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Chesapeake's Barnett Midstream Contracts Unfair to Texas Royalty Owners, Lawsuit Claims

More than 30 business entities and individuals in Texas, including Fort Worth's Kimbell Art Foundation, are suing Chesapeake Energy Corp. based on claims that the company structured a series of contracts to receive excessive fees and other charges after its 2009 sale of Barnett Shale midstream assets.

The lawsuit, filed in the 95th Judicial District Court in Dallas, involves oil and gas leases covering more than 5,400 mineral acres and 750-plus producing natural gas wells in Tarrant, Johnson and Ellis counties [Addax Mineral Funds, et al. v Chesapeake Operating LLC, et al., DC-16-07867].

"Chesapeake structured its midstream asset sale and transportation agreements in such a way that the lessors and royalty owners bore unreasonable costs," said plaintiffs attorney Daniel Charest of Burns Charest LLP. "My clients only want a fair price for their royalty production. That's what this case is about."

The plaintiffs allege that a $588 million sale in 2009 to its then-partner Global Infrastructure Partners (GIP) was structured to charge unreasonable fees on royalties (see Daily GPISept. 28, 2009). The lawsuit also challenges Chesapeake's transportation fees and net royalty interest calculations.

At the time, Chesapeake also sold midstream infrastructure in the Arkoma, Anadarko and Permian basins, and it included in the sale 20-year volume production commitments related to the gathering assets. The midstream properties sold initially were rolled into entity Chesapeake Midstream Partners LLC (CMP), which GIP at the time paid $588 million to buy a half-stake. GIP three years later purchased the entire midstream business (see Shale DailyJuly 3, 2012June 11, 2012).

CMP was designed to enter into various agreements with Chesapeake, including long-term gas gathering agreements at rates consistent with market pricing. Its revenues were to be generated almost entirely from fixed fee-based arrangements for gathering, compression, dehydration and treating services.

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