A Texas appeals court panel has ruled that Chesapeake Energy Corp. should have paid oil and gas royalties to Eagle Ford Shale leaseholders based on the gross proceeds from an adjacent well, not from take points within the trigger distances of the leases.
The Fourth Court of Appeals in San Antonio ruled Wednesday that compensatory royalties must be calculated according to the express terms of the leases. The three-judge panel reviewed two leases the Oklahoma City-based producer’s Chesapeake Exploration LLC unit signed in November 2009 and April 2010. The leases are considered representative of numerous leases involved in multidistrict litigation (MDL).
The appeals court was tasked with interpreting two lease provisions. Specifically, it considered whether a formula for calculating compensatory royalties is based on take points for an adjacent well within the lease triggering distances, and whether the reasonably prudent operator standard should apply in whole or in part to the lessee's offset obligations. The case is Stanton P. Bell et al. v. Chesapeake Energy Corp. et al., No. 04-18-129-CV.
According to court records, leaseholder Stanton Bell alleged that adjacent wells had been drilled within distances stated in the leases, and claimed Chesapeake had not drilled offset wells, released acreage or paid compensatory royalties.
Chesapeake filed a cross-appeal after the 224th Judicial District Court in Bexar County, the MDL court, disagreed that the leases were covered by the reasonably prudent operator standard. The MDL court granted a motion that compensatory royalties should be "based on production only from take points within certain trigger distances stated in the leases, rather than production from the entirety of a horizontal well."
The appeals reversed the MDL court's ruling on compensatory royalties.
"The gist of Chesapeake's argument is that calculating compensatory royalty according to the plain language of the leases is a bad deal," Justice Rebeca C. Martinez wrote in the opinion. "Regardless, that is the deal the parties made and this court is not permitted to rewrite it under the guise of interpreting it."
Leaseholders in oil and gas plays across the country have alleged Chesapeake has underpaid them royalties. A similar lawsuit concerning Chesapeake’s Eagle Ford leases was filed in March 2016.