Chesapeake Energy Corp. and former subsidiary Access Midstream Partners LP cheated Pennsylvania landowners of more than $5 billion in natural gas and oil royalties through inflated and unreasonable fees, a class action lawsuit filed in Pennsylvania is claiming.
Lead plaintiff Suessenbach Family LP is seeking damages for racketeering, unjust enrichment, mail fraud, wire fraud, honest services fraud, conversion and civil conspiracy [The Suessenbach Family LP et al v. Access Midstream Partners, LP et al, U.S. District Court for the Middle District of Pennsylvania, No. 3:14-cv-01197-MEM]. The Suessenbachs are seeking class certification, an injunction, disgorgement of ill-gotten gains and damages.
"Since at least 2010 Chesapeake engaged in unlawful conduct to improperly extract billions of dollars in royalties owed to plaintiffs and other lessors by artificially manipulating and deducting from royalty payments the cost of marketing, gathering and transporting natural gas," the lawsuit claims. "The marketing, gathering and transportation deductions at issue in this action were both unreasonable and inflated."
Plaintiffs claim Chesapeake subsidiaries paid fees, which then were charged to lessors, "for gas pipeline transport to Access Midstream that are many multiples of Access Midstream's actual costs." In one case, they said markup was more than 3,000%.
The deductions "were inflated, improper, completely unrelated to the cost of services, did not serve to enhance the marketability of gas, and instead, merely served to enrich the co-conspirators who devised the scheme," the complaint states. "The benefit to Access Midstream is clear. Access Midstream's predominant source of revenue is gathering fees and Chesapeake accounts for approximately 84% of Access Midstream's business."
Access has since been bought by Williams (see Daily GPI, July 1). Chesapeake remains its largest customer.
Under the Guaranteed Minimum Royalty Act, two kinds of leases were entered into with landowners to extract gas that promised a royalty based on realized commodity prices, the plaintiffs claim. Under law, the leases allow for gas to be explored for and developed, with royalty deductions for production, transport, treatment and processing, "but nowhere does either lease permit deductions in excess of actual cost or which are unreasonable."
About five years ago, the lawsuit claims, Chesapeake began experiencing "severe financial difficulty...due to major capital expenditures and lower natural gas prices and cash flow." As a result, Chesapeake is said to have formed Access in August 2010 to spin off the midstream assets and recoup cash. "During this time, Chesapeake was using its subsidiaries to artificially inflate deductions charged to lessors."
"Post-spinoff agreements" with Access offered a guarantee that Chesapeake also would benefit "in the form of payments for services and additional assets." Once a standalone, Access replaced Chesapeake as beneficiary of some contractual obligations and entered into gathering agreements with Chesapeake subsidiaries that were to pay Access for midstream services, including intrastate transport, plaintiffs claim. The services fees were "intended to provide Access Midstream with a guaranteed, above-market return as an incentive and consideration for the payments it made to Chesapeake." Chesapeake "pledged to pay Access enough in fees to repay the $5 billion plus a 15% return on its pipelines...
"Fully aware of the true market rates of such services, Chesapeake and its subsidiaries agreed to this above-market rate of return and then Chesapeake agreed to pay Access Midstream supra-competitive prices for natural gas gathering and transportation services," with Access agreeing to repay an off-balance sheet loan of its former parent. The off-balance sheet loan "was to hide Chesapeake's need to 'raise billions of dollars quickly' without alerting the market to its financial troubles when it was already saddled with billions of dollars in debt."
The Suessenbachs are not the only ones in Pennsylvania, nor in other Chesapeake operating areas, to seek restitution for apparent royalties gouging (see Shale Daily, April 10; Feb. 18). Pennsylvania lawmakers were considering legislation to shield landowners from royalties issues, but the measure has been delayed t(see Shale Daily, June 20).
Chesapeake also has faced litigation in other states for alleged royalty agreements (see Shale Daily, May 30, 2013; Oct. 5, 2010). And it is far from the only producer to face such charges. Among others, last October a federal judge certified class action cases against EQT Corp. and Consol Energy Corp. that allege the operators cheated landowners of millions in royalties (see Daily GPI, Oct. 4, 2013). Range Resources Corp. was sued by landowners in West Virginia also more than three years ago (see Shale Daily, Oct. 20, 2010).