State attorney general sues Chesapeake Energy over gas royalties

Posted By: Steven Townsend

The Pennsylvania Attorney General’s office is suing Chesapeake Energy Corp. and three of its affiliated companies for allegedly underpaying landowners tens of millions of dollars worth of royalties from the company’s natural gas operations in the state.

The lawsuit, which was filed Wednesday in the Bradford County Court of Common Pleas, accuses Oklahoma City-based Chesapeake of deceiving landowners as it sought to secure a broad leasehold in the gas-rich Marcellus Shale, especially in northeastern Pennsylvania.

When wells on those properties began producing gas, the company made deductions from royalties that the landowners said violated the terms of their leases.

The case also names as a defendant Tulsa-based Williams Partners, LP, which acquired Chesapeake’s former gas gathering pipelines and other infrastructure.

Attorney General Kathleen Kane said the company’s conduct “amounts to a ‘bait-and-switch.’”

The lawsuit claims Chesapeake empowered its landmen to use deceptive and high-pressure negotiating tactics to get landowners to sign leases.

The company later entered into self-serving agreements with its pipeline units that allowed for “artificially inflated” and “unreasonably excessive” post-production costs to be passed on to landowners, which radically diminished the landowners’ payments for the gas sold from their properties, the lawsuit claims.

The tactics were seen as necessary so that Chesapeake could generate cash “to cover losses, debt service or negative cash flow” caused by the company’s past practices, according to the suit. The company has been accused of similar tactics in lawsuits in several other states.

The attorney general’s office said the lawsuit seeks restitution for thousands of leaseholders, along with civil penalties of $1,000 for each violation of the Unfair Trade Practices and Consumer Protection Law and penalties of $3,000 for each violation involving a person 60 years old or older.

A spokesman for the attorney general said at least 4,000 royalty owners were affected by the company’s deduction tactics and “considerably more” are expected to come forward with claims.

Chesapeake spokesman Gordon Pennoyer said in a statement, “We strongly disagree with Attorney General Kane’s baseless allegations and will vigorously contest them in the appropriate forum.”

The attorney general’s office is also filing a friend of the court brief in a class-action case related to Chesapeake’s royalty deductions, known as the Demchak class action, urging the U.S. District Court for the Middle District of Pennsylvania to reject a proposed settlement of that case in its current form.

Landowners in the class are facing a deadline of next week to decide whether to opt out of the settlement.

“These people signed leases that assured them that there would be no deductions and Chesapeake just clearly was going to violate it and say, ‘Catch me if you can’,” said Jackie Root, president of the Pennsylvania chapter of the National Association of Royalty Owners, which has led the fight to correct what it sees as unfair royalty deductions.

The company “just got so greedy,” she said, that it attracted attention. “The pig gets fat; the hog gets slaughtered,” she said.

More information can be found at the Office of Attorney General’s Antitrust Section at www.attorneygeneral.gov or by calling 717-787-4530.

Laura Legere: llegere@post-gazette.com.

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