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Chesapeake trading natural gas for oil, ethane

January 28, 2012
By CASEY JUNKINS - Special to the Shale Play , The Herald-Star

WHEELING - Looking to find more ethane to feed a cracker plant and oil to refine for gasoline instead of low-value natural gas, Chesapeake Energy plans to refocus much of its Marcellus and Utica shale drilling this year.

"An exceptionally mild winter to date has pressured U.S. natural gas prices to levels below our prior expectations and below levels that are economically attractive for developing 'dry' gas plays in the U.S., shale or otherwise," said Chesapeake Chief Executive Officer Aubrey McClendon.

"We are redeploying rigs from our dry gas plays, such as northeastern Pennsylvania, to our liquid-rich plays," said Stacey Brodak, senior director of corporate development. "When Chesapeake began drilling the Marcellus Shale, we were focused on natural gas. Since then, the focus has shifted toward liquids-rich shale plays. A portion of the Marcellus in the Northern Panhandle of West Virginia is liquids rich, as well as a large portion of the Utica Shale."

Article Photos

Citing low natural gas prices, Chesapeake Energy plans to reduce drilling operations in the Pennsylvania portion of the Marcellus shale. The company will refocus much of its drilling on the liquids-rich areas of northern West Virginia and Ohio. (Casey Junkins)

According to the New York Mercantile Exchange, or NYMEX, natural gas prices are hovering around $2 per 1,000 cubic feet, sharply lower than in previous years. Natural gas prices are much lower than the nearly $100 per barrel oil price.

Generally, throughout the Marcellus and Utica shale formations, the farther east one drills for gas, the more likely this gas is to be of the dry type. The methane-dominated dry gas does not require much processing, so it is much more ready to be sold as a utility by companies such as Columbia Gas and Mountaineer Gas.

As drillers move their operations toward the west, they are more likely to find the liquids-rich "wet" gas, which includes ethane, propane, butane and pentane, in addition to the methane natural gas. Ethane is the product that would be used to make ethylene at the proposed ethane cracker for which West Virginia, Ohio and Pennsylvania are now competing. Ohio and Marshall counties in West Virginia, especially, contain the wet gas, as does the state of Ohio.

As one travels westward into Ohio, the more likely drillers are to locate oil, as Buckeye State industry leaders estimate the state's portion of the Utica Shale to contain as many as 5.5 billion barrels of oil. Chesapeake is among several companies, including Exxon Mobil via subsidiary XTO Energy and New York City-based Hess Corp., hoping to strike oil while drilling in Ohio.

"The Utica Shale is part of our national strategy to increase expenditures in liquids-rich plays. Our projection of operating 20 rigs in Ohio by year end 2012 has not changed," Brodak said.

Brodak noted Chesapeake now has 26 rigs operating in the Marcellus region. Six of these are drilling holes in northern West Virginia with two working in southwestern Pennsylvania. The additional 18 are now operating in the dry gas-rich area of Pennsylvania, particularly in Bradford County.

She said the company will cut the total number of active Marcellus rigs to 18 this year, with five in northern West Virginia and the remainder in Pennsylvania.

Though the company is shifting its focus to the wet gas areas, McClendon said Chesapeake will also immediately reduce overall natural gas production by 8 percent, equaling 500 million cubic feet per day. He said the company also plans to delay fracking dry gas wells that have been drilled but not fracked, while also delaying pipeline construction for such wells.

"We anticipate that more than 50 percent of Chesapeake's 2012 revenue will come from its oil and natural gas liquids production," McClendon added.

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