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Questions on Chesapeake Lease Transfer Near Ohio Storage Field

Chesapeake Energy Corp. transferred nearly 1,100 oil and natural gas leases in and around an underground natural gas storage field in Columbiana County, OH, to Hilcorp Energy Co. in February.

According to a report in the Youngstown Business Journal, Columbiana County records show that Chesapeake assigned most of the 1,097 oil and gas leases to Hilcorp effective Feb. 15. It was unclear if the deal between the companies, which was negotiated on Jan. 23, amounted to a bona fide sale or a swap for properties elsewhere.

The publication said the transferred leases were for properties in the six northeasternmost townships in Columbiana: Center, Elkrun, Fairfield, Middleton, Salem and Unity. It also reported that nine drilled wells were also excluded from the deal.

Chesapeake spokesman Jim Gipson told NGI's Shale Daily on Thursday that the company had no comment over the leases. Justin Furnace, spokesman for Houston-based Hilcorp, also declined to comment.

Alan Wenger, an attorney with Youngstown, OH-based law firm Harrington, Hoppe & Mitchell, told NGI's Shale Daily the leases were in or near the Brinker Storage Field, a 30,000-acre natural gas reserve in northern and central Columbiana County. The field, which was assembled over several decades, is owned by Columbia Gas Transmission.

"Columbia has all kinds of leases of various vintages that say all kinds of things," Wenger said Friday. "Some of them are storage leases and others are more conventional, production leases.

"As this play developed, largely after 2009, a lot of the landowners involved in this area knew their properties had leases on them but had no clue as to what they meant. Many of them had never received a royalty check or anything for years because these were ancient leases on properties that got subdivided into lots and the royalties never followed."

That's when Chesapeake came to town, Wenger said.

"Chesapeake was running around like a chicken [without a head], leasing anything that they could lease in this area. They were going door-to-door to these folks, signing them up and leasing their properties, initially for a fairly nominal bonus amount and then increasing over the months as the play developed.

"I don't know that Chesapeake, frankly, did a very exhaustive title run before signing a lot of these up. They wound up with a lot of leases that ostensibly were for these parcels, but many of them were already arguably held by production, at least by the storage leases that were held by Columbia."

Last September, Columbia, a NiSource Inc. subsidiary, formed a joint venture (JV) with Hilcorp to develop the deep rights to the Brinker Storage Field. Four months earlier, NiSource officials said "advanced discussions" about a JV in the Brinker were under way, but they did not identify Hilcorp as its negotiating partner (see Shale Daily, May 2, 2012).

"I believe Chesapeake was trying to negotiate such a deal with Columbia but wasn't successful in doing so for whatever reason," Wenger said. Many of the leases would have been hard to develop units without joint venturing with others who already held some rights.

Wenger said some of the leases held by Columbia were strictly for one specific geological stratum for gas storage and nothing else, which meant landowners were free to sell the deep rights. But he said most of the older leases covered all geological formations.

"The older leases were never used for anything other than for gas storage, but Columbia would not release them," Wenger said. "They held them and decided to profit from them. There were threats of litigation, and probably some actual litigation was filed, but I don't think it got anywhere, against Columbia to try and get those released."

Wenger said he did not know the collective value of the deep rights leases, if Hilcorp purchased them outright from Chesapeake or if they were transferred between the two companies for holdings elsewhere. More troubling, he said, was that it did not appear that Chesapeake had filed any information about the leases with the U.S. Securities and Exchange Commission (SEC).

"I'm not an SEC or a regulatory lawyer, but frankly I don't understand why this would not be reported by Chesapeake," Wenger said, adding that he has searched for records of the assignment in his spare time. "They report assiduously anything that they sell or buy. Maybe they're holding it because they would argue that it's not final yet. But if it were a trade, it should be reported for SEC purposes.

"Chesapeake files something with the SEC about every two weeks. There had to have been some consideration, but I don't know what it was."

Responding to Wenger's comments, Gipson on Friday said Chesapeake "takes the necessary steps to make all required SEC filings."

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