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Chesapeake on Track to Drill 170 Wells and Operate 31 Drilling Rigs in Marcellus Shale in 2010

This bit of information about Chesapeake’s Marcellus Shale activities from a recent operational update:

With approximately 1.5 million net acres, Chesapeake is the largest leasehold owner in the Marcellus Shale play that spans from northern West Virginia across much of Pennsylvania into southern New York. On its Marcellus leasehold, Chesapeake estimates it has approximately 26 tcfe of risked unproved resources and 66 tcfe of unrisked unproved resources.

During the 2010 first quarter, Chesapeake’s average daily net production of 65 mmcfe in the Marcellus increased approximately 40% over the 2009 fourth quarter and approximately 815% over the 2009 first quarter. Chesapeake is currently producing approximately 100 mmcfe net per day from the Marcellus. Chesapeake is currently drilling with 24 operated rigs in the Marcellus and anticipates operating an average of approximately 31 rigs in 2010 to drill approximately 170 net wells. During the 2010 first quarter, approximately $90 million of Chesapeake’s drilling costs in the Marcellus were paid for by its joint venture partner Statoil. From April 2010 through 2012, 75% of Chesapeake’s drilling costs in the Marcellus, or approximately $1.9 billion, will be paid for by Statoil.

Three notable recent wells completed by Chesapeake in the Marcellus are as follows:

  • The James Barrett 2H in Bradford County, PA achieved a peak 24-hour rate of 12.7 million cubic feet of natural gas (mmcf) per day;
  • The James Barrett 1H in Bradford County, PA achieved a peak 24-hour rate of 11.8 mmcf per day; and
  • The Strom 1H in Bradford County, PA achieved a peak 24-hour rate of 8.2 mmcf per day.

*Business Wire (May 3) – Chesapeake Energy Corporation Provides Quarterly Operational Update

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Chesapeake Energy’s Permit to Use State Route 1007 in Bradford County Revoked Until Damage is Repaired

Bradford-County-SR-1007 Chesapeake Energy’s permit to use a PA State Route in Bradford County has been revoked—now a second time—by the Pennsylvania Department of Transportation (PennDOT).

From the PennDOT press release:

HARRISBURG, Pa., April 15 — A road use permit issued to Chesapeake Energy Corporation for moving its drilling trucks and other equipment over State Route 1007 in Bradford County was revoked because of the company’s failure to deal with severe damage to the roadway, Transportation Secretary Allen D. Biehler, P.E., announced today.

Chesapeake was granted a permit to put heavy trucks and equipment on the road, known locally as Spring Hill Road in Tuscarora and Stevens townships. The road normally has a 10-ton weight restriction, and Chesapeake’s permit carried the understanding the company would be responsible for repairs.

“Chesapeake may not use this route until it makes the required repairs,” Biehler said. “We understand the importance of Marcellus Shale drilling to the region’s economy, but we will remain vigilant in requiring action to keep the roads safe and properly maintained for public use.”

PennDOT revoked the permit after Chesapeake failed to respond to two notices of unsafe conditions on the roadway. Under the terms of the permit, Chesapeake is to proactively monitor pavement conditions and immediately begin repairs as needed to keep the road safe.

On March 1, PennDOT revoked Chesapeake’s permit for State Route 1001 in Bradford County for the same reasons. The permit was restored after the road was closed for about one week and the company made the required repairs.

*PR Newswire (Apr 15) – PennDOT Revokes Road Use Permit for Chesapeake Energy Corporation on State Route 1007 in Bradford County Until Repairs Are Made

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Chesapeake & Range Resources Peg Value of Their Marcellus Shale Holdings from $36K – $56K per Acre

Range Resources CEO John Pinkerton said that their holdings in the Marcellus Shale play are worth more than four times the $14,000 per acre that recent deals between energy companies have brought. Chesapeake Energy CEO Aubrey McClendon says his company’s Marcellus Shale holdings are worth $35,900 per acre to the company. With 1.57 million acres leased, that’s an astonishing $53 billion worth of value for Chesapeake!

If those values are true—and not just hype for investors—that would make the recent deals between Reliance and Atlas Energy ($14,167/acre) and Misui and Anadarko Petroleum ($14,000/acre) real bargains.

