Are Marcellus drillers cheating the state? Agencies take a closer look

People who leased their land for Marcellus Shale drilling have been complaining for several years that some companies are cheating them out of gas royalty money.

It turns out the commonwealth of Pennsylvania is having the same problem. But the issue is so complex and convoluted, the state doesn’t even know how much money it’s owed.

“It’s complicated”

Gas drilling on state-owned land has sent hundreds of millions of dollars in royalties to Harrisburg. Private landowners have received millions more. But some companies have been accused of underpaying. Royalty disputes have led to several class action lawsuits and an ongoing investigation by the state attorney general’s office.

Towanda-based attorney Chris Jones says his clients don’t understand why the state hasn’t done more to protect them.

“Many times we’re being asked, ‘How come the state isn’t doing anything? How come there isn’t anything to stop what the gas companies are doing with our royalties–with our money?’”

Pennsylvania has its own problems– specifically two agencies managing drilling on public land: the Department of Conservation and Natural Resources (DCNR) and the Game Commission.

“We’ve been conducting investigations for some time now,” DCNR chief counsel Richard Morrison told StateImpact Pennsylvania in January. “It’s an internal process. It’s complicated and will take some time.”

He didn’t want to say which companies are under scrutiny, and the department has declined to comment further, citing the ongoing investigation. However documents obtained by StateImpact Pennsylvania through an open records request show most of DCNR’s problems are with Oklahoma City-based Chesapeake Energy. The company has been widely accused of charging landowners exorbitant fees known as post-production costs. Chesapeake declined to comment for this story.

Post-production costs are sort of like the gas industry’s “shipping and handling fees.” They’re the expenses of moving gas from the well to the market and include things like compression, dehydration, and pipeline transport.

Chesapeake has leased thousands of acres of public land from DCNR and the Game Commission—but no one really knows how much money could be missing from state coffers.

DCNR officials say none of its leases permit oil and gas drillers to charge post-production costs, but Chesapeake disagrees. Emails between the two parties show disputes going back several years and continuing to the present day. DCNR complains to the company about inaccurate or murky reporting on everything from how much gas is produced at wells, to its selling price.

“It’s going on with every company”

The Game Commission is still trying to sort out exactly what is and isn’t allowed under its leases. Mike DiMatteo oversees the commission’s oil and gas program.

“It’s definitely on our radar,” he says of the royalty issues. “We are aware they’re taking deductions, and we’re trying to assess the impact. Chesapeake seems to be targeted by a lot of investigations because they’re a big producer. It’s going on with every company.”

Chris Jones and several other attorneys recently filed a federal racketeering lawsuit against Chesapeake, alleging it’s part of a criminal conspiracy– along with partner companies Anadarko, Mitsui, Statoil, and Williams– to defraud private landowners. None of the companies would comment for this story.

“I’m surprised the state is shocked this is happening to them as well,” says Jones. “They don’t seem to be doing certain things I’d think they’d be doing– like having something that could verify the production from the wells.”

DCNR does perform audits of royalty statements and recently ramped up its efforts. It has a contract with Penn State University to check well volume information and hired a new accountant to review royalty statements. The agency is also planning to contract with an outside accounting firm.

The state Game Commission says it doesn’t have the resources to do that.

“We’re not officially auditing the companies,” says Matteo. “We review the statements and make sure we’re getting paid, but we don’t have an open investigation.”

The situation really bothers state Rep. John Maher (R- Allegheny.)

“I want to make sure the royalty payments the state is due for gas production are being fairly paid,” he says.

As the new chair of the House Environmental Resources and Energy committee, Maher’s vowing to take a fresh look at a bill aimed at limiting gas companies from withholding royalty money in the form of post-production costs.

“There needs to be action”

State Rep. Tina Pickett (R- Bradford) co-sponsors the measure.

“I don’t think initially as a state, we really looked at the financial angle of this,” she says.

Pickett represents one of the most drilled-on parts of Pennsylvania and supports the gas industry. But she’s troubled the state has to carefully comb through every royalty statement and hire more accountants to double check everything.

She says it’s time to update royalty laws and crack down on problem companies.

“We’ve talked about it. There’s been lots of news about it. There’s been lots of discussion about it, but there needs to be some action,” she says. “This is not something that should be allowed.”

The gas industry has lobbied heavily against the royalty bill—calling it a legislative overreach that violates contracts. The measure went nowhere during the last legislative session and it has not been reintroduced yet.

Meanwhile, state officials are still trying to get a handle on how much money they may be owed.

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