6 5 - RR DONNELLEY FINANCIAL - External Home Login

8 | LETTER TO SHAREHOLDERS
Growing Demand for U.S. Natural Gas Will Drive
Improved Prices in the Years Ahead
Several factors are emerging in the U.S. that will drive increased
demand for natural gas, which in turn could improve out year
natural gas prices:
Growing momentum for CNG passenger and LNG long-haul
truck vehicles
Enormous cost savings are available to consumers and businesses
that chose to use natural gas as an alternative transportation
fuel ($1.39 per gallon for CNG in Oklahoma, for example, compared
to $3.75–$4.00 per gallon for gasoline and diesel).
Growing industrial demand
With recent low prices for domestic natural gas, U.S. industries
that utilize natural gas as a feedstock in their manufacturing processes
have a significant cost advantage compared with international
peers whose feedstock is indexed either to oil or global
natural gas prices.
Continuing and accelerating shift from coal to natural gas for
U.S. electrical power generation
To clean our environment, dozens of aging coal-powered electricity
plants will be retired in the next decade and replaced
with the cleaner alternative of natural gas. A combination of
shifting power sources and higher utilization within existing
gas-fired power plants will likely increase natural gas demand by
10–15 bcf per day over the next decade.
Conversion of U.S. LNG import facilities to LNG export
facilities
With increasing demand for natural gas around the
world and the abundance of U.S. natural gas reserves,
producers will be able to tap into higher-margin markets
in Europe, South America and Asia once export capabilities
are available potentially beginning in 2015.
Construction of U.S. gas-to-liquids (GTL) plants
Converting natural gas to a room temperature liquid
would allow U.S. natural gas producers to sell products
based on world oil prices instead of domestic natural gas
prices. Technological advancements continue to gain
traction and may make GTL a realistic possibility by 2016.
U.S. natural gas producers are rapidly moving to a
more liquids-rich production base
Due to the premium margins realized in the U.S. when
producing liquids as compared to natural gas, there is
a meaningful shift of producers targeting liquids-rich
drilling prospects. This shift will ultimately help bring
U.S. natural gas markets back into balance by reducing the rigs
and capital available for natural gas drilling.
$2.25 billion in cash and drilling carries for its 25% stake in the
Barnett, and we are extremely proud to have Total as one of our
premier joint venture partners.
Haynesville Shale — The Haynesville Shale in Northwest Louisiana
and East Texas is the shale play of which we are most proud
(to date) because it was discovered by Chesapeake’s own geoscientists
and engineers. We conducted our geoscientific investigation
of the Haynesville in 2005–06 and tested our theories
through drilling in 2007. In 2008 we formed an innovative joint
venture agreement with our well-respected industry partner,
Houston-based Plains Exploration & Production Company, to
which we sold 20% of our Haynesville (and Bossier) assets for
approximately $3.2 billion in cash and drilling carries.
The Haynesville Shale is now the nation’s largest producing
natural gas shale play, having just recently passed the Barnett
Shale in production (in last year’s letter, I incorrectly estimated
it would take until 2014 for the Haynesville to reach this achievement,
a testament to the play’s enormous productive potential).
Ultimate recoveries from the Haynesville could exceed 250
tcfe, likely making it one of the five largest natural gas fields
in the world. Today, we are producing from more than 260 net
wells in the Haynesville on our 530,000 net leasehold acres,
are currently drilling with 35 rigs and estimate we could drill
up to 6,300 additional net wells in the years ahead. Our gross
operated production in the Haynesville recently set a record of
nearly 1.6 bcfe per day.
Bossier Shale — This shale
overlies about one-third
of our Haynesville acreage
and is the first of our
two “sleeper” natural gas
shale plays. The reason is
that in Louisiana, leases
often restrict the lessee
(i.e., the producer) to only
holding future drilling
rights down through the
deepest formation drilled.
Because the Bossier lies
above the Haynesville,
One producing and one on the way: the Texas Panhandle Granite
Wash offers high volumes of natural gas accompanied by highly
valued liquids production as well.