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PA Landowners Claim Chesapeake, Williams Unit Conspired to Constrain NatGas Market Services

A group of Pennsylvania landowners has filed a lawsuit asserting that Chesapeake Energy Corp. and Access Midstream Partners LP, now part of Williams, conspired to constrain trade for natural gas market services in Bradford County, in violation of federal antitrust laws.

The lawsuit also alleges that Chesapeake and the pipeline partnership schemed to help Chesapeake "solve financial problems" associated with debt it incurred when it acquired Pennsylvania leases "at the expense of royalty interest owners," resulting in violations of the Racketeer Influenced and Corrupt Organizations Act, better known as RICO.

The complaint by the 90-plus landowners and royalty interest owners was filed on Tuesday in U.S. District Court for the Middle District of Pennsylvania [A&B Campbell Family LLC et al v. Chesapeake Energy Corp. et al, No.3:15-cv-00340-MEM]. Among other things, the plaintiffs allege transactions between Chesapeake and Access "artificially inflated the costs of gas gathering services by eliminating competition in the market," resulting in a $5 billion financial windfall for Chesapeake and royalty underpayments because of improperly deducting the artificially inflated costs.

The lawsuit also claims contracts were breached by subsidiary Chesapeake Appalachia and exploration units of Anadarko Petroleum Corp., Statoil ASA and Mitsui & Co. Ltd. for allegedly underpaying royalties for gathering and post-production costs. Plaintiffs also are examining other gas companies, including Chief Oil & Gas, which bought some of Chesapeake's Marcellus leasehold in late 2013, to determine whether royalties have been underpaid (see Shale Daily, Dec. 18, 2013).

The Bradford County group claims the case is the first to raise antitrust violations related to gathering systems in the Marcellus Shale. Chesapeake is facing racketeering claims by the state of Michigan (see Shale Daily, Sept. 9, 2014; June 5, 2014). The U.S. Department of Justice and several state agencies also last November issued subpoenas to Chesapeake in connection with leasehold purchases and royalty underpayments in various states where it operates (see Shale Daily, Nov. 6, 2014).

"While several class action lawsuits and class arbitrations have been filed against Chesapeake based on similar allegations, this is the first direct action by Pennsylvania royalty owners seeking to address what we believe is one of the underlying causes of the problem -- the fact that the gathering pipeline system in most of Bradford County, and in parts of Sullivan, Susquehanna and Wyoming counties, were, and for the most part still are, owned and controlled by the same companies responsible for paying royalties on the gas transported through those pipelines, resulting in an inherent conflict of interest, as well as harm to competition," said plaintiffs attorney Thomas McNamara. "The terms of the transaction by which Chesapeake sold its interests to Access Midstream (now Williams Partners) only made the problem worse."

The Bradford County lawsuit asserts the direct claims of each of the plaintiffs, rather than claims on behalf of a class.

"Our clients were not satisfied with relying on the efforts of other individual royalty owners to protect their rights and interests through class actions or class arbitrations, which are largely driven by attorneys, or with the terms of settlements which have been proposed to date," said attorney Christopher Jones, who also represents plaintiffs. "As a result, they have retained us to pursue their direct claims, on a group basis, which enables them to have more direct input into and control over their claims."

The number of new wells drilled in Bradford County has slowed in recent years on both an absolute and a relative basis. The number of new wells drilled in the county peaked at 201 during the second half of 2011, but that number was down to just 44 during the last six months of 2014. Similarly, from January through June 2010, Bradford County accounted for nearly 25% of all unconventional wells drilled in Pennsylvania, but that figure was a mere 5.9% during the second half of 2014.

Meanwhile, a Beaver County, OK, judge has barred an attorney from communicating with Chesapeake royalty owners over a proposed $119 million settlement covering gas wells in the state. District Judge Jon K. Parsley issued a temporary restraining order against attorney Dan McDonald, who has filed lawsuits around the country on behalf of royalty owners, including in Pennsylvania. A hearing is set for later this month regarding a proposed class-action settlement, which was announced in January (see Shale Daily, Jan. 23).

Chesapeake in 2013 had settled a royalty deduction case for $18 million with the Oklahoma Commissioners of the Land Office. It also has settled several royalty-related lawsuits with various entities, including a previous case in Pennsylvania and several in Texas (see Shale Daily, Aug. 21, 2014).

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