[Ok-sus] From EnergyWire -- NATURAL GAS: Landowner disputes with Chesapeake hit a boiling point in northern Pa.

bob@bobwaldrop.net by E&E Publishing email_this at eenews.net
Tue Jul 23 14:25:30 UTC 2013


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You likely have to register for a free trial to read this.  Chesapeake is playing hardball with landowners it has leased property from in PA and elsewhere.  It has liberally interpreted contract terms and increased deductions for post production costs, most notably the cost of getting the gas through a pipeline to market.  This reduced royalties as much as 80-90%.  Chesapeake cheating its royalty owners?  I am shocked, shocked I say, to discover this. Bob, OKC

NATURAL GAS: Landowner disputes with Chesapeake hit a boiling point in northern Pa. (@story.published_at_string)

BRADFORD COUNTY, Pa. -- The quiet breeze rolling over the hills west of Litchfield Township has replaced the hum of natural gas rigs operating in rural northeastern Pennsylvania.

On a hot afternoon in June, Terry and Diana Van Curen's car ambled toward Aikens Well 5H, where Chesapeake Energy Corp. has been extracting gas from under the couple's 17-acre wooded property for the past year.

The concrete pad and wellhead sit on the crest of a small hill, roughly a mile from their home and off to the side of an old country road paved by gas companies. It overlooks farms and forests that straddle the border of Pennsylvania and New York. Well pads and pipelines are tucked into the countryside, where Marcellus Shale gas snakes into the hundreds of horizontal wells built here in Bradford County since 2009.

Terry and Diana Van Curen at their home near Sayre, Pa., in Bradford County. Photos by Joel Kirkland.

Swelling tax receipts and lease and royalty payments have breathed life into public budgets here and created a cushion for struggling dairy farmers and retirees like the Van Curens. Goodwill for the economic boost and investment in infrastructure has tended to quiet the din of anti-fracking activists.

But in recent months the goodwill has started to erode. Local officials and landowners, including the Van Curens, are accusing Chesapeake Energy of cheating them out of royalty payments by imposing large fees for "post-production" costs. Since January, with gas prices remaining persistently low, the cash-strapped driller from Oklahoma City has sliced off more than 80 percent of the Van Curens' monthly royalties in the form of a fee for the cost of transporting gas through gathering pipelines.

"It's like they have a dart board in Oklahoma City and they'll say, 'Let's see what we can get this month,'" Terry Van Curen said, fingering through a pile of financial spreadsheets. "What I don't understand is how in God's green earth they can take this much in gathering fees and not give us an explanation."

County commissioners and state officeholders are being inundated with complaints about royalty stubs. In this, Chesapeake stands almost alone in taking criticism from people who signed leases in 2009 and 2010 and are finally seeing royalty checks for gas production.

Chesapeake's investment partner in the region, Norwegian oil giant Statoil, and other operators are taking little or nothing off the top of royalty checks, causing confusion about Chesapeake's reading of the law and its interpretation of contractual agreements with landowners.

Amid the farms and the homesteads, Chesapeake's policy has neighbors talking about a loss of faith in the industry, which spent years building trust. Even as the drilling of new wells has slowed here because of low gas prices, existing wells are producing.

"The money they're taking out of the area is not what we signed up for, it's not what they told us," said Doug McLinko, chairman of the Bradford County Commission.

Market changes catch up to royalties

State Rep. Garth Everett, a Republican from Williamsport, the biggest city in the region with 30,000 people, is circulating bill language meant to tighten up a 12.5 percent minimum guaranteed royalty that state law says companies should pay landowners as a cut of the money made from selling gas.

In 2010, the state Supreme Court scrambled the straightforward understanding of Pennsylvania's minimum royalty when it ruled in Kilmer v. Elexco Land Services Inc. that companies could deduct post-production costs, meaning the cost of getting the gas to market.

Issues in the case about the calculation of royalties are rooted in how much the natural gas market has changed in 30 years. Pennsylvania enacted its guaranteed royalty before the federal government deregulated the U.S. gas market in the late 1980s. In 1979, royalties were paid by a producer based on the regulated price of unprocessed gas sold to pipelines at the wellhead. In today's deregulated market, there are multiple potential points of sale along the way as gas is processed and travels toward its end use. 

Aikens 5H is the well pad that produces shale gas from under the Van Curen property. Chesapeake and Statoil are joint operators of the well.

In the lawsuit leading to the Kilmer ruling, gas companies argued they can only "fairly calculate" the gas price used as a basis for royalty payments by deducting the cost of getting gas to market. In doing so, producers can defray costs they say should be shared by landowners who get a cut of the final sale.

In its decision, the court said: "Although the plain language of the [law] clearly provides that the lessor must receive a one-eighth royalty, it is silent regarding the definition of royalty and the method for calculating the royalty." 

In Bradford County, local officials concerned that Chesapeake is reading too much into the ruling to justify steep royalty deductions have noted that the court suggested the Legislature take up the issue. "We note that the General Assembly is the branch of government best suited to weigh the public policies underlying the determination of the proper point of royalty valuation in the deregulated gas industry," the court said in the decision.

"We're going to do what we can do," Everett told EnergyWire, adding that any bill will be walking a tight-rope to ensure it isn't open to a court challenge and doesn't step on contracts. 

