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Pennsylvania AG Sues Chesapeake For Royalty Deductions Following Investigation

After more than a year-long investigation that involved hundreds of landowners and industry cooperation, Pennsylvania Attorney General (AG) Kathleen Kane's office said Wednesday it has filed a wide-ranging lawsuit against Chesapeake Energy Corp. and its affiliates for deceptive business practices.

Filed in the Bradford County Court of Common Pleas, the complaint seeks restitution for thousands of consumers, as well as civil penalties and legal costs, compounding legal challenges in the state for Chesapeake, which has been accused of unfairly deducting post-production costs from royalty checks to cover marketing costs, including compression, dehydration and transmission.

Kane's office said the alleged deception "occurred as part of a rush to lock up acreage in the Marcellus Shale region."

"This alleged conduct amounts to a bait-and-switch," Kane said in announcing the lawsuit. "Pennsylvania landowners were deceived in thousands of transactions by a company accused of similar conduct in several other states. This lawsuit should serve as notice that we will not allow our residents to be exploited."

The AG's office said the lawsuit was the result of an "extensive investigation" that was launched last year by its Antitrust Section and Bureau of Consumer Protection, which brings legal action against overcharges and underpayment (see Shale DailyAug. 29, 2014). The office said hundreds of landowners played an integral role in the case. When the investigation was announced, several sources said administrative subpoenas were sent to multiple companies seeking information about royalty payments, leases and related practices.

The lawsuit also names as defendants Chesapeake Appalachia LLC, Chesapeake Operating Inc., Chesapeake Energy Marketing Inc. and Williams Partners LP, which owns and operates midstream infrastructure in the region and moves gas for the company.

According to the lawsuit, Chesapeake obtained leases and promised landowners certain royalty amounts, but underpaid them once wells started to produce. It also alleges that landowners were told certain lease provisions prevented them from incurring charges to extract and market natural gas. Landowners, according to the AG's complaint, were later told the leases permitted such charges.

The lawsuit is requesting the defendants pay restitution to all persons affected; civil penalties of $1,000 each for violations of the Unfair Trade Practices and Consumer Protection Law; and $3,000 for each violation involving people 60 years of age or older. It also asks that the companies "permanently refrain" from engaging in any practice that violates the consumer protection law.

The AG's announcement comes a little more than two months after a federal judge granted preliminary approval for a settlement involving more than 15,000 landowners in the state that would require Chesapeake to pay more than $17 million for post-production deductions (see Shale DailyDec. 8).

The AG's office said it would file a friend of the court brief in that case in the U.S. District Court for the Middle District of Pennsylvania and urge the court to reject the proposed settlement -- also known as the Demchak settlement. The office said it would request the settlement to be modified to clarify that the class does not have standing to bring the claims asserted by the state so that the AG's claims are not released through the Demchak case.

The AG's investigation was primarily stoked by an outcry from landowners that alleged Chesapeake was making improper deductions. While other operators were accused of similar practices, the AG's office announced no action against any other companies on Wednesday.

Chesapeake has argued in separate cases that its natural gas is in marketable form at the well head. It has also claimed that post-production deductions are allowed under the Pennsylvania Guaranteed Minimum Royalty Act of 1979, which state lawmakers have been trying to clarify to better protect landowners (see Shale DailyJune 26).

Chesapeake spokesman Gordon Pennoyer said Wednesday that "we strongly disagree with Attorney General Kane's baseless allegations and will vigorously contest them in the appropriate forum."

 

 

 

 

 

 

 

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