Hancock Gas Lease

Chesapeake Energy, the largest player in the Marcellus shale, has just released its Operational Update, discussing developments through 4th quarter of 2009. Although it doesn’t go very far in breaking things out by New York versus Pennsylvania or West Virginia, we can get some idea of what direction they’re going in overall. And that direction is down — drilling down, that is.

Since January 1, 2008, Chesapeake has drilled and completed 56 company-operated horizontal wells in the Marcellus. During the 2009 fourth quarter, Chesapeake’s average daily net production of approximately 45 mmcfe in the Marcellus increased approximately 26% over the 2009 third quarter and approximately 530% over the 2008 fourth quarter. Chesapeake is currently producing a company record monthly average of approximately 65 mmcfe net per day (115 mmcfe gross operated) from the Marcellus and anticipates reaching approximately 270 mmcfe net per day (515 mmcfe gross operated) by year-end 2010 and approximately 450 mmcfe net per day (855 mmcfe gross operated) by year-end 2011.

To further develop its 1.6 million net acres of Marcellus leasehold, Chesapeake is currently drilling with 24 operated rigs and anticipates operating an average of approximately 32 rigs in 2010 to drill approximately 175 net wells.

That is, they’re increasing the number of drill rigs they’ll be using in order to drill 175 new wells next year (across the whole Marcellus). And they’re expecting the output of these wells to significantly increase the amount of gas they’re extracting.

The last several days have brought some news that may anger environmentalists.

First, Cayuga Heights may have violated its own laws concerning water quality accepted at its treatment plant. Writes the Press & Sun-Bulletin:

According to tests on wastewater coming to the plant, the village accepted material exceeding standards for metals such as copper and lead, and greatly exceeded standards for “Chemical Oxygen Demand” and “Total Suspended Solids.”

However

Mayor Jim Gilmore and Superintendent of Public Works Brent Cross responded that the gas-drilling wastewater was 3 million gallons of 540 million processed during the period. Monthly tests showed no violations of the village’s DEC permit while accepting the waste, Cross said.

Two days later comes news that there may be unexpectedly high levels of radioactivity being produced from gas well drilling.

An analysis of wastewater samples by the Department of Health found levels of radium-226, and related alpha and beta radiation that are up to 10,000 times higher than drinking water standards, according to a memo the agency sent to the Department of Environmental Conservation. That means the DEC will have to do more testing to identify drilling sites that pose radiation risks, and ensure hot drilling waste is handled and disposed of properly, according to records from the state. …

“The issues raised are not trivial but are also not insurmountable,” the health department’s memo to the DEC concludes. “Many can be addressed using common engineering controls and industry best practices.”

This is troubling coming right after the Cayuga Heights piece, which reveals that the DEC doesn’t really have the capacity to do this testing adequately.

Finally, the next day, two companies involved in drilling — Chesapeake Appalachia and Schlumberger — were each fined for a chemical spill at a Pennsylvania drilling site. Again from The Press & Sun-Bulletin:

Chesapeake Appalachia and Schlumberger Technology Corp. were both fined $15,557 for spilling 295 gallons of hydrochloric acid at a Bradford County drilling site early this year, according to records from the Pennsylvania state Department of Environmental Protection.

Failure of a tank used in hydraulic fracturing caused the spill in Asylum Township. …

Chesapeake notified the DEP on Feb. 9. An inspector called to the site determined about 7.5 gallons of the solution leaked every hour, which would suggest the leak happened over two days or more.

The companies sopped up free standing acid from the ground with absorbent pads and excavated trenches to contain the spill, according to DEP records. They later removed 126 tons of contaminated soil.

It’s finally sinking in that Chesapeake’s promise last week to exclude the Delaware watershed from drilling isn’t really a big deal. We wrote then that the watershed isn’t actually that big an error; others note that a promise may not be worth that much in any case. Now ProPublica picks up this message, advocating for regulation to outright ban drilling:

Legally, it doesn’t mean much, said gas lease attorney Joshua Bernstein. Chesapeake could change its mind and go ahead with its drilling plans. It could also offer its leases to another company. “The way the lease is drawn up, they could turn it over to anyone,” Bernstein said.

Environmentalists and some state legislators say the only way to make sure the watershed is protected is to officially ban drilling there.

“I call on both the Department of Environmental Conservation and the governor now to ban drilling in the watershed,” said Deborah Goldberg, the managing attorney at EarthJustice, formerly the Sierra Club Legal Defense Fund. “It is needed to make sure that the promise is permanent.”

At the risk of letting politics intrude, we’ve criticized ProPublica before. One can understand how easy it is to be distrustful of corporations. But why are they willing to place so much trust in the hands of politicians, who are so stereotypically dishonest?

Their statement goes on to quote Assemblyman Jim Brennan (D-Brooklyn):

[Brennan,] who has legislation pending that would prohibit gas drilling in the New York City watershed and within five miles of its border, said such a ban would not amount to a “regulatory taking.”

“The state has the power to protect public health and safety,” Brennan said. “It’s not an indirect taking of property. The state has the right to protect its residents.”

Stepping back out of politics and into plain talk, this statement is nothing but Orwellian doublespeak. If the State is taking control of something you own — in this case the right to drill for gas, whether still retained by the landowner, or leased by a gas company — then it’s a “taking”. You bought and paid for it; if they say you no longer have the right to use what you paid for, then it’s most certainly a regulatory taking. Brennan’s excuse that the taking is for our own safety does not change the fact that the government is taking control of your property.

