Chesapeake Energy 2010 Annual Report Download - page 75

least 1.65 times. Under certain circumstances, such as a spike in volatility measures without a corresponding
change in commodity prices, the collateral value could fall below the coverage designated, and we would be
required to post additional reserve collateral to our hedge facility. If we did not have sufficient unencumbered
natural gas and oil properties available to cover the shortfall, we would be required to post cash or letters of
credit with the counterparties. Future collateral requirements are dependent to a great extent on natural gas
and oil prices.
Natural gas and oil drilling and producing operations can be hazardous and may expose us to
liabilities, including environmental liabilities.
Natural gas and oil operations are subject to many risks, including well blowouts, cratering and explosions,
pipe failures, fires, formations with abnormal pressures, uncontrollable flows of natural gas, oil, brine or well
fluids and other environmental hazards and risks. Our drilling operations involve risks from high pressures and
from mechanical difficulties such as stuck pipes, collapsed casings and separated cables. Some of these risks
or hazards could materially and adversely affect our revenues and expenses by reducing or shutting in
production from wells or otherwise negatively impacting the projected economic performance of our prospects.
If any of these risks occurs, we could sustain substantial losses as a result of:
• injury or loss of life;
• severe damage to or destruction of property, natural resources or equipment;
• pollution or other environmental damage;
• clean-up responsibilities;
• regulatory investigations and administrative, civil and criminal penalties; and
• injunctions resulting in limitation or suspension of operations.
There is inherent risk of incurring significant environmental costs and liabilities in our operations due to our
generation, handling and disposal of materials, including wastes and petroleum hydrocarbons. We may incur
joint and several, strict liability under applicable U.S. federal and state environmental laws in connection with
releases of petroleum hydrocarbons and other hazardous substances at, on, under or from our leased or
owned properties, some of which have been used for natural gas and oil exploration and production activities
for a number of years, often by third parties not under our control. For our non-operated properties, we are
dependent on the operator for operational and regulatory compliance. While we may maintain insurance
against some, but not all, of the risks described above, our insurance may not be adequate to cover casualty
losses or liabilities, and our insurance does not cover penalties or fines that may be assessed by a
governmental authority. Also, in the future we may not be able to obtain insurance at premium levels that justify
its purchase.
Potential legislative and regulatory actions could increase our costs, reduce our revenue and cash
flow from natural gas and oil sales, reduce our liquidity or otherwise alter the way we conduct our
business.
The activities of exploration and production companies operating in the United States are subject to
extensive regulation at the federal, state and local levels. Changes to existing laws and regulations or new laws
and regulations such as those described below could, if adopted, have an adverse effect on our business.
Federal Taxation of Producers of Natural Gas and Oil
Federal budget proposals would potentially increase and accelerate the payment of federal income taxes
of producers of natural gas and oil. Proposals that would significantly affect us would repeal the expensing of
intangible drilling costs, the percentage depletion allowance and lengthen the amortization period of geological
and geophysical expenses. These changes, if enacted, will make it more costly for us to explore for and
develop our natural gas and oil resources.
OTC Derivatives Regulation
In July 2010, the U.S. Congress enacted the Dodd-Frank Wall Street Reform and Consumer Protection
Act (the Dodd-Frank Act), which contains measures aimed at increasing the transparency and stability of the
over-the-counter (OTC) derivative markets and preventing excessive speculation. We maintain an active price
and basis protection hedging program related to the natural gas and oil we produce to manage the risk of low
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