Pennsylvania

Energy. Environment. Economy.

Lt. Governor Cawley: Chesapeake Energy royalty practices are ‘egregious’

Lt. Governor Jim Cawley.

Scott Detrow/ StateImpact Pennsylvania

Lt. Governor Jim Cawley.

Lieutenant Governor Jim Cawley sat down with StateImpact Pennsylvania recently to talk about how the Corbett administration is handling allegations of fraud against the state’s biggest natural gas driller– Chesapeake Energy.

Corbett recently reached out to state Attorney General Kathleen Kane and asked her to investigate complaints the company is cheating Pennsylvania landowners out of royalty money.

For an overview of the issue, listen to our audio report:

Note: this interview has been edited for length and clarity

Q: There have been complaints for quite some time. This company has been sued all over the country for this issue. What was the tipping point for the administration to reach out to Attorney General Kane and have her look into this?

A:  This is really a matter of equity and fairness for our fellow Pennsylvanians, many of whom rely on the royalty checks they receive monthly in order to help make ends meet. When it became clear that this issue of post-production costs was significantly impacting their monthly royalty checks, it became of great concern to Governor Corbett and I.

The governor reached out to the CEO of one of the major companies that seemed to constantly have this issue. While the governor had a good discussion, nothing really came of it.

In the meantime, House and Senate members are looking at legislative ways this can be addressed under the oil and gas act. It’s supposed to guarantee that at least 12.5 percent of the royalties be returned to the landowner. With this post-production cost built in it is– asserted by this company–that they are well-within their legal rights to do that. But our position is it goes beyond just whether legally you can do it. Really, is it fair to do that? We don’t believe it is.

So the governor has fired off another more pointed letter to that company, saying basically, ‘Knock it off.’ We’re going to pursue whatever means we need to make sure those folks get what they deserve. One of the avenues through which that is being addressed is through the bureau of consumer protection in the Attorney General’s office. Both Sen. Gene Yaw and the governor have asked the attorney general’s office to investigate this as well. So it’s a multi-pronged approach, all aimed at just trying to bring a little bit of fairness to this.

Q: Do you feel like laws need to be passed or changed to address this?

A: Ultimately we want to make sure this practice stops, and that it can’t be done again by any other company again in the future. If that’s achieved through the investigation of the attorney general’s office so be it. If that’s achieved through passing legislation—we’re there, we’re part of that.  If that’s achieved by this company simply stepping forward and saying, ‘We’re no longer going to be doing this practice.’

That’s why we’re working on a multi-pronged approach. The governor has clearly indicated that he’s supportive of the legislative initiatives that are ongoing in both the House and the Senate. We want to make sure we fix this problem once and for all.

Q: When you say, ‘this practice should stop,’ do you mean post-production costs broadly? Or has this company just crossed a threshold?

A: It seems to me that there are a lot of different companies all throughout the gas-producing area, and most of those landowners seem pretty satisfied. It seems like there is this one recurring theme of this one company. But before it does become more pervasive throughout the industry – if it were to be—we want to step in and stop it. Obviously there are costs in doing business. That’s a matter of reaching a contractual relationship between the landowner and company to talk about what those costs are.

But to go from, in some cases, [landowners] getting consistently several hundred dollars monthly to be being reduced down to 27 cents–clearly something’s gone awry there. We had hoped there would be a voluntary self-policing. I think that was the governor’s original intent in reaching out to the company, but it didn’t happen. Now we have to take it to other avenues– be it legislative or be it the investigation of the attorney general.

Q: I’ve seen the exchange of letters between the governor and Doug Lawler [Chesapeake’s CEO]. He says he’s aware of the complaints and takes them seriously. Have you heard anything more from him? [note: Chesapeake declined to comment for this story]

A: We’re still waiting to hear. I too have read the governor’s most recent letter and the response back from Chesapeake. We are still moving forward, working with the local communities as well. I would be remiss if I didn’t point out the Bradford County commissioners–Doug McLinko is the chairman–are really stepping up and being very supportive of their constituents. We are still moving forward with them to try to find legislative remedies. We’d like for the company to realize that this practice just seems to be so egregious on its face, that changes need to be made. But we’re not waiting for them to voluntarily do that. We would welcome it if they did. We’re going to continue to try to bring fairness and equity in this issue.

