A late evening press release and SEC filing from Chesapeake Energy reveals that the natural gas explorer will reduce its drilling capital expenditure budget during the second half of 2008 through year-end 2010 by approximately $3.2 billion, or 17%.

The company cited an approximate 50% decrease in natural gas prices since June 30, 2008 and concerns about the possibility of an “emerging U.S. natural gas surplus.”

Of the $3.2 billion drilling budget reduction over the two-and-a-half year period, $800 million will come in the Fayetteville Shale play, which Chesapeake now will operate as a joint venture with BP America..

$500 million in capex reductions will impact the company’s Marcellus Shale joint venture and $1.9 billion is attributable to reduced drilling activity overall.

Chesapeake says it plans to reduce its current operated drilling rig count of 157 rigs to approximately 140 rigs by year-end 2008 and expects to keep its rig count relatively flat through 2009 and 2010.

Aubrey McClendon, Chesapeake’s CEO, also indicated that a primary reason for the curtailment centers around a lack of infrastructure for more CNG (compressed natural gas) fuel stations.

“In fact, we believe there is now sufficient domestic natural gas supply growth to satisfy a growing percentage of the U.S. transportation fuel market through the use of CNG-fueled vehicles,” said McClendon. 

“However, until the market has sufficient incentives for service station owners to build out CNG infrastructure, for auto manufacturers to offer new CNG vehicles in large quantities and for consumers to install home refueling devices, retrofit existing vehicles and purchase new CNG vehicles, insufficient natural gas demand exists to prevent periodic declines in wellhead natural gas prices below the industry’s breakeven profitability levels,” he added.

You can read the full SEC filing at this link.

UPDATE:  Chesapeake officials just concluded a conference call with analysts to discuss their announcement of a reduction in capital expenditures for the next 10 quarters.

CEO Aubrey McClendon predicted that Chesapeake will slow down its drilling activity in Texas’ Barnett Shale over the next decade.  In Louisiana’s burgeoning Haynesville Shale, McClendon sees the company ramping up.

As for the Fayetteville Shale play in Arkansas, McClendon said “steady as she goes.”  One of the major reasons for certainty in Arkansas can be attributed to Chesapeake’s newly announced joint venture agreement with BP America, which we reported on earlier this month.  That deal officially closed late yesterday.