Chesapeake Energy 2010 Annual Report Download - page 70

scheduled to be drilled within five years, unless the specific circumstances justify a longer time. Estimates for
proved undeveloped reserves are not attributed to any acreage for which an application of fluid injection or
other improved recovery technique is contemplated, unless such techniques have been proved effective by
actual projects in the same reservoir or an analogous reservoir, or by other evidence using reliable technology
establishing reasonable certainty.
Reserve Replacement. Calculated by dividing the sum of reserve additions from all sources (revisions,
extensions, discoveries and other additions and acquisitions) by the actual production for the corresponding
period. The values for these reserve additions are derived directly from the proved reserves table located in
Note 10 of the notes to our consolidated financial statements. In calculating reserve replacement, we do not
use unproved reserve quantities or proved reserve additions attributable to less than wholly owned
consolidated entities or investments accounted for using the equity method. Management uses the reserve
replacement ratio as an indicator of the company’s ability to replenish annual production volumes and grow its
reserves, thereby providing some information on the sources of future production. It should be noted that the
reserve replacement ratio is a statistical indicator that has limitations. As an annual measure, the ratio is limited
because it typically varies widely based on the extent and timing of new discoveries and property acquisitions.
Its predictive and comparative value is also limited for the same reasons. In addition, since the ratio does not
imbed the cost or timing of future production of new reserves, it cannot be used as a measure of value
creation.
Royalty Interest. An interest in a natural gas and oil property entitling the owner to a share of oil or natural
gas production free of costs of production.
Seismic. An exploration method of sending energy waves or sound waves into the earth and recording the
wave reflections to indicate the type, size, shape and depth of subsurface rock formation (3-D seismic provides
three-dimensional pictures).
Shale. Fine-grained sedimentary rock composed mostly of consolidated clay or mud. Shale is the most
frequently occurring sedimentary rock.
Standardized Measure of Discounted Future Net Cash Flows. The discounted future net cash flows
relating to proved reserves based on the prices used in estimating the proved reserves, year-end costs and
statutory tax rates (adjusted for permanent differences) and a 10-percent annual discount rate.
Tcf. One trillion cubic feet.
Tcfe. One trillion cubic feet of natural gas equivalent.
Unconventional Reserves. Natural gas and oil occurring in regionally pervasive accumulations with low
matrix permeability and close association with source rocks.
Undeveloped Acreage. Acreage on which wells have not been drilled or completed to a point that would
permit the production of economic quantities of natural gas and oil regardless of whether such acreage
contains proved reserves.
Unproved Properties. Properties with no proved reserves.
VPP. As we use the term, a volumetric production payment represents a limited-term overriding royalty
interest in natural gas and oil reserves that (i) entitles the purchaser to receive scheduled production volumes
over a period of time from specific lease interests; (ii) is free and clear of all associated future production costs
and capital expenditures; (iii) is nonrecourse to the seller (i.e., the purchaser’s only recourse is to the reserves
acquired); (iv) transfers title of the reserves to the purchaser; and (v) allows the seller to retain the remaining
reserves, if any, after the scheduled production volumes have been delivered.
Working Interest. The operating interest which gives the owner the right to drill, produce and conduct
operating activities on the property and a share of production.
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