Chesapeake Energy 2015 Annual Report Download - page 62

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The following table shows our production expenses (excluding ad valorem taxes) by operating division and our
ad valorem tax expenses for 2015, 2014 and 2013:
2015 2014 2013
Production
Expenses $/boe Production Expenses $/boe Production Expenses $/boe
($ in millions, except per unit)
Southern(a) ............................................ $ 771 5.36 $ 882 5.92 $ 925 5.46
Northern ................................................ 188 1.81 229 2.10 164 2.19
959 3.87 1,111 4.31 1,089 4.46
Ad valorem tax ...................................... 87 0.35 97 0.38 70 0.28
Total................................................ $1,046 4.22 $ 1,208 4.69 $ 1,159 4.74
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(a) The per unit increase in the Southern Division from 2013 to 2014 is primarily the result of increased artificial lift,
repairs and maintenance and a higher percentage of oil produced which has higher lifting costs.
Oil, Natural Gas, and NGL Gathering, Processing and Transportation Expenses. Oil, natural gas and NGL
gathering, processing and transportation expenses were $2.119 billion in 2015 compared to $2.174 billion in 2014 and
$1.574 billion in 2013. On a unit-of-production basis, gathering, processing and transportation expenses were $8.55
per boe in 2015 compared to $8.43 per boe in 2014 and $6.44 per boe in 2013. Certain of our gathering agreements
require us to pay the service provider a fee for any production shortfall below certain annual minimum gathering volume
commitments. These fees amounted to $171 million in 2015, $120 million in 2014 and $42 million in 2013, or $0.69,
$0.47 and $0.17 per boe, respectively, and we anticipate incurring shortfall fees in 2016 based on current production
estimates. Previously, these costs were reflected as a deduction to oil, natural gas and NGL sales. See Note 1 of the
notes to our consolidated financial statements included in Item 8 of this report for further discussion of this
reclassification.
Production Taxes. Production taxes were $99 million in 2015 compared to $232 million in 2014 and $229 million
in 2013. On a unit-of-production basis, production taxes were $0.40 per boe in 2015 compared to $0.90 per boe in
2014 and $0.94 per boe in 2013. In general, production taxes are calculated using value-based formulas that produce
lower per unit costs when oil, natural gas and NGL prices are lower. The absolute and per unit decrease in production
taxes in 2015 was primarily due to lower prices received for oil, natural gas and NGL. Production taxes in 2015, 2014
and 2013 included approximately $2 million, $16 million and $22 million, or a nominal amount, $0.06 and $0.09 per
boe, respectively, associated with VPP production volumes. We anticipate a continued decrease in production tax
expenses associated with VPP production volumes as the contractually scheduled volumes under our VPP agreements
decrease. In addition, our obligations with respect to two of our VPPs were assumed by third parties as a result of our
divestiture of related properties in 2014 and another VPP expired in 2015.
General and Administrative Expenses. General and administrative expenses, including share-based
compensation expenses, were $235 million in 2015, $322 million in 2014 and $457 million in 2013, or $0.95, $1.25
and $1.86 per boe, respectively. The absolute and per unit expense decrease in 2015 was primarily due to reduced
overhead as a result of the spin-off of our oilfield services business in June 2014, our workforce reduction in the 2015
third quarter and our continuing efforts to reduce other administrative expenses. In addition, in 2015, we recorded
negative fair value adjustments to PSUs granted to executives of the Company, which corresponded to a decrease in
the trading price of our common stock. The absolute and per unit expense decrease in 2014 was primarily due to our
workforce reduction in the second half of 2013 as well as efforts to reduce other administrative expenses. See Note
9 of the notes to our consolidated financial statements included in Item 8 of this report for further discussion of our
share-based compensation.
Chesapeake follows the full cost method of accounting under which all costs associated with oil and natural gas
property acquisition, drilling and completion activities are capitalized. We capitalize internal costs that can be directly
identified with the acquisition of leasehold, as well as drilling and completion activities, and do not include any costs
related to production, general corporate overhead or similar activities. We capitalized $196 million, $230 million and
$317 million of internal costs in 2015, 2014 and 2013, respectively, directly related to our leasehold acquisition and
drilling and completion efforts.