Chesapeake Energy 2012 Annual Report Download - page 41

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based upon various factors, including drilling results, natural gas and oil prices, the availability and cost of capital,
drilling and production costs, availability of drilling services and equipment, gathering system and pipeline transportation
constraints and regulatory approvals.
Our hedging activities may reduce the realized prices we receive for our natural gas, oil and NGL sales,
require us to provide collateral for hedging liabilities and involve risk that our counterparties may be unable
to satisfy their obligations to us.
In order to manage our exposure to price volatility in marketing our production, we enter into natural gas and oil
price risk management arrangements for a portion of our expected production. Commodity price derivatives may limit
the prices we actually realize and therefore reduce natural gas, oil and NGL revenues in the future. Our commodity
hedging activities will impact our earnings in various ways, including recognition of certain mark-to-market gains and
losses on derivative instruments. The fair value of our natural gas and oil derivative instruments can fluctuate significantly
between periods. In addition, our commodity price risk management transactions may expose us to the risk of financial
loss in certain circumstances, including instances in which our production is less than expected.
Derivative transactions involve the risk that counterparties, which are generally financial institutions, may be
unable to satisfy their obligations to us. Although the counterparties to our multi-counterparty secured hedging facility
are required to secure their hedging obligations to us under certain scenarios, if any of our counterparties were to
default on its obligations to us under the hedging contracts or seek bankruptcy protection, it could have an adverse
effect on our ability to fund our planned activities and could result in a larger percentage of our future production being
subject to commodity price changes. The risk of counterparty default is heightened in a poor economic environment.
Most of our natural gas and oil derivative contracts are with the 17 counterparties to our multi-counterparty hedging
facility. Our obligations under the facility are secured by natural gas and oil proved reserves, the value of which must
cover the fair value of the transactions outstanding under the facility by at 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 hedging
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. Some of these risks or hazards could materially and adversely affect our revenues
and expenses by reducing or shutting in production from wells, loss of equipment 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 use,
generation, handling and disposal of materials, including wastes, petroleum hydrocarbons and other chemicals. 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 resulting from current or historical operations. In some cases our properties 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. We also
could incur material fines, penalties and government or third-party claims as a result of violations of, or liabilities under,
applicable environmental laws and regulations. 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