MDN Note: These prices are not the prices energy companies pay landowners to lease land. Lease prices are more in the range of $5,000 per acre recently. Rather, this is the value energy companies say an average acre of Marcellus Shale land will eventually supply in revenue to the company. Not all land is productive, so the number is an average across all leased acreage.

*Tulsa World/Bloomberg News (Apr 14) – Marcellus Shale assets considered valuable

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Statoil Takes Over Another 59,000 Acres from Chesapeake, Pays $4,325 Per Acre

Norwegian energy giant Statoil, which has a deal with Chesapeake Energy to develop some of Chesapeake’s acreage in the Marcellus Shale, has just transferred 59,000 acres from Chesapeake’s lease holdings to their own.

From a press statement issued by Statoil on Friday, March 26:

Statoil has signed an agreement with Chesapeake which will add approximately 59,000 net acres to Statoil’s current 600,000 net acre positions in the Marcellus Shale.

The cost to Statoil of the transaction is $253 million, with an average acreage cost of $4,325 per acre.

As part of Statoil’s joint venture agreement with Chesapeake in 2008, Statoil has the right to periodically acquire its share of leasehold that Chesapeake continues to acquire in the Marcellus Shale. Statoil has now exercised such acquisition rights on a series of Chesapeake Marcellus Shale acquisitions.

Statoil has seen very encouraging production performance since the entry into the Marcellus play in late 2008. This new acreage is expected to strengthen the position of Statoil and our cooperation with Chesapeake as the largest lease holders in one of the most prospective US shale gas plays.

This acquisition will enable the partnership to optimize its development activity and secure additional developments in the play. Statoil expects to continue to grow its Marcellus position together with Chesapeake.

Andy Winkle, VP for the Marcellus Asset, says “We were an early mover into the Marcellus and we will continue to build a long term position in what we expect will become a legacy asset and reach our goal of 50,000 boepd production by 2012.”

*Statoil Website (Mar 26) – Statoil strengthens US shale gas position

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Chesapeake Drilled 94 Wells in PA in 2009, Plans to Drill 200 Wells in PA in 2010

An article in the Wilkes-Barre Times Leader reveals this interesting information about Chesapeake Energy’s activity in Pennsylvania:

Chesapeake Energy has invested significantly in not only leasing land in Pennsylvania, but in doing business with private companies.

With 94 wells drilled in the state in 2009 and more than 200 additional wells planned for this year, the company has paid subcontractors and vendors in Pennsylvania $269 million since January 2009, company spokesman Rory Sweeney said in an e-mail.*

*Wilkes-Barre Times Leader (Mar 21) – Law, engineering firms will be the first for jobs

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A Novel Approach to Signing New Landowners by Chesapeake Energy in Bradford County, PA

Forget the landmen, Chesapeake Energy wants to talk directly to landowners and is throwing a “signing party” hoping to convince landowners in Bradford County to show up and sign up at the Wysox Fire Hall on March 20th.

Chesapeake sent letters to unsigned landowners in Towanda, North Towanda, Wysox, Standing Stone, Monroeton, Asylum, Wyalusing and Herrick, inviting them to the event.

Chesapeake tells landowners in the letter:

“Our records indicate that you own certain oil and gas rights that Chesapeake is interested in leasing,” the copy of the letter states. “We will have personnel on hand to discuss with you an offer to lease [the oil and gas rights on] your property that will potentially allow you to share in the royalty pool to be established for wells to be drilled in your area.”*

The letter offers unsigned landowners a 10-year lease for $5,000 per acre and 20% royalties. By comparison, just last September Chesapeake signed a deal with the Wyoming County Landowners group for $5,750 per acre and 20% royalties. Chesapeake has made an offer to Wysox Township to lease town land for the same terms ($5,750 per acre, 20% royalties). However, in January 2010, Northern Tier Career Center in North Towanda approved a five-year lease with Chesapeake for $6,500 per acre and 20% royalties on the school’s 73 acres.

