Chesapeake Essay Research Paper Oil and Gas

Chesapeake Essay, Research Paper

Oil and Gas Industry

Chesapeake Energy Corporation

Firm Description

Chesapeake Energy Corporation (NYSE: CHK), headquartered in Oklahoma City, Oklahoma, owns 1.1 trillion cubic feet equivalent (tcfe) of proved oil and gas reserves, one of the largest inventories of onshore U.S. natural gas {Chesapeake Annual Report, 1998, p. 1}. Recently, Chesapeake finished the transformation from an aggressive exploration company focused on developing short-reserve life, to a lower-risk, longer reserve life natural gas producer.

Chesapeake s operations are focused on developmental drilling and producing property acquisitions. These operations are concentrated in three major areas: the Mid-continent, the onshore Gulf of Mexico and far northeastern British Columbia, Canada [Chesapeake Annual Report, 1998, p. 1].

Management Team

Aubrey K. McClendon is Chesapeake s Chairman of the Board, Chief Executive Officer and Director. Tom L. Ward is the President, Chief Operating Officer and Director. McClendon met cofounder Tom Ward in the 1980 s. Both were independent oil producers; they teamed up in 1983 [Morgenson, p. 2]. They each have more than 16 years of experience in the oil and natural gas industry. All other members of the management team have multiple years of experience in the industry.

Competitive Environment

Chesapeake has concentrated on expanding its holdings in natural gas since the company s incorporation in 1989. Chesapeake thinks that natural gas will be the fuel choice of the 21st century. The company has been highly competitive in both its exploration activities and efforts to increase its inventory of undeveloped leasehold land. This combination should enable Chesapeake to remain a competitive force in the energy producing industry.

New technology in the oil and gas industry has made exploration and production more profitable. This is key for the survival of American businesses that compete with OPEC and other foreign cartels that have very low production costs. New technology, including three-dimensional imaging, which has greater resolution than the previously existing technology, will enable Chesapeake to detect reserves more accurately. Also, horizontal drilling has enabled companies to drain more than one reserve at a time. With profits continuing to be squeezed within this industry, new technology is necessary to help American businesses compete on a global scale.

Economic Climate

The oil and gas industry is truly a global market. The industry boosted gains in 1999 from increased production efficiency and a decrease in the current supply. U.S. firms, along with OPEC, have voluntarily reduced their total production, which has increased the price. OPEC currently supplies approximately 40% of the world oil production. If OPEC chooses to produce at a lower output, Chesapeake could easily increase production with its low production costs and huge reserves. Many other nations are emerging as competitors, such as the former Soviet Union and Latin American countries. The continuing increase in supply from other nations would potentially saturate the market, causing lower prices and lower profits. Demand is expected to rise only slightly more than two percent through the year 2005.

The outlook for this industry is for increased competition domestically (from smaller companies) and internationally from emerging nations. The U.S. has superior technology, which will help keep profits up as supply increases and demand remains relatively constant.

Natural gas makes up 72% of Chesapeake s revenue. They usually sell the product to third parties and are not dependent on any one buyer. Less than 10% of their revenues are generated from two buyers.

Governmental Regulations Operational and Labor Relations

The oil and gas industries are subject to considerable government regulation. These laws and regulations are primarily directed toward the handling and disposal of drilling and production waste products and waste created by water and air pollution control devices [Chesapeake 10-K, 1998, p. 10]. The oil and gas industry is accountable to numerous government agencies, including the Environmental Protection Agency, the Department of the Interior, the Department of Energy, the State Department and the Department of Commerce. Virtually every aspect of operations is subject to complex and ever changing regulations.

The oil and gas industry is tightly regulated in regard to labor relations by government department and agencies, including the Occupational Safety and Health Association (OSHA) and the National Labor Relations Board (NLRB). Some states have their own state sponsored occupational safety plans, while the remainder must comply with federal OSHA regulations. Some of the topics covered under OSHA include personal protective equipment, hazardous communication (HAZCOM) and safety process training.

Chesapeake had 453 employees as of March 15, 1999. None of these employees were represented by organized labor unions. The company considers its employee relations to be good [Chesapeake 10-K, 1998, p. 13]. Unocal (NYSE: UCL) employed 7,880 people as of December 31, 1998, of which 575 were represented by various U.S. labor unions [Unocal 10-K, 1998, p. 12].

Both companies are subject to new laws and r

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