A group representing Pennsylvania mineral owners says Chesapeake Energy leaseholders should pay very close attention to news of a recent class action settlement.
The agreement still needs to be approved by a federal judge, but if that happens, letters alerting landowners will be mailed throughout the state.
The deal could affect more than 1,000 Chesapeake leaseholders.
Anyone who ignores the letter will be automatically made part of the class and gives up the right to pursue future royalty claims against Chesapeake.
Trevor Walczak is the vice president of the National Association of Royalty Owners Pennsylvania chapter (NARO-PA).
He cautions landowners to read the agreement carefully and consult with an attorney who specializes in oil and gas law.
He says the settlement could potentially have broad implications for the way royalties are paid in the future.
“By our estimates, this is a much larger settlement than getting a piece of $7.5 million, so do not discard the notification when it comes in the mail,” Walczak says in an email to StateImpact Pennsylvania, “This settlement is potentially worth tens of thousands of dollars to royalty owners who leased with Chesapeake and the importance of deciding whether to participate in this settlement is second only to the initial decision of signing a gas lease.”
The complaint alleges Chesapeake improperly withheld royalty money by charging landowners for so-called “post production costs” — the expenses involved in processing and transporting gas from the wellhead to the market.
Chesapeake denies this, and a spokesman declined to comment for this story. The company has previously said the agreement is “fair and reasonable.”
Larry Moffett is with the Jackson, Mississippi-based Daniel Coker Horton and Bell law firm. He was among the group of attorneys who negotiated the settlement.
He believes it’s a good deal for landowners, given the time and expense involved in pursing individual claims.
“The reality is, when you have disputes like this, many of these landowners would likely not receive any money at all,” he says.
Who does the settlement affect?
If approved, the settlement will affect anyone in Pennsylvania with a Chesapeake lease that contains a “market enhancement clause.”
This includes leaseholders who have not received any royalty checks yet.
What’s a market enhancement clause?
It’s lease language that explicitly prohibits royalty deductions of post-production costs. There is more than one version of this language.
Here are two examples:
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 Lessor’s share of
production so long as they are based on Lessee’s actual cost of
such enhancements. However, in no such event shall Lessor
receive a price that is less than, or more than, the price received
Royalties shall be paid without deductions for the costs of
producing, gathering, storing, separating, treating, dehydrating,
compressing, transporting, or otherwise making the oil and/or gas
produced from the leased premises ready for sale or use. All oil
and/or gas royalty shall be delivered free of cost into the tank or
pipeline (for oil) and into the pipeline (for gas), with the exception
of Lessor’s prorated share of any taxes, measured by volume, on
the oil and/or gas royalty.
What are the options for leaseholders?
There are three options:
1. Stay in the class. If you take part in the settlement and remain a member of the class, then you don’t have to do anything. Money will be distributed to you based on the settlement terms. You also give up the ability to pursue any future claims against Chesapeake based on the calculation, payment, and/or reporting of royalties.
2. You can choose to opt-out of the class and must reply to the letter. You won’t receive any money from the settlement but you’ll retain the ability to pursue future claims against Chesapeake for royalties issues.
3. You can object or comment on the proposed settlement and must reply to the letter.
What are the settlement terms?
Chesapeake has agreed to pay class members an amount equal to 55% of of all post-production costs reflected as deductions from royalty payments prior to September 1, 2013 (so this covers deductions taken in the past).
Going forward, Chesapeake has agreed to pay class members 27.5% of all post-production costs reflected as deductions.
So settlement class members will no longer bear 100% of post-production costs, but will instead bear 72.5% of these costs.
The attorneys who negotiated the settlement and represent the class have asked the court to award attorneys fees and expenses in an amount not exceeding one-third of the settlement funds, as well as one-third of the future economic benefits (the money you get in the future that you wouldn’t have received without this agreement) for five years.
The court may choose to award the attorneys less than they have requested.
Here is a example of a letter that may be mailed to Chesapeake leaseholders.
The language of this letter and the entire settlement agreement are still awaiting approval from a federal judge.