- Associated Press - Monday, January 23, 2012

NEW YORK - Faced with decade-low natural gas prices that have made some drilling operations unprofitable, Chesapeake Energy Corp. said Monday it will drastically cut drilling and production of the fuel in the U.S.

Chesapeake, the nation’s second largest natural gas producer, said Monday that it plans to cut its current daily production by 8 percent. Over a year, that means the company would produce the same or slightly less natural gas in 2012 than it did in 2011. Chesapeake produces about 9 percent of the nation’s natural gas.

That’s a change from the dramatic increase in domestic output seen in recent years. Chesapeake and other drillers have learned to tap enormous reserves of natural gas trapped in shale formations under several states using a controversial drilling method known as “hydraulic fracturing” combined with horizontal drilling.

Extreme weather for two winters and two summers kept natural gas prices high by boosting demand for home heating and power generation. But this season’s mild winter weather, especially in the Northeast and Upper Midwest, has crimped demand and led to a glut.

Natural gas futures slipped to $2.32 per 1,000 cubic feet last week, their lowest levels since 2002, before rising slightly to $2.34 on Friday. Prices have fallen 23 percent since the beginning of the year. Storage levels of the fuel are 21 percent higher than their five-year average for this time of year, according to the Energy Information Administration.

The drop in price has meant lower revenues and profits for drillers. Analysts estimate that Chesapeake’s earnings fell to $2.81 per share in 2011, excluding special items, from $2.95 per share in 2010. They say at today’s prices only the least expensive, most productive natural gas wells remain profitable for drillers.

Drillers had already begun to shift their drilling activity toward shale formations and other regions that produce oil and other liquid hydrocarbons. Strong global demand has kept oil prices high and made these drilling operations extraordinarily profitable.

Chesapeake’s move is designed to reduce the glut of natural gas in the country, and therefore increase prices. But analysts caution that drillers historically have reneged on plans to cut output in times of low prices, bowing to pressure from investors to increase production.