Chesapeake Energy 2014 Annual Report Download - page 91

CHESAPEAKE ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
83
Asset Retirement Obligations
We recognize liabilities for obligations associated with the retirement of tangible long-lived assets that result from
the acquisition, construction and development of the assets. We recognize the fair value of a liability for a retirement
obligation in the period in which the liability is incurred. For oil and natural gas properties, this is the period in which
an oil or natural gas well is acquired or drilled. The liability is then accreted each period until the liability is settled or
the well is sold, at which time the liability is removed. The related asset retirement cost is capitalized as part of the
carrying amount of our oil and natural gas properties. See Note 20 for further discussion of asset retirement obligations.
Revenue Recognition
Oil, Natural Gas and NGL Sales. Revenue from the sale of oil, natural gas and NGL is recognized when title
passes, net of royalties due to third parties and gathering and transportation charges.
Natural Gas Imbalances. We follow the "sales method" of accounting for our natural gas revenue whereby we
recognize sales revenue on all natural gas sold to our purchasers, regardless of whether the sales are proportionate
to our ownership in the property. An asset or a liability is recognized to the extent that we have an imbalance in excess
of the remaining natural gas reserves on the underlying properties. The natural gas imbalance net liability position as
of December 31, 2014 and 2013 was $12 million and $11 million, respectively.
Marketing, Gathering and Compression Sales. Chesapeake takes title to the oil, natural gas and NGL it purchases
from other interest owners in operated wells at defined delivery points and delivers the product to third parties, at which
time revenues are recorded. In addition, we periodically enter into a variety of oil, natural gas and NGL purchase and
sale contracts with third parties for various commercial purposes, including credit risk mitigation and to help meet
certain of our pipeline delivery commitments. In circumstances where we act as a principal rather than an agent,
Chesapeake's results of operations related to its oil, natural gas and NGL marketing activities are presented on a
"gross" basis. Gathering and compression revenues consist of fees billed to other interest owners in operated wells
or third-party producers for the gathering, treating and compression of natural gas. Revenues are recognized when
the service is performed and are based upon non-regulated rates and the related gathering, treating and compression
volumes. All significant intercompany accounts and transactions have been eliminated.
Oilfield Services Revenue. Prior to the spin-off of our oilfield services business in June 2014, we reported oilfield
services revenue. Our former oilfield services operating segment was responsible for contract drilling, hydraulic
fracturing, oilfield rentals, oilfield trucking and other oilfield services operations for both Chesapeake-operated wells
and wells operated by third parties. Our oilfield services revenues prior to the spin-off were as follows:
• Drilling. Revenues were generated by drilling oil and natural gas wells for our customers under daywork
contracts and recognized for the days completed based on the dayrate specified in each contract. Revenue
generated and costs incurred for mobilization services were recognized over the days of actual mobilization.
• Hydraulic Fracturing. Revenue was recognized upon the completion of each fracturing stage. Typically, one
or more fracturing stages per day per active crew was completed during the course of a job. A stage was
considered complete when the customer requested or the job design dictated that pumping discontinue for
that stage. Invoices typically included a lump sum equipment charge determined by the rate per stage specified
in each contract and product charges for sand, chemicals and other products actually consumed during the
course of providing fracturing services.
• Oilfield Rentals. Oilfield equipment rentals included drill pipe, drill collars, tubing, blowout preventers, and frac
and mud tanks, and services included air drilling services and services associated with the transfer of fresh
water to the wellsite. Rentals and services were priced by the day or hour based on the type of equipment
rented and the service job performed. Revenue was recognized ratably over the term of the rental.
• Oilfield Trucking. Oilfield trucking provided rig relocation and logistics services as well as fluid handling services.
Trucks moved drilling rigs, crude oil, other fluids and construction materials to and from the wellsites and also
transported produced water from the wellsites. These services were priced on a per barrel basis based on
mileage and revenue was recognized as services were performed.
• Other Operations. A manufacturing subsidiary designed, engineered and fabricated natural gas compressor
packages that were purchased primarily by Chesapeake. Compression units were priced based on certain
specifications such as horsepower, stages and additional options. Revenue was recognized upon completion
and transfer of ownership of the natural gas compression unit.