Chesapeake hit with another Barnett Shale suit

Houston (Platts)--7 Jul 2016 616 pm EDT/2216 GMT

Chesapeake Energy has once again become the target of a lawsuit by property owners in the North Texas Barnett Shale region alleging the producer underpaid millions of dollars of royalties to them.

In a suit filed in District Court of Dallas County, more than 30 North Texas businesses and individuals are suing Chesapeake and Total USA, alleging that Oklahoma City-based Chesapeake's $588 million sale of assets to New York hedge fund Global Infrastructure Partners in 2009 resulted in the charging of unreasonable fees on royalties.

The lawsuit, which involves oil and gas leases covering more than 5,400 mineral acres and more than 750 producing gas wells in Tarrant, Johnson and Ellis counties in Texas, alleges that the sale was structured to benefit Chesapeake at the expense of royalty owners.

"Chesapeake structured its midstream asset sale and transportation agreements in such a way that the lessors and royalty owners bore unreasonable costs," plaintiffs' attorney Daniel Charest of Dallas said in a statement.

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Representatives for Chesapeake and Total could not be reached for comment Thursday.

The suit alleges that the royalty underpayments began with the sale of Chesapeake's midstream assets to GIP and the subsequent formation of Chesapeake Midstream, later called Access Midstream, to manage those assets.

The deal included an exclusive 20-year production commitment related to Chesapeake's Barnett Shale midstream gathering assets.

"As part of this transaction, the Chesapeake defendants agreed to pay excessive, unreasonable gathering charges (the "Barnett Gathering Fees") to Chesapeake Midstream/Access," the suit charges.

Those fees formed "the core of the excessive charges that the Chesapeake defendants deduct from the monthly royalty and overriding royalty interest owner payments," the suit alleges.


The suit quotes Chesapeake Energy's former CEO, the late Aubrey McClendon, who in September 2009 called the Barnett Shale midstream asset sale "the first step in unlocking the embedded value in [Chesapeake's] midstream assets and further execution of its monetization program."

The plan resulted in the enrichment of Chesapeake and the other defendants at the expense of the royalty owners, the suit alleges.

"The onerous terms in the gathering agreement, including the Barnett Gathering Fees, were a cost of that plan," the lawsuit claims.

Chesapeake is no stranger to lawsuits related to alleged underpayments of royalties in the Barnett Shale play and other basins in which it operates.

"Chesapeake is defending numerous lawsuits filed by individual royalty owners alleging royalty underpayment with respect to properties in Texas," the company said in its March 31 10-Q filing with the Securities and Exchange Commission.

"These lawsuits, which primarily relate to the Barnett Shale, generally allege that Chesapeake underpaid royalties by making improper deductions and using incorrect production volumes," the company said.

Chesapeake added that it expected that additional lawsuits would be filed by new plaintiffs making similar allegations.

In addition to the Barnett Shale suits, last December the Commonwealth of Pennsylvania filed a lawsuit in the Bradford County Court of Common Pleas "related to royalty underpayment and lease acquisition and accounting practices with respect to properties in Pennsylvania," Chesapeake said.

"The lawsuit, which primarily relates to the Marcellus Shale and Utica Shale, alleges that Chesapeake violated the Pennsylvania Unfair Trade Practices and Consumer Protection Law by making improper deductions and entering into arrangements with affiliates that resulted in underpayment of royalties," the company said.


In addition, Chesapeake noted that putative statewide class actions in Pennsylvania and Ohio and purported class arbitrations in Pennsylvania had been filed on behalf of royalty owners "related to alleged underpayment of royalties as a result of the company's divestiture of substantially all of its midstream business and most of its gathering assets in 2012 and 2013."

In that case, Pennsylvania Attorney General Kathleen Kane accused Chesapeake of engaging with a "bait-and-switch," scheme with landowners.

Both Chesapeake and Total already have resolved a number of royalty-related lawsuits involving both public entities and private landowners in the Barnett Shale region.

In May, the Fort Worth City Council voted to approve a $15 million settlement with the Chesapeake in a lawsuit that claimed the company had underpaid royalties for gas produced on city-owned land.

In the same week, Chesapeake announced that it and Total E&P had agreed to pay out about $52.5 million to settle a lawsuit brought by about 13,000 private North Texas landowners to settle similar royalty claims.

Last September, Chesapeake settled a lawsuit with a group of Barnett Shale mineral rights owners led by prominent Texas oil and gas investor Edward Bass.

--Jim Magill,

--Edited by Richard Rubin,

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