MDN has not seen a copy of the full letter, but a commenter on The Daily Review website states the Chesapeake letter was sent to landowners with less than 3 acres of land. Landowners with small parcels do not have as much negotiating clout as larger landowners or groups. Even so, MDN cautions landowners about just showing up and signing up. While it may be a good deal, the devil is in the details of a contract. There is no substitute for having a contract reviewed by legal counsel before signing. Landowner groups (who retain legal counsel) are often the best way to ensure your interests as a landowner are protected. If you cannot find a landowner group to join, make sure you retain a good lawyer with experience in mineral rights leases.

Go enjoy the free coffee and donuts, but be careful about signing anything on the spot.

*Towanda The Daily Review (Mar 17) – Chesapeake to hold lease-signing event for Towanda-area landholders

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Marcellus Leasing & Drilling in the West Virginia Panhandle Heats Up

West Virginia Marcellus Shale is getting hot. From an article* in the Steubenville (OH) Herald-Star, we get a mountain of good intelligence on what energy companies have and are paying in the West Virginia panhandle:

  • AB Resources is paying the New Vrindaban Hare Krishna Community in Marshall County $2,500 per acre for approximately 4,000 acres, and 18.75 percent production royalties. That works out to $10 million in lease payments.
  • Chesapeake paid $750 per acre and 14 percent royalties to the Wheeling Park Commission for leases in the Oglebay and Wheeling Parks in 2009. The park commissioner is not happy that Chesapeake is planning to pay more this year to lease public lands in neighboring Ohio County.
  • Chesapeake paid $2,800 per acre and 18.75 percent production royalties last month to the Marshall County Board of Education for rights to 177 acres in Sherrard.
  • Chesapeake has 11,000 acres under lease in Ohio County, and 45,000 acres (with 26 wells drilled) in Marshall County.
  • Trans Energy owns and operates 300 active wells in Marshall, Wetzel and Marion counties, with 40,000 acres under lease.

Also, according to the article:

Current lease contracts range from as low as $5 per acre to as high as $2,800 per acre, with production royalties ranging from 12.5 percent to 18.75 percent. Landowners are being urged to think carefully before signing any contract.*

*Steubenville Herald-Star (Mar 8th) – Steubenville Herald-Star – Natural gas could bring riches to Panhandle

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Chesapeake Given Green Light to Drill 5 Wells in Washington County, PA

Chesapeake Appalachia, a subsidiary of Chesapeake Energy, has received clearance from two townships in Washington County, Pennsylvania, to move forward with plans to drill five gas wells. Three of the wells will be drilled in Robinson Township, and two in North Fayette Township. Supervisors in both townships voted unanimously (3-0) to allow drilling to begin. The PA Department of Environmental Protection will still need to approve permits, but all systems appear to be “go” for drilling to begin.

Each well will take approximately three weeks to drill with drilling activity scheduled seven days a week, 24 hours a day. The approvals were granted contingent on certain guarantees and conditions about safety.

For full details, see: Pittsburgh Post-Gazette (Mar 4) – Officials OK plan to drill Marcellus shale for natural gas

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Chesapeake Withdraws Application to Store Millions of Gallons of Wastewater near Keuka Lake

Syracuse Post-Standard (Feb 21)
Plan to truck hydrofracking wastewater to Finger Lakes shelved, for now

Readers of Marcellus Drilling News know that we advocate for landowners, and that we support safe drilling. But, drilling companies sometimes do themselves no favors and deservedly receive suspicion and condemnation. Case in point: Chesapeake Energy, one of the largest drillers in the U.S., is looking for a place to store millions of gallons of wastewater from their drilling operations in Pennsylvania. They thought they may have found a spot in the Steuben County (New York) town of Pulteney, in an old gas well no longer in use. They wanted to store up to 663 million gallons of wastewater—called “flowback” in the drilling business—in the old gas well, and they filed an application to do so.

Flowback, which is water combined with sand and unspecified chemicals, is what’s leftover after it’s been pumped into the ground and brought back out again. The problem is, the chemicals used by drilling companies are a closely guarded trade secret—something that gives them an edge over competitors when drilling. So no one knows what, exactly, is in the flowback, nor in what proportions. This makes people uneasy when you want to store millions of gallons of it close to homes with water wells, and close to their vineyards. The old gas well sits next door to an active vineyard.

