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Chesapeake, Plains Set to Tap Gas Field

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Chesapeake, Plains Set to Tap Gas Field

Joint Investment Seeks 
To Make Obscure Area 
A Big Energy Producer
By BEN CASSELMAN
July 3, 2008; Page B3

A $3.3 billion joint-venture deal between Chesapeake Energy Corp. and Plains Exploration & Production Co. is the latest sign that a long-obscure swath of north Louisiana and east Texas is emerging as the country’s hottest area for natural-gas exploration.

Under the agreement, Plains will pay $1.65 billion in cash for a 20% interest in Chesapeake’s drilling leases in the field, known as the Haynesville Shale. Plains will also shoulder $1.65 billion of Chesapeake’s drilling costs over the next three years or so, and will have the right to buy into any future leases Chesapeake signs in the area.

[Gas Power: A $3.3 billion joint venture between Chesapeake Energy and Plains Exploration & Production is bringing attention back to this swath of north Louisiana and east Texas.]
Chesapeake Energy Corp.
Gas Power: A $3.3 billion joint venture between Chesapeake Energy and Plains Exploration & Production is bringing attention back to this swath of north Louisiana and east Texas.

Chesapeake was the first company to recognize the Haynesville field’s potential, and its 550,000 leased acres there make it by far the area’s largest player. The company has said its leases could produce as much as 44 trillion cubic feet of natural gas — nearly twice what the entire U.S. consumed last year.

Chesapeake shares rose 3% to $69.40 in 4 p.m. New York Stock Exchange composite trading on the news, and are up 56% since the company first announced its Haynesville discovery in March. Plains shares fell 5.3% to $69.35, also on the NYSE.

Experts said the deal shows how much Chesapeake stands to gain from its head-start. The agreement with Plains values Chesapeake’s Haynesville territory at $30,000 per acre, more than six times what the company paid. In a conference call with investors Wednesday, Chesapeake said it has spent $2.5 billion to acquire and develop its Haynesville holdings — meaning the company will earn back all its money and more via the Plains deal, while still retaining 80% of its acreage.

The deal also highlights just how fast development is moving in the Haynesville field. The town of Haynesville, 60 miles northeast of Shreveport, was the site of an oil boom in the 1920s, according to local history, though today it has only about 2,700 residents.

But the area’s natural-gas potential was almost completely unknown until March, when Petrohawk Energy Corp. discussed it at an analyst conference. Later that month, Chesapeake announced it had leased more than 200,000 acres in what is known in the industry as a play, and said Haynesville may “have a larger impact on the company than any other play in which it has participated to date.”

That announcement set in motion a frantic rush to lease land and drill wells. Major natural-gas producers such as Anadarko Petroleum Corp., Devon Energy Corp. and XTO Energy Inc. have leased land, and even global giant Royal Dutch Shell PLC has gotten involved, via a partnership with Canadian energy producer EnCana Corp.

On Monday, Petrohawk said its first horizontal well in the Haynesville field was producing nearly 17 million cubic feet of natural gas a day, and Chesapeake on Wednesday said it expects its wells to produce an average of 4.5 to 8.5 billion cubic feet each over their lifetimes.

The potential investment is huge. Chesapeake alone expects to drill 600 Haynesville wells in the next three years, which would cost $3.9 billion at current rates, although the company expects to reduce its per-well costs over time. Ultimately, Chesapeake plans to drill some 6,875 wells on its current leases.

[Combo]

Discovery of the Haynesville field is the latest in a series of developments that have remade the U.S. natural-gas industry in recent years. Higher prices and new technologies have allowed companies to extract gas from dense rocks called shales, a process considered too difficult and expensive until a few years ago.

The success of the Barnett Shale, a massive gas formation around Fort Worth, Texas, has driven companies to scour the continent for new shale resources — though none has yet rivaled the Barnett field.

Experts said early results suggest Haynesville could be different. But they warned that companies are buying access to acreage there in part to appeal to outside investors, who are seizing on the latest natural-gas discoveries — and often moving on as soon as the next one is announced.

“People want the exposure and Haynesville’s the latest and greatest,” said David Tameron, an analyst at Wachovia Capital Markets. “If you go back six months, it was Appalachia. A year before that it was the Barnett. Six months from now, they’ll be talking about a Utica shale or something else. It’s the nature of Wall Street.”

Write to Ben Casselman at [email protected]

http://online.wsj.com/article/SB121501262685723169.html

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