the forced pooling or integration of tracts to facilitate exploration while
other states (such as Texas) rely on voluntary pooling of lands and leases. In areas where pooling is voluntary,
it may be more difficult to form units and, therefore, more difficult to develop a prospect if the operator owns
less than 100% of the leasehold. In addition, state conservation laws establish maximum rates of production
from oil and gas wells, generally prohibit the venting or flaring of gas and impose certain requirements
regarding the ratability of production. The effect of these regulations is to limit the amount of oil and gas the
Company can produce from its wells and to limit the number of wells or the locations at which the Company
can drill. The extent of any impact on the Company of such restrictions cannot be predicted.
Environmental and Occupational Regulation
General. The Company's activities are subject to existing federal, state and local laws and regulations
governing environmental quality and pollution control. It is anticipated that, absent the occurrence of an
extraordinary event, compliance with existing federal, state and local laws, rules and regulations concerning
the protection of the environment and human health will not have a material effect upon the operations,
capital expenditures, earnings or the competitive position of the Company. The Company cannot predict what
effect additional regulation or legislation, enforcement policies thereunder and claims for damages for injuries
to property, employees, other persons and the environment resulting from the Company's operations could
have on its activities.
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