Chesapeake Facing Many, Many Lawsuits From Unhappy Landowners

Two different articles today are detailing the legal challenges facing Chesapeake Energy because of the way the company has dealt with landowners.

First, from the Wall Street Journal:

In Bradford County, a rural area in northern Pennsylvania where a lot of the drilling has taken place, anti-Chesapeake sentiment is running high, said Doug McLinko, a county commissioner. "Bradford County is a pro-gas part of the country where we support hydrocarbons 100%," he said, "but we don't support everyone who's doing it."

Landowners typically receive monthly royalty payments when a company extracts oil or gas from wells on their property. The payments usually are a fixed percentage of the market value of the oil or gas or the proceeds from selling it.

In some cases, energy companies deduct the costs of transporting, processing and marketing the oil or gas. The size of these deductions, and whether Pennsylvania law can limit the deductions, are at the heart of the royalty disputes.

Disagreements over royalties are common in the industry, and Chesapeake is hardly the only company facing them. But Chesapeake's deductions and fees appear to far surpass those taken by other energy companies operating in Pennsylvania, including Anadarko Petroleum Corp. APC -0.01% , Mitsui E&P USA LLP and Statoil AS STL.OS -0.74% A, based on royalty checks from the companies reviewed by The Wall Street Journal.

Mary Moon, a property owner in rural New Albany Township, said the deductions Chesapeake takes from her and her husband's royalty checks are twice the size of those taken by the other companies that own stakes in the multiple gas wells on her land.

Chesapeake deducted about 37% from Mrs. Moon's most recent check for expenses such as the cost of shipping the gas to a big interstate pipeline and for processing the fuel. Those deductions cut her royalty payment for one well to $1,372 from $2,207. The well's other owners, Anadarko and Mitsui, each deducted 18% from their share of the royalty payment, their checks to her show, while Statoil didn't take any deductions or fees.

Read more here (subscription required).

Then, from Forbes:

In recent weeks more and more oil and gas industry folks have been drawing my attention to articles like this, this, and this, from small-town papers about the bevy of lawsuits being filed against Chesapeake Energy. Most of the plaintiffs are landowners in Texas and Michigan who agreed to lease their land to Chesapeake (often at prices more than $5,000 an acre) for oil and gas exploration. They signed contracts with Chesapeake, or one of its agents and received orders for payment in amounts totaling millions of dollars. So imagine their surprise when a few weeks later instead of getting cash the landowners instead got letters from Chesapeake claiming to void the leases and stating “we will not be funding the order of payment.” Try doing that with your landlord sometime and see what happens. 

Enough landowners felt they had a case against Chesapeake that in Texas last year they filed a class action lawsuit over leases in the Barnett Shale. More recently we’ve seen individual cases being filed in northern Michigan, where Chesapeake and Encana Energy had been competing for acreage in the Collingwood Shale. A test well drilled by Encana into the Collingwood a year ago was a big success, and set off the land rush. A state auction of mineral rights last May reportedly brought an unprecedented $178 million for 118,000 acres. 

Read the rest of that article here.

None of this should be in the least bit surprising.  Chesapeake has been firing employees left and right and selling off assets at a loss constantly.  Why would anyone expect them to show any consideration to landowners?  It's all about the bottom line.  

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