Chesapeake Energy 2010 Annual Report Download - page 161

CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
11. Divestitures
Industry Participation Agreements
As of December 31, 2010, we had entered into five significant industry participation agreements to sell a
portion of our leasehold in certain areas, which allowed us to recover much or all of our initial leasehold
investments in the plays, reduce our ongoing capital costs, reduce future DD&A expense and reduce future
risks. The transactions are detailed below.
On November 16, 2010, we entered into an industry participation agreement with a wholly owned U.S.
subsidiary of CNOOC Limited (CNOOC) to develop our Eagle Ford Shale leasehold in South Texas. Under the
terms of the agreement, CNOOC acquired a 33.3% undivided interest in approximately 600,000 net acres of
our Eagle Ford Shale leasehold along with 18.2 bcfe of estimated proved reserves. We received $1.12 billion in
cash at closing, and CNOOC agreed to fund 75% of our share of drilling and completion costs in the Eagle
Ford Shale until an additional $1.08 billion has been paid, which we expect to occur by year-end 2012. In
addition, CNOOC has the right to a 33.3% participation in any additional leasehold we acquire in the Eagle
Ford Shale at cost plus a fee.
On January 25, 2010, we entered into an industry participation agreement with Total E&P USA, Inc., a
wholly owned subsidiary of Total S.A., to develop our Barnett Shale leasehold in north-central Texas. Under
the terms of the industry participation agreement, Total acquired a 25% undivided interest in approximately
270,000 net acres of our Barnett Shale leasehold along with 840 bcfe of estimated proved reserves. Total paid
us approximately $800 million in cash at closing (plus $78 million of drilling and completion carries due from the
effective date of the transaction to the closing date). Total is obligated to fund 60% of our share of future drilling
and completion costs until $1.45 billion has been paid, which we expect to occur by year-end 2013. In addition,
Total has the right to a 25% participation in any additional leasehold we acquire in the Barnett Shale at cost
plus a fee.
On November 25, 2008, we entered into an industry participation agreement with Statoil to develop our
Marcellus Shale leasehold in Appalachia. Under the terms of the industry participation agreement, Statoil
acquired a 32.5% undivided interest in approximately 1.8 million net acres of our Marcellus Shale leasehold
along with 2.5 bcfe of estimated proved reserves. Chesapeake received $1.25 billion in cash at closing, and
Statoil agreed to fund 75% of our share of drilling and completion costs in the Marcellus Shale until an
additional $2.125 billion has been paid, which we expect to occur by year-end 2012. In addition, Statoil has the
right to a 32.5% participation in any additional leasehold we acquire in the Marcellus Shale at cost plus a fee.
On September 5, 2008, we entered into an industry participation agreement with BP America Inc. to
develop our Fayetteville Shale leasehold in Arkansas. Under the terms of the industry participation agreement,
BP acquired a 25% undivided interest in approximately 540,000 net acres of our Fayetteville Shale leasehold
along with 161.8 bcfe of estimated proved reserves. We received $1.1 billion in cash at closing, and BP paid an
additional $800 million by funding 100% of Chesapeake’s 75% share of drilling and completion costs during
2008 and 2009. In addition, BP has the right to a 25% participation in any additional leasehold we acquire in
the Fayetteville Shale at cost plus a fee.
On July 1, 2008, we entered into an industry participation agreement with Plains Exploration & Production
Company (PXP) to develop our Haynesville and Bossier Shale leasehold in Northwest Louisiana and East
Texas. Under the terms of the industry participation agreement, PXP acquired a 20% undivided interest in
approximately 550,000 net acres of our Haynesville and Bossier Shale leasehold along with 22.9 bcfe of
estimated proved reserves. We received $1.65 billion in cash at closing, and PXP agreed to fund 50% of our
share of drilling and completion costs in the Haynesville and Bossier Shale over a multi-year period, up to an
additional $1.65 billion. In August 2009, Chesapeake and PXP amended their industry participation agreement
to accelerate the payment of PXP’s remaining drilling and completion cost carries as of September 30, 2009, in
exchange for an approximate 12% reduction in the total amount of carry obligations due to Chesapeake. As a
result, on September 29, 2009, Chesapeake received $1.1 billion in cash from PXP, and beginning in the 2009
fourth quarter Chesapeake and PXP each began paying their proportionate working interest costs on drilling. In
addition, PXP has the right to a 20% participation in any additional leasehold we acquire in the Haynesville and
Bossier Shales at cost plus a fee.
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