Chesapeake Energy 2009 Annual Report Download - page 23

ture growth largely in new leasehold in emerg-
ing plays and to further solidify our leasehold
position in our existing plays. As part of our pro-
gram to fund our leasehold investments while
reducing our financial leverage, we periodically
sell or monetize non-core assets. Our goal is to
secure proceeds from asset sales well in excess
of our reinvestment needs in order to provide
cash for debt reduction. We believe this finan-
cial strategy will enable Chesapeake to become
an investment-grade company.
In just the past two years, we have success-
fully monetized $10.7 billion of assets (in which
our cost basis was only $2.7 billion) by selling
minority joint venture interests in four of our
shale plays. In addition, we have sold producing
assets through volumetric production payment
transactions and also smaller packages of non-
core assets that did not compete well for capital
in our overall investment program. We plan to
pursue similar asset sales in the years ahead,
possibly including a joint venture in the Eagle
Ford Shale, additional volumetric production
payments and partial monetization of our mid-
stream and other non-E&P assets.
Why have world-class energy
companies chosen to do joint
ventures with CHK?
DOUG JACOBSON: Chesapeake’s industry-
leading position in U.S. shale gas plays has at-
tracted the interest of numerous world class
energy companies, including three European in-
tegrated oil companies: London-based BP, Oslo-
based Statoil and Paris-based Total, which have
a combined market capitalization of $400 billion.
We believe these joint ventures are also great
investments for our joint venture partners, who
benefit from Chesapeake’s expertise in iden-
tifying and leasing prime shale gas assets, our
industry-leading drilling program that efficiently
converts leasehold to producing assets, our scale
and purchasing power with service providers
and our vertically integrated operations. Our
partners are also able to make substantial low-
risk investments over multi-year periods with
minimal commitment of their own personnel.
These benefits have enabled Chesapeake to
secure premium valuations for its assets though
joint venture transactions and generate attrac-
tive returns for Chesapeake’s shareholders.
Will shale gas plays permanently
oversupply U.S. natural gas
markets?
JEFF MOBLEY: The rise of shale gas plays
in the U.S. has led to substantial growth in
natural gas supplies and much lower natural
gas prices for consumers. More importantly,
this new abundant and affordable resource
provides consumers with long-term supply
visibility and reliability to meet market de-
mands and dampen price volatility. However,
shale gas only accounts for approximately
15% of total U.S. natural gas production.
Currently, 85% of U.S. natural gas produc-
tion comes from non-shale plays, the vast
majority of which have substantially higher
finding and development costs than the major
U.S. shale gas plays. Without new drilling,
production from virtually all natural gas fields
declines approximately 20% or more per year
INVESTOR Q&A 21
through normal depletion. Chesapeake believes
this depletion, combined with reduced drilling
activity in high-cost, non-shale gas fields will
make way for further growth in production
from the low-cost shale plays to perhaps as
much as 30–40% of total U.S. natural gas
production over the next few years.
Will this lead to a permanent oversupply?
We don’t believe so. Rather, the market will be
balanced over time through reduced drilling
on marginal, high-cost production, probably in
the range of $6–7 per mcf. The abundance of
low-cost shale gas will likely lead to a lower
ultimate cost of gas supplies to consumers,
but we believe that natural gas prices will be
sustained at high enough levels to profitably
develop shale gas.
Chesapeake was early to recognize this
structural change in the natural gas industry
and strategically invested to capture the larg-
est leasehold position in the Big 6 shale plays.
This unique position in the industry should
make Chesapeake one of the greatest ben-
eficiaries of the shale gas revolution and the
more stable price of natural gas in the future.
STEVEN C. DIXON Executive Vice
President – Operations and Geosciences
and Chief Operating Officer
MARTHA A. BURGER Senior Vice
President – Human and Corporate Resources
MARCUS C. ROWLAND Executive Vice
President and Chief Financial Officer
DOUGLAS J. JACOBSON Executive
Vice President – Acquisitions and Divestitures
JEFFREY L. MOBLEY Senior Vice
President – Investor Relations and Research
DIXON BURGER ROWLAND MOBLEYJACOBSON