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Pennsylvania Attorney General Thought to Be Expanding Royalties Investigation

Pennsylvania Attorney General (AG) Kathleen Kane's office appears to be pressing ahead with a far-reaching investigation into the royalty deductions by Chesapeake Energy Corp. from landowner’s checks, most recently issuing administrative subpoenas to multiple companies operating in the state.

News of the AG's latest step was first reported on Wednesday by Capitolwire.com, a Harrisburg-based subscription news service, which quoted anonymous sources who confirmed the subpoenas have been issued "throughout the energy industry for information about royalty calculations and payments."

When asked about the scope of the investigation and the subpoenas by NGI's Shale Daily, Kane spokesman J.J. Abbott neither confirmed nor denied that the documents were sent to producers in the state. He said the office had no comment, and when asked if he could explain why, he wrote in an email that "I cannot."

Kane, a Democrat who took office for a four-year term in 2013 after the 2012 general election in which she took more than 50% of the vote, has been actively involved in policing the shale gas industry in comparison to her predecessors. Last year, she brought unprecedented criminal charges against XTO Energy Inc. for a 2010 incident in which tens of thousands of gallons of wastewater spilled at a site operated by the company (see Shale Daily, Sept. 12, 2013).

The Chesapeake royalties investigation was stoked by an outcry from landowners who alleged that the company was unfairly making deductions from their royalty checks to cover gas marketing and transportation fees.

While other companies have been accused of similar practices in letters to Kane's office and lawmakers, Republican Gov. Tom Corbett and legislators called for an investigation into Chesapeake in February (see Shale Daily, March 14; Feb. 18). The AG's Bureau of Consumer Protection Antitrust Section took it on that month, and the watchdog reportedly sent out the latest administrative subpoenas, which are judicially enforceable requests for records issued by a government authority.

While some exploration and production companies operating in the state told NGI's Shale Daily that they have not received any subpoenas regarding the AG's investigation, others did not respond to the inquiry.

Marcellus Shale Coalition (MSC) spokesman Travis Windle said his organization had no information about a widening investigation, and he added that the group knew only about what was published by the news service.

Jackie Root, president of the Pennsylvania chapter of the National Association of Royalty Owners (NARO), which has been a vocal proponent of legislation making its way through the statehouse that would clarify the state's minimum royalty definition (see Shale Daily, April 7), said she knew little about the status of the AG's investigation, but she added that her members have been actively involved.

"What we know about is that hundreds of landowners have spoken to the attorney general about this problem," she said. "I also know that the attorney general has interviewed many, many royalty owners. It's not my area of expertise, but when the attorney general builds a case, I don't think they share much of that with anyone at all. We've been waiting at the edge of our chairs for an announcement on this."

To be sure, the AG's office has stayed quiet about both the XTO case and the Chesapeake investigation, choosing to release few details about both. Penn State University professor Ross Pifer, who teaches a course on the law and policy of shale gas development, said he too was hard pressed to provide an explanation of why the office has remained silent.

He told NGI's Shale Daily that it's likely because the Chesapeake investigation is one of the first instances in which the attorney general has been involved with shale gas royalties in the state, adding that the investigation's civil nature is complex because it deals with consumer protection and the interpretation of oil and gas leases.

Most leasehold contracts include standard provisions to deduct some expenses from royalties. Deductions for transportation and marketing are typically set at the discretion of operators. Last year, Chesapeake allegedly began to deduct higher fees from Pennsylvania royalty checks, which it claimed was allowed under the state's Guaranteed Minimum Royalty Act of 1979. The company has not commented about the investigation since it began.

Other operators have made similar moves, and landowners have sued to recover such underpayments. In October 2013, a federal judge certified class action cases against EQT Corp. and Consol Energy Inc. alleging that the operators cheated them of millions in royalties (see Shale Daily, Oct. 4, 2013).

Also last year, Chesapeake settled a $7.5 million claim with Pennsylvania landowners for underpayment, which Root said is tied up in court, with property owners still waiting for payment (see Shale Daily, Sept. 4, 2013).

HB 1684, which would clarify a minimum allowable royalty with a new definition, has stalled in the Pennsylvania legislature and a floor vote has been delayed until the fall session after the bill met opposition from natural gas producers, their allies -- such as the MSC -- and ambivalent lawmakers (see Shale Daily, June 20, 2014).

"This goes beyond Chesapeake. I believe these companies came in here evaluating the possibility of this play and knowing there was this minimum royalty act in Pennsylvania, planning to pay a 12.5% royalty," Root, who added that she is a staunch supporter of the industry, said. "But Chesapeake is aggressive, and they paved the way for this to happen and took it farther than anyone else. All we want, as royalty owners, is a level playing field and transparency.”

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