Southwestern Energy Company discovered the economic viability of the Fayetteville Shale and was the first company to drill and successfully produce its natural gas. At December 31, 2010, Southwestern held leases for approximately 915,884 net acres in the Fayetteville Shale play area (367,206 net undeveloped acres, 423,692 net developed acres held by Fayetteville Shale production, 123,442 net developed acres held by conventional production and an additional 1,544 net undeveloped acres in the traditional Fairway).

As of December 31, 2010, Southwestern had spud a total of 2,445 wells in the play since its commencement in 2004, 2,001 of which were operated and 444 of which were outside-operated wells. Of the wells spud, 658 were in 2010 compared to 570 wells in 2009. At year-end 2010, 1,820 operated wells had been drilled and completed overall, including 1,730 horizontal wells.
Southwestern’s net production from the Fayetteville Shale play was 350.2 Bcf in 2010, up 44% from 243.5 Bcf in 2009, as gross production from the company’s operated wells in the Fayetteville Shale play increased from approximately 1,225 MMcf per day at the beginning of 2010 to approximately 1,635 MMcf per day by year-end.

The company’s total proved net reserves booked in the Fayetteville Shale play at year-end 2010 were 4,345 Bcf from a total of 3,682 locations, of which 2,120 were proved developed producing, 36 were proved developed non-producing and 1,526 were proved undeveloped. Of the 3,682 locations, 3,610 were horizontal.

The average gross proved reserves for the undeveloped wells included in its year-end reserves was approximately 2.4 Bcf per well, up from 2.2 Bcf per well at year-end 2009. Total proved net gas reserves booked in the play at year-end 2009 totaled approximately 3,117 Bcf from a total of 2,675 locations, of which 1,428 were proved developed producing, 97 were proved developed non-producing and 1,150 were proved undeveloped.

During the fourth quarter of 2010, the company’s operated horizontal wells had an average completed well cost of $2.7 million per well, average horizontal lateral length of 4,667 feet and average time to drill to total depth of 8.2 days from re-entry to re-entry. This compares to an average completed operated well cost of $2.8 million per well, average horizontal lateral length of 4,503 feet and average time to drill to total depth of 11 days from re-entry to re-entry in the third quarter of 2010.

In the fourth quarter of 2010, the company had 13 operated wells placed on production which had average times to drill to total depth of 5 days or less from re-entry to re-entry. The company currently has 20 drilling rigs running in its Fayetteville Shale play area, 12 that are capable of drilling horizontal wells and 8 smaller rigs that are used to drill the vertical portion of the wells.

The company placed 159 operated wells on production during the fourth quarter of 2010 which averaged initial production rates of 3,472 Mcf per day, up 6% from average initial production rates of 3,281 Mcf per day in the third quarter of 2010. Results for the fourth quarter of 2010 include 39 operated wells (or 25%) placed on production which were the first well in a new section, compared to 56 wells (or 39%) in the third quarter of 2010. The company also placed 2 wells on production with initial production rates over 7.0 MMcf per day during the fourth quarter.
Operating income for the company’s midstream activities was $191.6 million in 2010, compared to $122.6 million in 2009. The increase in operating income was primarily due to increased gathering revenues and an increase in the margin from gas marketing activities related to the Fayetteville Shale play, partially offset by increased operating costs and expenses.

At December 31, 2010, the company’s midstream segment was gathering approximately 1.8 Bcf per day through 1,569 miles of gathering lines in the Fayetteville Shale play, compared to gathering approximately 1.3 Bcf per day through 1,137 miles of gathering lines at December 31, 2009.

Gathering volumes, revenues and expenses for this segment are expected to continue to grow as reserves related to the company’s Fayetteville Shale play are developed and production increases and as it develops its Appalachian properties. The company is currently considering various strategic alternatives for maximizing and/or recognizing the value of this asset.

In 2011, Southwestern plans to invest approximately $1.15 billion in the Fayetteville Shale play, which includes participating in approximately 530 to 540 gross horizontal wells, 440 to 450 of which will be operated by the company.