"I can't imagine why anybody in the Legislature would not want to assure that landowners get the minimum of what we intended by law for them to get," he said.

'Potentially infinite variations' on leases

Through public forums and calls with local officials, Chesapeake has defended its royalty deductions. The producer points to lease language stating it can pass on costs that "enhance" the gas before a sale, according to sources, including the cost of transporting gas from the wellhead to hubs, processing plants and interstate pipelines that deliver gas into a bigger market.

Chesapeake declined to comment for this story. It also chose not to appear before a Pennsylvania Senate committee hearing in Harrisburg last month, leaving the issue to the Marcellus Shale Coalition, the Pittsburgh-based industry group.

At the June 27 hearing, George Bibikos, an oil and gas attorney, spoke for the coalition. He steered clear of specifics of potential legislation or unhappy landowners. Gas producers handle royalty deductions based on the terms of leases negotiated and signed by landowners, he told the lawmakers.

"There are potentially infinite variations of oil and gas leases," Bibikos told the Environmental Resources and Energy Committee.

The deregulation of gas in the late 1980s meant producers and landowners "share proportionately" in the cost of getting gas to a hub or pipeline where it can be sold, he said. "Royalty provisions started accounting for the cost-sharing," he said.

Shortly after the hearing, Gene Yaw, the chairman of the committee and a Republican who represents Lycoming and Bradford counties, sponsored legislation that standardizes the information found on royalty stubs. Yaw hasn't backed the full-throated effort by county officials in his district to stop gas producers from using post-production costs to cut into the 12.5 percent guaranteed minimum royalty.

The onus is on landowners, Yaw suggested, to sue gas producers they think are breaching the terms of a lease.

"It would pique my interest if I thought somebody was not abiding properly in a contract I was involved in," Yaw said. "I'd be in court asking for an accounting."

Joel Rotz, senior director of the Pennsylvania Farm Bureau, responded: "It takes a lot to cause a farmer or a landowner to go to court."

Critics say that gas from this corner of the Marcellus Shale is pipeline-ready, and that the cost of gathering gas is part of the production process. Those costs shouldn't be passed on to the landowner. Further, they assert Chesapeake's tough stand is a policy aimed at shifting the company's heavy financial burdens to landowners. 

"Send a clear message to the industry: You're not going to come in here and abuse the people financially," said McLinko, the Bradford County chairman, who says he still supports gas as an economic boon in the region. 

"When the 'anti' people talk about the boom and the bust, one of the things that evens out that boom-and-bust theory are the royalties," he said. "They remain here, whether it's $400 for a small property owner or a larger property owner."

Landowners fight back

The issue isn't new for Chesapeake, which has had to respond to lawsuits challenging royalty withholdings for the past several years. The pace picked up after the price of natural gas hit a 10-year low in spring 2012 and Chesapeake began looking for ways to dig out of a $13 billion debt load and cash shortfalls.

Chesapeake has been taken to court over alleged royalty underpayments in the Barnett Shale play in Texas, and in Oklahoma, Louisiana and Arkansas, all areas where Chesapeake leased huge swaths of acreage in the early days of the shale boom. At least two of those are class-action suits.

In May, the 6th U.S. Circuit Court of Appeals in Cincinnati ruled that Chesapeake must face a class-action lawsuit among Ohio leaseholders alleging underpayment of royalties since 2005.

In that case, a lower court had ruled that allegations had breached the four-year statute of limitations. The appellate court disagreed, arguing the case can go forward since the alleged underpayment of royalties is ongoing.

Jerry Simmons, executive director of the National Association of Royalty Owners, said part of the problem is bad contracts. In some instances, landowners should have done more due diligence before signing a gas lease. But Simmons said he supports efforts by the Pennsylvania chapter to get lawmakers to clarify the minimum royalty rule to rein in excessive post-production deductions.

"Most of these cases about underpayment have come up within the last 10 years," he said. "There was a time when the definition of payment to a royalty owner had been clear and free of cost. They're chipping away at that so you're only getting 40 or 50 percent, and that's one of the big frustrations."

Companies' rationales for deductions are hard to pinpoint, Simmons acknowledged, but he also noted that landowner groups in shale plays across the country had been effective in negotiating higher royalties, closer to 20 to 25 percent. Some companies might be thinking, "How can we get some of that money back?" Simmons surmised.

There are also concerns that Chesapeake, in particular, is using lease language to require arbitration when lease terms are disputed. That way, goes the argument, Chesapeake can stay out of court and avoid court decisions that establish law and precedent around leasing terms.

"They know that even if it's contested, there's no penalty," said Jackie Root, head of the Pennsylvania chapter of the National Association of Royalty Owners.

Back at the Van Curens' kitchen table near Sayre, Pa., in Bradford County, Terry and Diana arranged their payment stubs.

On a spreadsheet, the monthly royalties plunged at the start of this year with some adjustment for less gas production. For December, the couple netted $425.34 after a 23 percent gas gathering deduction. For February's production, Chesapeake slashed 88 percent for the same purpose. 

The couple cashed a check for $29.54. For March, $66.10.

"You do listen to your neighbors," said Diana Van Curen. "There are a lot of people disappointed with what's going on." 

"I guess the assumption was that there would be some kind of protection for the landowner," said Terry, her husband.

What about court? "They have a lot more money than we do," he said.
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