Pennsylvania

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Bradford County Landowners Accuse Chesapeake Of Underpaying Royalties

Janet and Richard Geiger are Chesapeake leaseholders and claim the company has taken advantage of them by underpaying royalties.

Marie Cusick/StateImpact Pennsylvania

Janet and Richard Geiger are Chesapeake leaseholders who claim the company has taken advantage of them by underpaying royalties.

It’s not easy to find Mary Jane Foelster’s home.

“We wanted the peace and quiet,” she says. “It’s just wonderful out here.”

Her home sits on 50 acres tucked away down a 1.7 mile dirt road in Bradford County. It’s as far north as you can go in Pennsylvania before crossing the border into New York.

The property is surrounded by forested hills. There’s a pond and a vegetable garden in the yard.

When she and her husband retired here from Philadelphia five years ago, they didn’t realize the property had a gas lease. They also didn’t know there was a gas well on the other side of their hill, nor did they notice when it was drilled and fracked.

But Foelster says she did begin to notice when the royalty checks started coming in from Chesapeake. There was something missing.

Money was being taken out for what Chesapeake called post-production costs –expenses it incurred getting the gas from her well to the market.

She was confused.

“There’s never a clear delineation of what those costs are. I couldn’t begin to tell you what they are.”

After numerous attempts, she finally got a Chesapeake representative on the phone and asked him to explain.

“He really couldn’t tell me why,” she says, “But I can tell you why. Chesapeake is doing whatever they think they can get away with.”

Chesapeake is the biggest natural gas producer in Pennsylvania and the second largest in the nation. But recently it’s faced financial troubles amid low natural gas prices.

Guaranteed 12.5 Percent

Many people across the state signed leases with the understanding that under Pennsylvania law, they were entitled to a cut of the money drilling companies made from selling the gas.

The Guaranteed Minimum Royalty Act of 1979 put the figure at 12.5 percent.  According to the law, if the royalties are less than that, a lease is invalid.

However some gas leases do allow companies to deduct the expenses they incur moving gas from the well to the market – things like compressor stations and pipelines.

But a few years ago, a number of Pennsylvania landowners complained and filed lawsuits. In dozens of cases they argued all those deductions invalidated their leases.

In 2010 the State Supreme Court sided with the gas industry.

In a unanimous decision in Kilmer v. Elexco Land Services Inc., the court held that since the word royalty was not defined in the law, the industry could rely on its own interpretation, which allowed for subtracting the costs of moving the gas to market.

Chesapeake’s Troubles

Jackie Root is president of the Pennsylvania Chapter of the National Association of Royalty Owners. The organization works to educate and advocate for mineral owners.

“It’s a business arrangement,” says Root. “You need to watch your business partner. A lot of people don’t understand their royalty checks.”

She adds many gas companies don’t deduct unreasonable fees.

“We don’t normally call out a company publicly, but I don’t think it’s any secret. Chesapeake is known for being unscrupulous,” she says.

Chesapeake did not respond to multiple requests to comment for this story, but the company has recently had some very public problems.

Chesapeake's co-founder and former CEO Aubrey McClendon stepped down April 1 and is being investigated by the SEC.

REUTERS /SEAN GARDNER /LANDOV

Chesapeake's co-founder and former CEO Aubrey McClendon stepped down April 1 and is being investigated by the SEC.

Its co-founder and former CEO Aubrey McClendon stepped down April 1. He’s being investigated by the federal Securities and Exchange Commission for a controversial perk he received which allowed him to have a personal financial stake in the company’s wells.

Bryan McNamara is a financial analyst who follows Chesapeake for IHS. He says the company is dealing with a number of challenges.

“They’re going to have a $3.5 to $4 billion cash shortfall this year, so they’re looking to sell additional assets.”

Chesapeake’s also fighting lawsuits across the country filed by landowners alleging underpayment of royalties.

“We Never Sent You a Check”

The check deductions have become a hot topic in Bradford County.

County Commissioner Daryl Miller has been hearing a lot about it from his constituents.

