Friday, March 14, 2008

Chesapeake "Helps" Us?

I found another reference on the cost of production and value of production in the Barnett Shale. Last October, Chesapeake announced first D/FW Airport natural gas production and total production estimates that substantiate my recent analysis.

According to the Dallas Business Journal (, Chesapeake expects 2.5 to 3 billion cubic feet of production per well. At $10 per cubic foot, that substantiates my estimates. Each well will produce $25 to $30 million. If prices do not rise above the current $7 per 1000 cubic feet, these wells will still produce over $17 to $21 million each.

Further the article wrote that the cost of production will be only $2 per 1,000 cubic feet or $5 to 6 million per well. It is not clear if this cost includes royalties or other post-production or overhead costs. However, I tend to think that it does not include royalties but may include post production expenses.

In any case, if royalties add another $2 per 1000 cubic feet to the cost of production, Chesapeake will book a very healthy $7 to $20 million in profit per well after all their expenses. Note that this gas was "donated" to Chesapeake by the tax payers of Tarrant and Dallas County that set up and funded DFW Airport.

Did the Airport Board drive a hard bargain? You tell me.

Do Chesapeake and/or the Board even say thank you? No, Chesapeake just has land men combing the neighborhoods trying to sign up more leases and Airport Board continues to charge incredible prices for parking.

How could they say thanks? Perhaps they could at least build a few free parking spaces at DFW and set up a low-cost airport shuttle service. Perhaps they could make reduced-cost gas available to local utilities. If gas was sold to utilities at $4 per MCF, then everyone in Tarrant and Dallas county would benefit directly from the gas production at DFW.

But instead, Chesapeake has the audacity to continue to offer as little as 1/5th of signing bonus they paid at DFW; i.e., as little as $2,000 compared to the $10,000 per acre. Give me a break!

Is it just me, or do others feel like they have been and are being smashed in a massive rip off?


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