The U.S. energy industry is in the midst of a gas bubble, according to Aubrey McClendon, president and chief executive of Chesapeake Energy Corp. He spoke during a “shale-side chat” with Leslie Haines, editor-in-chief of Oil and Gas Investor, at the 2010 Developing Unconventional Gas (DUG) Conference and Exhibition, held in Fort Worth.

At some point, the rig count has to fall, said McClendon. Price expectations, hedging and drilling to hold production have encouraged producers to continue drilling, but that may change.

“Today’s drill-rig count reflects gas-price expectations of three to six months ago,” he said. “I think gas production is going to fall dramatically, but we haven’t seen that in the data yet. I think today’s rig count reflects a $6-per-Mcf gas price rather than the current $4.25 price.”

Also, most gas producers have hedged their production, which is delaying a reduced rig count. “We hedge too, so last year when Chesapeake made $2.4 billion on hedging, we enjoyed probably our best year ever from a cost perspective.”

Meanwhile, about half of Chesapeake’s drilling is “nonvoluntary,” he said. “In some of (the plays), we are drilling to hold leases and not because we think this is a great gas price.”

Looking at rig counts across U.S. gas plays, McClendon surmised that half of the horizontal rigs are working to hold leases.

Oklahoma City-based Chesapeake is producing about 40,000 barrels of oil per day and plans to look at another 10 discreet oil projects. Currently, oil production accounts for about 7% of Ches­apeake’s portfolio, but it plans to increase that to 20%, which would generate about 50% of the company’s revenue.

In light of recent reports of new Chesapeake leases in the Rockies, Haines asked about his previous claims that he would never drill there. “Well, we haven’t admitted that yet, but now that you have ‘outed’ me in front of 1,200 of my friends (conference attendees), I have to say, I was misquoted,” he said.

“In fact, I said that about gas. We are looking for oil in the Rockies. We do have a play in the Powder River Basin and we have acquired 700,000 acres with a partner there.”
‘Did you say 700,000?” Haines asked, to confirm the large asset.

“Yes,” McClendon replied. “It’s a little starter kit.”

Today’s economics are compelling producers to look for oil instead of gas, he said. “I think this will be the biggest news for the next three to five years. It’s about taking these technological advances that we have developed together as an industry to find gas in unconventional reservoirs and applying them to oilier reservoirs. It’s a very exciting development.”

The next big play for the E&P might be the wet-gas and oily sections of the Eagle Ford shale, McClendon said. Chesapeake has amassed about 300,000 acres there and plans to add another 100,000. The company is looking for a 25% partner for that play, he said. He predicted the industry will see “some new names” in the Marcellus.

Elsewhere, the Granite Wash play in the Texas Panhandle and the Anadarko Basin is giving Chesapeake its best return on capital now. The firm has about 190,000 acres there and is “by far the biggest producer,” he said. The wells are paying out in six to 12 months, and McClendon plans to have at least 16 rigs working there by summer.

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