For Harold Korell, chairman, chief executive and president of Houston-based Southwestern Energy Co., 2006 was a very good year. By mid-December, the company had drilled and completed 157 wells in its Fayetteville Shale play in Arkansas, and 102 more were under way. Its year-end production exit rate from the shale is expected to be some 100 million cubic feet of gas per day, up from approximately 9 million at year-end 2005.

Korell's success in the Fayetteville, which has been Southwestern's brain-child since it quietly began buying nearly 900,000 acres in eight counties in 2003, has not gone unrecognized. He has been named "Executive of the Year" by Oil and Gas Investor in its 2006 Excellence Awards program and he received the Outstanding Service Award from the Sam M. Walton School of Business at the University of Arkansas in April.

Under Korell's leadership, Southwestern's once-foundering E&P unit has become formidable. The Fayetteville is rumored to rival the Barnett Shale, and the company has had repeatable success in East Texas and elsewhere as well.

But Korell is not yet content. His plans for 2007 include a 45% increase in the company's capital program, which will allow Southwestern to drill 400 to 450 horizontal wells in the Fayetteville, giving it expected year-end 2007 production in the play of 300 million cubic feet per day. All this involves only 45% of Southwestern's acreage in the play, a fact that has allowed Korell to make this assertion with complete confidence: the Fayetteville Shale is huge.

Investor: Is this the year for the Fayetteville?

Korell: This is definitely the year it's really going to take off for a couple of reasons. We started 2006 with just three drilling rigs running in the Fayetteville Shale and we ended the year with about 19 rigs running. Through 2007, we'll have all 19 of those rigs running. We're going to drill a lot more wells.

The other place you're going to notice the play taking off is in our production volumes. At the beginning of 2006, we were producing about 9 million cubic feet of gas per day out of the Fayetteville. We ended 2006 at close to 100 million per day. Our plan is to end 2007 at close to 300 million per day.

It took basically 15 or 16 years and 400 wells for the Barnett Shale to get to producing 100 million cubic feet of gas per day, and we've basically gone to that level in two years. We have completed about 160 wells in the Fayetteville and generated good economics because we were able to figure out how to drill the wells in less time, so they cost us less money.

Investor: The Fayetteville was first speculated to be the next Barnett. Might it actually be larger than the Barnett?

Korell: We don't know the complete extent of the Fayetteville because we haven't drilled out all of our acreage. We still think the acreage we bought is all prospective. We've probably tested now about 45% of our close to 900,000 net acres. What we do know is that it's already big. With fairly conservative assumptions, just within that 45%, we could say, if a well produces 1.4 billion cubic feet and it's drilled on 80-acre spacing, we would be exposing ourselves to 11 trillion cubic feet and maybe 8,000 wells. And we haven't even drilled on the remaining 55% of our acreage yet. It could be as big as the Barnett.

Investor: In that respect, you're in the same position as operators in the Barnett: You don't know how far the play extends yet?

Korell: Not completely. We know some other companies have drilled wells outside of our acreage that have turned out not to be good, so we still think our original focus was the right one, and that would make this play very large. It's a significant gas resource, no doubt about it. It's not as deep as the Barnett. But since it's shallower, our well costs will be lower.

Investor: Are you worried about softening gas prices?

Korell: Not much. We have close to 65% of our gas volume hedged for 2007, so we kind of know what we're going to be getting.

Investor: What is your gas-price threshold in the Fayetteville?

Korell: It's a little hard to say because it will depend upon many factors, such as service costs, our most recent results and how good the wells are. It's lower than current gas prices, though, for sure.

It's not so much where gas prices are today that matters; what matters more is gas prices over the life of the well, especially in the first four or five years of production.

Investor: What additional price-appreciation potential is left in Southwestern's shares now that the market has already priced in the success of the Fayetteville program?

Korell: The market value is the sum of the perceptions of all of the players in the market. That's how gas prices work and that's how Southwestern Energy's stock price works. A lot hangs on the performance of our wells in the Fayetteville Shale. As we drill wells and put them on production, we share our results on a regular basis. Because of this, the stock price tends to be very volatile.

As a result, when you look at 2006, from the beginning of the year to the end, we were almost flat, but we went up and down a lot. I'm not going to make a prediction about our stock price in 2007, but the important factors in determining which way it goes will be the continuing performance of our wells, and as we drill into new areas and prove up more of the project area, that will add value to our stock.

Investor: You've been named Oil and Gas Investor's 2006 Executive of the Year. What are some of the important lessons you have learned about leadership?

Korell: Whatever I am today is really the result of having crossed paths with a lot of people in my time. I've tried to have a little bit of what I saw as the right thing rub off on me from those individuals, and I've tried to stay as far away as I can from what I thought was the wrong thing.

As a leader, you have to continue to learn and you have to have some natural ability to be out there in the front lines, not just telling or managing but leading and being an example. Honesty and integrity and trust are important words to me.

It's also important to me to be accomplishing something and it's important to most people, so it's very important to have an organization in which people have the freedom to think and innovate and generate new ideas and get those ideas tested and if they're good, move forward with them aggressively. It's important to have an environment that fosters the generation of ideas.

Externally, it's important for your shareholders to trust what you're doing, to trust you as a person, to trust your management team, and to see you taking actions that follow through with what you say you're going to do. If they're betting on you as a company and they're buying your stock, it's because they trust you and your strategy and your team. You need to show follow-through.

Investor: What would you recommend to other E&P leaders to take their companies ahead in value?

Korell: Put together the foundation of a strategy that you believe in, that your people internally can believe in and that your shareholders can believe in, and pursue it. If you figure out it's not working, you better change your strategy. The worst thing you can do is try to stick with something and make people believe in something that isn't really working.

Investor: What will be the E&P industry's challenges during the next 20 years?

Korell: Our biggest challenge will be to continue to find enough oil and gas to supply the country. That leads to having enough young people coming into the business trained in the technical disciplines to generate the ideas, yet emotionally intelligent to know how to work in teams and get along. It's going to be a "people resource" issue and the ability to generate new ideas to find oil and gas.

In this industry there's no question about whether people want our product. We don't have to put a TV ad out there to get someone to heat their home. Our challenge is one of generating new ideas to find oil and gas. Our competition is Mother Nature, who hid the jewels somewhere, and we're trying to find them.

Investor: What are the industry's strengths that will help accomplish that?

Korell: One of the main strengths of this business is it is still a treasure hunt. This will encourage young people to go into this business because it's still something they can do. Creative people with a technical background can still find oil and gas. If I'm encouraged about anything, it's that, if you do well in this business, there is a pot of gold at the end of the rainbow.

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