“We’re getting phone calls. Our office is getting emails,” he says. “We’re getting approached personally on the street –in the post offices, convenience stores. Everywhere we go.”

Miller stresses he’s an “unapologetic” supporter of the gas industry. The Republican won’t single out a particular company, but agrees most don’t take out large deductions.

As a conservative, he’s a little uneasy about advocating for more government oversight. But he feels it’s needed.

“I think there needs to be light shed on what is taking place. What can we do to better look for out for the landowners in our communities?”

Terry Van Curen (left) shows his royalty statements to Bradford County Commissioner Doug McLinko.

Marie Cusick/StateImpact Pennsylvania

The Geiger's neighbor Terry Van Curen (left) discusses his royalty payments with Bradford County Commissioner Doug McLinko.

His fellow Republican commissioner Doug McLinko agrees.

“They’re going to be here for a long time,” says McLinko. “What’s with the greed? It’s incredible really.”

McLinko’s been meeting with landowners like the Geigers.

Richard and Janet have lived together in their Sears and Roebuck cottage for nearly 40 years and own about 10 acres along a quiet road in Sayre.

When they signed a gas lease seven years ago they never thought much would come of it.

Now Janet Geiger says not much has come of it, because Chesapeake has deducted so much.

Although many factors go into royalty payments such as the amount of gas coming out of the well, or the market price of gas, Janet says they used to get checks for $300 or $400 a month and lately it’s dwindled.

In May, their royalty check from Chesapeake was $39. In March, Janet says they didn’t get a check at all.

“I made three phone calls to Oklahoma City before they finally told me, ‘We never sent you a check. We hadn’t sold the gas. We didn’t have the money.’”

Mary Jane Foelster tells the same story, except she got the news by email when she didn’t get a check in March.

“What bothers me is that I’m being cheated,” she says, “And I want that to change.”

A state House committee recently approved a bill aimed at clarifying the cost deductions on royalty checks, but many people in Bradford County feel the measure doesn’t go far enough.

They want the legislature to step in with a clear definition of the word royalty, to ensure they’re actually getting a 12.5 percent cut.

 

Bradford County landowners talk about their dealings with Chesapeake:



 

Non-payment of royalty e-mail

The Geiger’s royalty statement

Comments

  • DoryHippauf

    they better get their lawyers on the this, Chesapeake has sold much of their
    holding in Bradford and surrounding counties to Southwest Energy at everything-must-go prices

    http://online.wsj.com/article/SB10001424127887323982704578452913155811812.html

  • Misanthrope36

    I hate to say it, but I don’t feel the least bit sorry for these people. When you sell your soul, you get what you get.

    • docscience

      Selling natural gas is selling your soul????

      You have lost your mind in the green fog.

  • Scott Brion

    I suggest that the bigger issue not mentioned in the article is the amount of the costs being deducted by Chesapeake. From the royalty statement provided it looks like CHK is charging the mineral owner about $2.80 per mcf for gathering in March of this year. That has to be far in excess of the actual costs of an arms length transaction. I believe Chesapeake still owns the gathering systems so it looks like they are paying themselves that $2.80.MCF?

    • Scott Brion

      For a frame of reference Range Resources shows their average gathering and transportation costs to be $.70/ per MCF.

  • http://www.facebook.com/profile.php?id=1522786448 Scott Cannon

    If your County Commissioners cared as much about the people who’s water was destroyed by gas drilling as the lease holders, you’d have some real leaders running your county.

  • gasfriendlybut…

    Chesapeake’s “purchaser” is a subsidiary of Chesapeake…

  • thatgirlinnewyork

    Lay down with dogs, and you get fleas. Sorry, land owners!

  • Landman

    These landowners complaining about deductions from royalty are uninformed.
    The smart mineral owners added “no deduction” clauses to their leases. As for the silly folks complaining about smaller royalty checks than the year before…duh, oil and gas wells decline in production over time.

    • CamptownGal

      the no deduction clauses were only available early on, and got taken off the table around 2010

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