It’s also bone-headed of Chesapeake to want to store it in this particular abandoned gas well, as the location is just one mile away from Keuka Lake, one of the Finger Lakes in Central New York. The proposed underground storage by Chesapeake “would not be lined or contained.” If, by some unfortunate event, the stored flowback were to leak into Keuka Lake, the resulting contamination could be catastrophic. It appears to be a risk just not worth taking. Much better for Chesapeake to look for a facility that will treat the flowback and return it to them to be reused for more drilling.

Chesapeake has withdrawn its application for now. Although not a popular subject with drillers, if drilling companies were to disclose the chemicals used in the drilling process, it would go a long way to silencing the critics that there is no safe way to drill.

The article from the Syracuse Post-Standard is fair and balanced (more or less) with a video interview of a local landowner who lives across from the abandoned gas well. It’s worth your time to read the article and watch the video interview.

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Tennessee Gas Pipeline to Invest $400 Million in New Pipeline from PA to NJ

El Paso Press Release (Feb 16)
El Paso Corporation Announces Northeast Upgrade Project

Part of the development required to tap the huge natural gas reserves in the Marcellus includes the infrastructure to get the gas from well to market. El Paso Corporation’s subsidiary Tennessee Gas Pipeline is helping provide the pipeline piece of the puzzle.

Below is the full text of a press release from El Paso, dated Feb. 16:

HOUSTON, TX, — El Paso Corporation (NYSE: EP) today announced that its wholly owned subsidiary, Tennessee Gas Pipeline Company (TGP), has executed binding, 20-year term agreements with Chesapeake Energy Marketing, Inc., a wholly owned subsidiary of Chesapeake Energy Corporation (NYSE: CHK), and StatOil Natural Gas LLC, a wholly owned subsidiary of Statoil (NYSE: STO), for 100 percent of the capacity for its Northeast Upgrade Project. The project will provide 636,000 dekatherms per day of incremental firm transportation capacity from TGP’s 300 Line in Pennsylvania to an interconnect in New Jersey to serve growing markets in the Northeast.

The Northeast Upgrade Project is a natural extension of TGP’s presence in the heart of the developing Marcellus Shale play. The project would cost approximately $400 million with a majority of the capital spending taking place during 2013.

"We are very pleased to add another major pipeline project that provides significant new firm transportation capacity for two prominent Marcellus Shale producers," said Doug Foshee, El Paso’s chairman, president, and chief executive officer. "With the previously announced 300 Line Project, we will be adding approximately 1 billion cubic feet per day of new firm capacity that will provide safe and reliable transportation of clean-burning, domestic natural gas supplies to key Northeast markets."

"We are pleased to enter into this agreement with El Paso," said Aubrey McClendon, Chesapeake’s chief executive officer. "It continues our practice of contracting for strategic pipeline capacity, which in this case provides access to premium northeast markets for our growing Marcellus production in Northeast Pennsylvania. We have a long history of transactions with the El Paso family of companies, and this transaction continues that tradition, creating substantial value to both firms."

A spring 2011 Federal Energy Regulatory Commission filing date is anticipated with a scheduled November 1, 2013 in-service date. An open season is expected to begin this month with final capacity awarded in March 2010.

El Paso Corporation provides natural gas and related energy products in a safe, efficient, and dependable manner. The company owns North America’s largest interstate natural gas pipeline system and one of North America’s largest independent natural gas producers. For more information, visit www.elpaso.com.

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Chesapeake Energy Continues to Expand Production in the Marcellus Shale

Houston Star-Telegram (Feb 16)
Chesapeake reports 19 percent production increase

Chesapeake Energy, one of the largest gas drilling companies in the U.S., recently reported a 19% increase in its natural gas production across all of its shale plays. With respect to the Marcellus, we learn from a Houston Star-Telegram article that:

  • Chesapeake has a huge leasehold of 1.6 million net acres in the Marcellus
  • Current net Marcellus production equals 65 million cubic feet of gas per day
  • Chesapeake expects its Marcellus output will rise to 270 million cubic feet of gas per day by year-end 2010 (over 4x current levels)
  • Chesapeake expects its Marcellus output will rise to 450 million cubic feet of gas per day by year-end 2011 (nearly 7x current levels)
  • Three recent wells drilled in Susquehanna County (PA) had peak 24-hour rates of 8.7 million, 8.6 million and 8.4 million cubic feet of gas
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Millionaire Landowners – In New York State?!

