Chesapeake Increases Arkansas Shale Play Investment

After more than three years feeling out the Fayetteville Shale Play in north-central Arkansas, Chesapeake Energy Corp. has turned the corner and is developing a long-term strategy for success in tapping into the abundant natural gas reserves there.

Chesapeake, of Oklahoma City, is increasing its investment in the play with additional infrastructure and key local hires and plans to spend nearly $500 million there in 2007. The energy company is the play’s second-largest explorer – but largest lease-holder, with more than 1.1 million acres.

“We’ve been a little slower to ramp up our presence in Arkansas until our geology and science had a chance to give the leadership of the company a much better confidence of what the potential is of the play,” said Jim Gipson, director of media relations for Chesapeake. “I think it’s fair to say a corner has been turned and we’re getting a little more aggressive in terms of infrastructure and drilling there.”

The evidence that Chesapeake likes what it sees in north-central Arkansas speaks for itself.

The company announced last week that it would open a 2,700-SF office at the Victory Building on West Capitol in Little Rock this fall, where two new key professionals will set up shop with the potential for more growth.

The new employees are Danny Games, previously a team leader of business development for Energy’s Teamwork Arkansas program, and Mark Raines, longtime news director at KTHV-TV, Channel 11. Games will be director of corporate development for Chesapeake, while Raines will be public relations manager for the company’s Arkansas operations.

Chesapeake is also on the verge of making a formal announcement about a 16,500-SF production operations facility it will be opening just north of Searcy on Highway 16 in Albion and is in the final stages of getting approval to build a somewhat controversial water pumping station on the Little Red River, also north of Searcy.

From an operations standpoint, Chesapeake also recently announced that the Fayetteville Shale Play had been upgraded from its classification as an “emerging unconventional” to a “confirmed unconventional,” meaning it likes what it sees and is ready to kick it up a notch in terms of drilling investment.

This year’s first-quarter results were a telltale sign that the Fayetteville Shale is a key factor for Chesapeake. In the first quarter, Chesapeake passed ExxonMobil to become the nation’s sixth-largest gas producer and also more than tripled its production in Arkansas from 4 million cubic feet (MMcf) per day to 14 million MMcf per day, and more than tripled its drilling rig count from three operating rigs to 10.

Both those numbers have continually risen since the first quarter, with about 17 MMcf per day being produced and 12 rigs in operation with plans to have 16 soon.

“Quite simply, the play is working very well for us,” Aubrey McClendon, CEO of Chesapeake, said in a recent conference call. “Our costs continue to come down to around the $3 million level per well, while our production levels and estimated ultimate reserve recoveries continue to generally exceed our expectations.”

Albion Investment

The 16,500-SF facility being built at Albion is about three months from opening, according to Games.

The building mainly will be for Nomac Drilling Corp., Chesapeake’s drilling subsidiary, to be used as a permanent maintenance facility for its rigs and other heavy equipment. The facility will also have office space for additional employees, though the total number of workers is not yet known.

“We’re not prepared to announce any details just yet, but the facility will primarily be a home for our drilling subsidiary and a place for them to do maintenance and upkeep that was primarily being done in the field,” Gipson said. “It’s a substantial investment that will be a much-needed addition to our operations in Arkansas.”

‘Enormous Potential’

The Little Rock office at the Victory Building near the state Capitol will be ready to go by early fall, according to Gipson.

For Games, an economic development veteran who was most recently involved in bringing the Welspun Group and LM Glasfiber manufacturing plants to the state, the move to business development and government relations for Chesapeake was a good fit.

“I have a passion for economic development, and what better way to branch out a little than to be a part of a longer term of economic development in the state that is still developing?” he said. “The Fayetteville Shale Play’s potential for development in the state is enormous, and I felt privileged to get in there and help realize some of that potential.”

Raines, a former public relations professional at Cranford Johnson Robinson Woods before his tenure at KTHV, will be moving into the same building that houses his former television competitor, KARK-TV, Channel 4, which occupies a large space at the Victory Building.

Gipson said the Little Rock office will provide a centralized meeting space for key business affiliates and political figures and will give better access to the Little Rock National Airport. He said Games and Raines will be stationed there, along with a handful of others, but that could eventually expand.

Another Dimension

By the end of 2006, Chesapeake had already invested about $600 million in Arkansas, mainly in leasing and testing potential reserves.

With the rush to secure land among competing gas companies nearly complete, Chesapeake feels it has won that race, and now plans on investing as much as $500 million at the Fayetteville Shale Play this year alone in continued leasing, drilling, well completions and infrastructure.

“And we’ve spent about $150 [million] to $200 million gathering 3-D seismic data, which allows us to be more accurate and precise when we select the locations that we drill,” Gipson said.

Using its 3-D seismic equipment, Chesapeake has determined that an area in White County near Little Creek is its most concentrated and that about 700,000 acres of its “non-core leasehold,” mostly east and a little bit to the south of there, has little value at this time.

“The wells that we drilled over there, there were a handful, and the other couple of handfuls of wells that were drilled by other companies show that the Fayetteville basically east of White County will not likely be productive,” McClendon said.

The seismic data also indicated that Chesapeake should stay away from faults in those directions, where some unsuccessful wells had been drilled. It proved to be difficult to keep the hydraulic fracturing jobs in a specific zone.

Economic Driver

Chesapeake points to the Barnett Shale at Fort Worth, also an unconventional reserve, as an indicator for what its holdings in Arkansas can achieve.

In 2005 the company was running three rigs there. In 2006 it had 10, and now it is on the verge of having 36 operating rigs. What began as extracting 38 MMcf per day is now more than 200 MMcf per day.

In Arkansas, Chesapeake just decided last week to move to 16 operating rigs from 12, and within its 370,000 acres of core leasehold, McClendon said, it can easily handle a 20-rig drilling program.

Gipson said it’s important to note that these rigs are “economic development dynamos,” with the typical rig having an economic impact of about $3 million. “Virtually all of that is spent with service and supply companies with a local presence in Arkansas,” he said.

“And while the rig has 22 employees on it, there are several hundred involved during the course of identifying the site, preparing the location, building roads, and various supplies from fuel to propane to water. We have about 73 Arkansas companies on our vendor list.”

Gipson said a typical rig will yield about 600 checks to an average of 97 different companies.

“The impact that occurs is much more than a manufacturing plant that will hire 300 people,” he said. “When you get out into these areas and talk to a guy who had one piece of equipment, he now has four pieces of equipment and four times the employees. Now replicate that several dozens times over.”

Plan to Tap Little Red’s Water Pending

Hydraulic fracturing, the technique used to extract compacted gas from deep within the layers of shale, takes millions of gallons of water per job.

Chesapeake Energy Corp. of Oklahoma City is in the process of a fairly controversial push to build a pumping station to remove water from the Little Red River, store it in a nearby pond and truck it to drilling sites.

A public hearing period on the application, which is being handled by the Little Rock District Corps of Engineers, has expired, and a spokesman there says the agency received about 70 comments.

“There is nothing out of the ordinary relative to other public notices,” said P.J. Spaul, a Corps spokesman. “One or two public notices each year generate similar or greater public response.”

Questions and concerns have been tallied and will be submitted to Chesapeake for review, and if questions linger, a public hearing will be issued.

Spaul said Chesapeake is not required to respond, but the company told the Corps it has retained environmental consultants to respond.