Q: A separate, but related, issue is that people have said they’d like a lot more transparency from companies on royalty statements—even about how much gas is coming out of the ground.  Landowners have said there is no way to verify the information.  Is there any effort to bring more clarity to that?

A: I think we do want to bring more clarity to that issue as well. That’s part of our discussions right now with those legislative remedies I was discussing before. Ways in which we might be able to address it and try to bring a more definitive picture of what exactly is being produced.  I think it’s self-evident and important that we have good numbers.

Q: I know the administration is supportive of the gas industry and what it’s done for the economy. Do you feel like this company is just an outlier?

A: I think when a situation like this crops up, any industry would recognize that’s bad for business. To be put in a situation by one of your industry members that casts a shadow over the entire industry is something that just isn’t helpful.

There are a lot of folks who are already skeptical of the industry and for something like this to be placed on top of that, it isn’t helpful in trying to advance a narrative in which this is an industry which offers a great deal of positive benefits—be it a cheaper energy source, a cleaning-burning energy source, a plentiful domestic energy source. While balancing with all those economic development and job creation opportunities, our responsibility to make sure we are good stewards of the land that we protect our water and our air and we protect the public’s health and safety.

Add on top of all that—this practice—and it’s just not helpful. It’s something that quite frankly is a distraction, but it is a necessary distraction. We have to resolve this issue.

Comments

  • BILL

    The Lt. Governors’ claims that royalty checks have dropped from hundreds of dollars to pennies merely as a result of corporate greed is MISLEADING! A well produces a majority of its gas in the first several months of it being drilled, so obviously royalty payments decrease as time goes on. I understand he has to pretend to be outraged to appease constituents, but at least get the facts straight.

    • Josh

      Bill, that’s not necessarily true. A lot of deep wells are producing much more gas for longer than first anticipated. And that’s not what this issue is about. Chesapeake and other companies routinely nickel and dime the royalty owners with a dozen fabricated “costs,” none of which actually exist and none of which are allowed by state law. The Dewey, Cheatham & Howe culture among many gas companies goes way back to the industry’s beginning. That has to change. Until that culture changes, and transparency is standard, people’s perceptions won’t be any different. Ye reap what ye sow.

  • darlnewton

    MY CRIES HAVE GONE UNHEARD FOR 3 YEARS , THEY STOLE MONEY THAT WOULD HAVE PAID MY TAXES! GUESS WHAT THE IRS IS GOING TO TAKE AN ASSETS TO COVER THE TAXES I CANNOT PAY THEM! THAT MONEY WAS ALL TAKEN BACK BY CHESAPEAKE AND THEN SOME! BILL THE LT GOVERNOR SPEAKS OF THE TRUTHS AND I HAVE THE PAPER WORK TO PROVE IT! SO YOU BEST GET YOUR FACTS RIGHT! CHESAPEAKE MADE A LOT OF PROMISES AND FAILED ON EACH AND EVERY ONE OF THEM, THEY ARE A GAS AND OIL COMPANY OF WHICH I DO NOT HAVE ANY PITTY FOR WHEN THEY HAVE TO STEAL WHAT LITTLE THEY AGREED UPON IN THE FIRST PLACE!

  • Paul Schinider

    Chesapeake Energy is currently trading at a one year forward price to earnings multiple that is lower than its major competitors Anadarko Petroleum and Exxon Mobil.

    http://bit.ly/CHKenergy

    • mikewatson021

      Chesapeake revenues grew at an annually compounded rate of 12.46% from fiscal year 2009 to fiscal year 2012. Its yearly revenues at the end of that period totaled $12.32 billion.

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