Crain’s New York Business (Nov 1):
The new gold rush

With heavy dollops of anti-drilling sentiment (so the reporter keeps his job), this article is worth a read because of the fountain of good information about economics for landowners in the Marcellus Shale. The theme that runs through it is the story of a truck driver with 120 acres outside of Binghamton, NY who stands to become a millionaire many times over if and when drilling starts to take place in New York. The truck driver, Jeff Decker, is not allowed to divulge the terms of his upcoming lease, but it’s thought to be in the neighborhood of $700,000–and that’s just the signing bonus for his 120 acres. If they drill on his property and he gets, oh say a 20% royalty, he’s easily into millions of dollars.

This nugget of useful detail from the article:

An 80-acre swath of the Marcellus can eventually produce $42 million worth of natural gas, says Dean Lowry, president of Fort Worth, Texas-based Llama Horizontal Drilling Technologies. With drilling leases now giving landowners 20% royalties on productive wells, Mr. Decker could become a millionaire several times over.

Drillers, whose cost to develop an 80-acre parcel is about $4 million, would also prosper. “Fifty percent of the gas could be extracted in the first three or four years,” Mr. Lowry says. “You get your investment back in the first year to 18 months. Then you get seven to nine times your money over the next 20 to 25 years.”

I would also caution about what’s coming in the way of taxes when drilling finally does start in New York. This rather sobering paragraph from the article:

In New York the Paterson administration, heeding the cries of landowners and local officials in economically depressed upstate communities, has issued draft regulations to allow it here. Landowners are keen to lease their property. Cash-strapped municipalities are eager to tax the extracted gas. Business groups say drilling would bring jobs and jolt local economies. The state would collect more income tax and, if it imposes one, a tax on gas production.

You can expect local municipalities to not be able to resist putting their hands into landowners’ pockets to relieve them of some of their new found money. And New York State will undoubtedly not be able to resist either. Politicians are like drug addicts who need an economic “fix”. Just a warning so you’re not surprised when it happens.

We also have the obligatory couple of paragraphs on “don’t you dare drill in the Catskill watershed” for fears of contaminating New York City’s water supply. The stated reason is this:

New York is one of five big cities not required by the federal government to filter its water, and revocation of that waiver would necessitate a filtration plant costing $10 billion to $20 billion.

It seems Crain’s New York Business is a bit behind the eight ball. Chesapeake Energy, the only leaseholder with land in the Catskill watershed, has already said they won’t drill there. Makes no difference, this particular political issue is just too juicy to not use–even if it’s no longer an issue.

We learn from this article that Hess is New York’s largest energy company, and that Chesapeake Energy and Fortuna Energy are the most active leasing companies (so far) in the Marcellus Shale in New York.

Overall, some good info in this article, but as always with mainstream media, be sure to read between the lines.

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Chesapeake Energy Decides to Not Drill in Catskill Region of New York

Albany Times Union (Oct 29):
Gas company backs off drilling

There is an important lesson to be learned today: Anti-drilling groups will not be satisfied until there is zero drilling anywhere. This truth is now on full display for all to see. An article in today’s Albany Times Union trumpets the announcement that Chesapeake Energy, sole leaseholder of rights to drill in the Catskill Mountain region of upstate New York (with 5,000 acres), has decided not to drill in that area.

The Catskill region feeds and contains water resevoirs for New York City. The City is dependent on the water from that region of upstate. This fact is being used as a weapon by anti-drillers to stoke fears that the water supply for nine million people would be poluted if there’s any drilling in or near that area. So Chesapeake decided to remove that objection from the table by announcing they would voluntarily commit to not drilling in the watershed area.