In saying this we are not advocating drilling, nor forgetting environmental concerns. What we’re saying that the only way we can guarantee that our values are protected is to protect them ourselves. If you want to keep your land pristine, then don’t sign a lease. If you’re concerned about pollution, then make sure any lease you do sign makes the gas company responsible for cleaning any mess they make. Don’t trust the company’s press releases, and don’t trust a pandering politician who’s only interested in NYC voters and doesn’t give a hoot about the Southern Tier.

Much of the controversy about gas drilling in the region has centered around possible pollution to the NYC water supply. In response to this, Chesapeake Energy is now saying they will not drill in the watershed region. As reported in OilVoice:

Chesapeake Energy Corporation, America’s most active driller of new natural gas wells and one of its largest natural gas producers, today confirmed its previous announcements that it has no intention of drilling natural gas wells within the New York City watershed.

Be sure to read that carefully. They are most assuredly not backing away from all drilling. The sketchy reports carried in The Times and WNYC are misleading, implying that Chesapeake is backing out of the whole region.

Actually, they’re only excluding the watershed itself — and that is smaller than you might think. The OilVoice article reports that Aubrey K. McClendon, Chesapeake’s CEO says:

Our research has shown we are the only leasehold owner in the New York City watershed, and so Chesapeake is uniquely positioned to take this issue off the table and allow the discussion to proceed constructively on natural gas development in the Southern Tier. The small amount of acreage Chesapeake had acquired within the watershed region – fewer than 5,000 acres – was largely obtained as a result of leasing land outside the watershed from property owners who also had tracts within the watershed. This leasehold is immaterial to Chesapeake and also does not appear prospective for the Marcellus Shale.

The above emphasis is mine, to show that they absolutely do plan to pursue drilling in the region, just staying out of the watershed itself.

(Yes, it’s been a very long time since our last update here. But it seems that things are getting interesting again…)

A Norwegian company, Statoil, is paying $3.375 billion for about a 32.5% interest in Chesapeake’s Marcellus operations. According to Reuters,

StatoilHydro, the second-largest supplier of natural gas to Europe, said it would pay Chesapeake $1.25 billion in cash and pay $2.125 billion in drilling costs for a 32.5 percent stake in the Marcellus prospects in the Appalachia region in the northeastern United States. …

The deal, which covers 1.8 million acres of land, will ease tight funding at Chesapeake, which labours under a heavy debt burden. …

The transaction is expected to close by year end. …

StatoilHydro also exports liquefied natural gas to the U.S. from its Barents Sea field.

StatoilHydro said Chesapeake planned to continue acquiring leases in the Marcellus shale play and that it had the right to a 32.5 percent participation in any such additional leasehold.

I find it interesting that they import gas from the Barents Sea. I had understood that transportation of gas was difficult, which is why pipelines are being built all over the place.

It’s also interesting that CHK will continue to acquire leases, considering that they’ve curtailed them this fall.

Earlier this year, geologists were telling us that the Marcellus Shale is huge — that it could supply enough gas to supply the entire USA for two full years. Experts now think that estimate may be incorrect: it could contain seven times that much! As reported in Forbes:

Penn State University geoscientist Terry Engelder said in a phone interview Monday that he now estimates 363 trillion cubic feet of natural gas could be recovered over the next few decades from the 31-million-acre core area of the Marcellus region…

“It has the potential to be the biggest gas field in the United States,” John Pinkerton, chairman and chief executive of Range Resources Corp., said last week in an interview at the Fort Worth, Texas-based company’s office in western Pennsylvania.

Engelder first presented his new numbers in Pittsburgh last week at a conference on Appalachian gas sponsored by the energy information firm Platts. He said he based his revised estimate on new figures from Chesapeake Energy Corp., the nation’s largest natural gas producer.

As reported in the past, Chesapeake has slowed its pans to a much slower pace than originally expected. They’ve now announced some specifics about their Marcellus plans, reported in the Fort Worth Business Press:

The Oklahoma City-based company will reduce drilling and leasehold expenditures to meet the mark, and said it also expects to generate at least $2.5 billion from the sale of a 25-percent interest in its Marcellus Shale holdings, according to an Oct. 10 statement. Investment in the company’s midstream operations also is sought.

Furthermore, Chesapeake Energy will reduce its rig count to between 135 and 140, and will keep that count flat through 2010…

The Times Tribune provides some analysis:

“The industry as whole spent too much on land,” Subash Chandra, an analyst with Jefferies & Company Inc. of New York, said. “Generally speaking, the speculative land bubble is over.” That does not mean, however, that Chesapeake and other natural gas companies are ending lease activity altogether.

We’ve written before that the prospects from gas drilling are likely to have slowed down, if only temporarily. Here is further evidence, from the National Post:

Flashy unconventional natural gas plays attracted considerable excitement this summer, but observers — as well as the largest U. S. natural-gas producer — now expect drilling and spending plans to be axed as new discoveries are resulting in a glut of gas hitting the market. …

“The development has been so rapid that it probably overran the market a little bit,” said Richard Smead, project manager and co-author of a recent report, North American Natural Gas Supply Assessment, prepared by Houston-based Navigant Consulting Inc. for the American Clean Skies Foundation. “Right now we have enough supply. We probably have more than we need in the short term.”

The result, he says, will be a slowdown in exploration and production in unconventional North American shale plays. …

It doesn’t make financial sense to produce gas at certain wells when prices dip below US$7.50, [Aubrey McClendon, chief executive of Chesapeake] said.

“If those prices stay out there for very long, the industry will have to restrict its capital expenditures.”