Pennsylvania

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Chesapeake Energy Agrees To Pay $7.5 Million To Settle Royalty Lawsuit

Chesapeake Energy's headquarters in Oklahoma City.

REUTERS /STEVE SISNEY /LANDOV

Chesapeake Energy's headquarters in Oklahoma City.

The biggest natural gas driller in Pennsylvania has agreed to pay $7.5 million to settle a class action lawsuit alleging the company underpaid gas royalties to leaseholders.

From the Towanda Daily Review:

Attorney Michelle O’Brien of the O’Brien Law Group, Moosic, said the settlement, reached Friday with Chesapeake Energy Corp.’s subsidiary Chesapeake Appalachia LLC, will benefit several thousand leaseholders who alleged they were wrongly charged fees related to process used to refine and transport natural gas extracted from Marcellus Shale …

O’Brien, lead counsel, joined with several other law firms along the East Coast to negotiate the settlement, which was more than a year in the making. The lawsuit, filed in federal court, named 14 plaintiffs from Susquehanna, Northampton, Lehigh, Lancaster and Montgomery counties in Pennsylvania, and Cortland County in New York, as representatives of the class.

Some gas leases allow companies to deduct the expenses they incur moving gas from the well to the market – things like compressor stations and pipelines. These deductions are known as “post-production costs.”

O’Brien tells StateImpact the settlement applies to anyone in Pennsylvania with a Chesapeake lease that specifically prohibits the deductions.

“We’ve been working on this for two years,” she says “We were thrilled with the result of the settlement.”

Chesapeake spokesman Jim Gipson called the settlement fair and reasonable in an emailed statement.

“Chesapeake is pleased,” he wrote. “We are hopeful the Court will approve the resolution of this dispute.”

The language prohibiting deductions is called a “market enhancement clause,” and can look like this:

It is agreed between the Lessor and Lessee that, notwithstanding any language herein to the contrary, all oil gas or other proceeds accruing to the Lessor under this lease or by state law shall be without deduction directly or indirectly for the cost of producing gathering storing separating treating dehydrating compressing processing transporting and marketing the oil gas and other products produced hereunder to transform the product into marketable form; however any such costs which result in enhancing the value of the marketable oil, gas or other products to receive a better price may be deducted from Lessors share of production so long as they are based on Lessee’s actual cost of such enhancements. However, in no event shall Lessor receive a price that is less than, or more than, the price received by Lessee.

O’Brien says the court still has to approve the settlement terms. After that happens, members of the effected class will be notified.

She says the money will not be split evenly among them, but will instead depend on the amount of deductions each leaseholder has incurred.

“If there’s 5,000 plaintiffs the amount of the settlement will not be split evenly by 5,000 people,” she explains, “So for example, if one person had $100 in deductions out of their check, and another person had $1,000 taken out, there would be different amounts returned for both plaintiffs.”

Chesapeake has faced similar allegations and lawsuits across the country.

UPDATE 9/4/13 11:39am:

Days after the settlement was announced, Governor Corbett released a statement saying after he met with local officials to talk about the royalty concerns, he personally reached out to Chesapeake’s new CEO:

“I am pleased with the proposed settlement in the class action lawsuit filed against Chesapeake Appalachia, Inc.

“As governor, my foremost interest is in ensuring that the landowners of Pennsylvania are treated fairly and with respect.  I have previously discussed this matter with both state and local elected officials who likewise were concerned about the deductions taken from citizens’ natural gas royalty payments.  In response, I communicated these concerns on behalf of Pennsylvania’s landowners directly to Doug Lawler, Chesapeake Energy’s new President and Chief Executive Officer.

“I am very appreciative of Mr. Lawler’s personal interest and efforts to resolve this matter.  While I understand that serious issues still remain concerning other landowners affected by royalty payment deductions, the proposed settlement is a significant step forward in protecting the interests of Pennsylvania’s landowners.”

Comments

  • Scott Brion

    Ummm, I am nearly speechless….

    The problem is that Chesapeake landmen routinely presented the clause above as one that did not allow Chesapeake to deduct any expenses. The upfront payment in the settlement is very very small and my understanding is that Chesapeake agrees to reduce the amount it had been deducting by 30% for future payments. This means that Chesapeake would be allowed to deduct 70% when landowner’s believed (and were told by Chesapeake’s representative that) they had negotiated a zero deduction lease.

    Chesapeake must be very happy indeed. Also very kind of the governor to get involved and help industry with its PR problems.

    Landowners in Pennsylvania really need to engage our eleceted officials and voice our interests at election time.

    • Louise

      I concur. If landowners agree to allow Chesapeake to continue taking deductions, whereas the leases state “no deductions”, then what does that tell us about contract leases? Are all contracts entered into then null & void? Does it mean we can use the contracts as placemats, because that’s about what they would be worth. Talk about problems….

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