So what do the anti-drillers do? Rejoice…dancing in the streets…express gratitude to Chesapeake? Not on your life. Here’s their response:

“One company’s voluntary moratorium on drilling at this point is no substitute for a thorough analysis by the Department of Environmental Conservation and Department of Health to determine the catastrophic potential of drilling into the watershed and in adjacent communities,” said Michael Saucier, a spokesman for the city Department of Environmental Protection.

And this:

“We’re calling on Chesapeake Energy to back up this promise by transferring its leases to the city of New York for the price of $1. After the transfer, the state should ban drilling in the New York City watershed,” said Deborah Goldberg, a managing attorney with EarthJustice, an environmental lobbying group.

And finally, this precious piece of logic:

“When the gas drilling industry says it won’t drill within the source of drinking water for nine million people, it sends a strong message to state regulators that this activity is inappropriate,” said James L. Simpson, Staff Attorney with Riverkeeper.

So, don’t do what the anti-drillers want and your Satan himself. Do what they want, and you’re still Satan himself. Let this be a lesson to all drilling companies and landowners: No compromise with the anti-drillers. Their objective is to shut you down permanently. Stick up for your rights. We still (for now) live in a free country with private property rights. Thank God for the Constitution! Exercise your rights before they’re gone.

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Wheeling, WV Drilling Vote Delayed

Intelligencer Wheeling News Register (Oct 7):
Drill Vote Delayed

Wheeling, WV city council members have delayed a vote to allow Chesapeake Appalachia (a subsidiary of Chesapeake Energy) to begin drilling on city-owned land. From the article:

Though the Wheeling Park Commission has approved the lease allowing the company to drill on its property at Wheeling and Oglebay parks, city officials want to gain more information about the potential environmental impact of Chesapeake’s work before allowing the company to drill on city property.

Council members want to visit some of Chesapeake’s other drilling sites first to see first-hand what they look like. No complaints here. Council members should satisfy themselves that it will be safe and beneficial to the local community (which it will be), and then move forward.

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Europe Invests Heavily in American Natural Gas Drilling in the Marcellus, Details of Chesapeake/StatoilHydro Deal

The Fort Worth Business Press reports European companies are making major investments in American shale plays, including the Marcellus. The article reports the following details about Chesapeake Energy’s new partner Norwegian-based StatoilHydro:

Norwegian state-controlled energy company StatoilHydro would pay $3.375 billion for a 32.5-percent stake in [Chesapeake’s] 1.8 million net acres of Marcellus Shale assets, according to a November 2008 agreement. StatoilHydro paid $1.25 billion in cash at closing, and the remaining $2.125 billion over the next three years “by funding 75 percent of Chesapeake’s 67.5 percent share of drilling and completion expenditures until the $2.125 billion obligation has been funded,” according to the Nov. 11 statement.

“This deal adds a major building block to the gas value chain position we have established in the U.S., the world’s largest and most liquid gas market,” said StatoilHydro President and CEO Helge Lund in a statement. “This is a significant step in strengthening our U.S. gas position, building on our existing capacity rights for the Cove Point LNG terminal, our gas trading and marketing organization and the gas producing assets in the Gulf of Mexico.”

Read the full article: Europeans see benefits in U.S. shale

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Chesapeake Files Application to Drill in Oregon Twp, PA

Wayne County, PA may see the first Chesapeake-drilled well as soon as late March:

Chesapeake Appalachia, a West Virginia subsidiary of the natural gas development giant Chesapeake Energy, filed a permit application last week for permission to drill a natural gas well on a Oregon Township property located near Fox Hill Road, according to state and county records obtained by the Wayne Independent.

As for the timing:

DEP spokesperson Mark Carmon said the agency has recently expedited the permit review process, creating a 45-day timetable to approve or deny.

Also from the article, StatoilHydro, a Norweigen-based energy company, has taken over some 590 leases from Chesapeake in Wayne County as part of a larger deal:

StatoilHydro, which is the second largest natural gas supplier to Europe, entered a joint venture with Chesapeake Energy in November. As part of the deal announced then, Chesapeake would relinquish 32 percent of its leases – 600,000 acres – in the Marcellus Shale area to StatoilHydro for $3.3 billion.

Wayne Independent: Oregon Twp may see natural gas drilled