Chesapeake to cut natural gas production

[January 24, 2012]  NEW YORK (AP) -- Faced with decade-low natural gas prices that have made some drilling operations unprofitable, Chesapeake Energy Corp. says it will drastically cut drilling and production of the fuel in the U.S.

Chesapeake, the nation's second largest natural gas producer, said Monday that it plans to cut its current daily production by 8 percent. Over a year, that means the company would produce the same or slightly less natural gas in 2012 than it did in 2011. Chesapeake produces about 9 percent of the nation's natural gas.

That's a change from the dramatic increase in domestic output seen in recent years. Chesapeake and other drillers have learned to tap enormous reserves of natural gas trapped in shale formations under several states using a controversial drilling method known as hydraulic fracturing combined with horizontal drilling. The drillers force millions of gallons of water and sand, laced with chemicals, into compact rock to create cracks that serve as escape routes for the gas.

Extreme weather for two winters and two summers kept natural gas prices high by boosting demand for home heating and power generation. But this season's mild winter weather especially in the Northeast and Upper Midwest, has crimped demand and led to a glut.

Natural gas futures slipped to $2.32 per 1,000 cubic feet last week, their lowest levels since 2002, before rising slightly to $2.34 on Friday. Prices have fallen 23 percent since the beginning of the year. Storage levels of the fuel are 21 percent higher than their 5-year average for this time of year, according to the Energy Information Administration.

The drop in price has meant lower revenues and profits for drillers. Analysts surveyed by FactSet estimate that Chesapeake's earnings fell to $2.81 per share in 2011, excluding special items, from $2.95 per share in 2010. They say at today's prices only the least expensive, most productive natural gas wells remain profitable for drillers.

In trading in New York Monday, natural gas prices rose 6.4 percent to $2.546 per 1,000 cubic feet, getting a boost from the Chesapeake announcement. Chesapeake shares gained 5.7 percent to $22.15.

Drillers had already begun to shift their drilling activity toward shale formations and other regions that produce oil and other liquid hydrocarbons. Strong global demand has kept oil prices high and made these drilling operations extraordinarily profitable.

Chesapeake said it would cut its current activity in so-called dry-gas regions by half, to 24 rigs, by the second quarter. That's 67 percent fewer rigs than an average of 75 rigs the company had in use last year.

Chesapeake increased natural gas production by 13.5% from 2010 to 2011. It now plans to cut spending on natural gas regions to $1 billion in 2012, down from $3.1 billion in 2011.

The plan calls for a cut of 500 million cubic feet of gas per day, about 8 percent of its current production, in two drilling regions in Texas, Arkansas and Louisiana.

The move is designed to reduce the glut of natural gas in the country, and therefore increase prices. But analysts caution that drillers historically have reneged on plans to cut output in times of low prices, bowing to pressure from investors to increase production.

Also, even as drillers avoid dry-gas regions, they are aggressively increasing drilling in regions rich in oil and other liquids. Those regions also produce large amounts of natural gas, which will help keep total natural gas production high and will likely keep prices relatively low.

Chesapeake and others are also working to stimulate demand for the fuel, advocating its use as a transportation fuel or exporting it. International natural gas prices are high because they are linked to the price of oil.

[Associated Press; By JONATHAN FAHEY]

Jonathan Fahey can be reached at http://twitter.com/JonathanFahey.

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