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Does Chesapeake Energy Sell Gas To Itself?

Chesapeake Energy Corporation's 50 acre campus in Oklahoma City.

REUTERS/Steve Sisney/Landov

Chesapeake Energy Corporation's 50 acre campus in Oklahoma City.

A moment of confusion surfaced earlier this summer at a state senate hearing on gas royalty payments.
Rep. Tina Pickett (R- Bradford) asked an industry attorney about where the specific point of sale is for natural gas.
His reply?
It’s complicated.
“It can be many places,” said George Bibikos, who was testifying on behalf of the gas industry trade group, the Marcellus Shale Coalition. “It could be the wellhead. It could be downstream. It’s an intricate and complicated structure of contractual arrangements.”
Pickett then followed up with another question.
“Is it a valid point of sale if you’re selling it to a company you own yourself?” she asked.
At first Bibikos didn’t seem to understand. Pickett asked again. There was a pause.
“Yes,” he finally said. “As long as it’s an arm’s length transaction. Sure.”
The question of where and how gas gets sold has become a hot topic in the most drilled on region of Pennsylvania– Bradford County.
A number of landowners there allege they’re being cheated out of royalty payments by Pennsylvania’s biggest gas drilling company, Chesapeake Energy.
The landowners say Chesapeake is improperly charging them for the costs of moving gas from their wells to the market. They say fees for so-called “post-production” costs are exorbitant and not well accounted for– the expenses include things like transportation, pipelines and compressor stations.
Some leases allow for the deductions, while other leases have clauses explicitly prohibiting the practice.
Towanda-based attorney Christopher Jones represents landowners. He testified at the June hearing and says Chesapeake still takes deductions from people with these clauses.
“They’re deducting these costs based on a payment arrangement they have with a company that is a subsidiary of themselves,” he told the Senate Environmental Resources and Energy committee. “In my opinion, that’s an absolute misrepresentation.”
Chesapeake was invited to the hearing, but no one from the company attended.
Other landowners’ attorneys have voiced similar concerns about Chesapeake’s wholly owned subsidiary, Chesapeake Energy Marketing Inc. (CEMI).
“We certainly think it’s a questionable arrangement,” says Scranton-area attorney Doug Clark, “We’re not seeing that with other companies we’re dealing with.”
Clark and several other attorneys have filed class action arbitration against Chesapeake over the royalty payment issue.
Chesapeake has repeatedly refused to comment on widespread allegations it underpays royalties.
As part of his Senate Committee testimony, Jones submitted letters from Chesapeake to his clients explaining its relationship with CEMI. Read one below:

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