Chesapeake Energy Corp. is awaiting approval by the courts of a proposed $7.5 million settlement to resolve claims that a unit improperly charged Pennsylvania leaseholders post-production fees, a spokesman said Tuesday.
The federal lawsuit was filed and a proposed settlement reached within three hours on Friday.
At about 3 p.m. EDT, 14 plaintiffs in Pennsylvania's Susquehanna, Northampton, Lehigh, Lancaster and Montgomery counties, and in Cortland County, NY, filed the federal lawsuit in U.S. District Court, Middle District of Pennsylvania (Demchak Partners LLP et al, v. Chesapeake Appalachia, LLC, No. 3:13-cf-02289-MEM).
The lawsuit, settled before 6 p.m. EDT, asserted that Chesapeake deducted post-production fees from royalties, despite the terms of the leases that precluded the company from doing so. The lawsuit also alleged that the fees charged were more than the actual and reasonable costs incurred and that Chesapeake improperly based the royalties on the market value of the natural gas before it was processed, which was lower than the value once it was marketable.
Deductions from royalties, usually 5-10%, are set at the discretion of operators and are permitted under many Pennsylvania drilling leases. Texas also allows these types of deductions. However, Chesapeake this year began to deduct higher fees from the Pennsylvania royalty checks, which it claims is allowed under the Pennsylvania Guaranteed Minimum Royalty Act of 1979.
The Marcellus region holds about one-quarter of Chesapeake's 10.93 Tcf of proven natural gas reserves.
Under the proposed settlement, leaseholders would be required to pay some post-production fees, but the share would be reduced to 72.5% of the costs. Leaseholders would continue to pay all of the costs related to transporting the gas through pipelines.
Chesapeake spokesman Jim Gipson said the settlement was a "fair and reasonable agreement" and management is "hopeful the court will approve the resolution of this dispute," he told NGI's Shale Daily.
The settlement would "benefit several thousand leaseholders," said plaintiffs' lead counsel Michelle O'Brien. The O'Brien Law Group of Moosic, PA, helped to negotiate the settlement over the course of more than a year with attorneys representing other plaintiffs.
The settlement, to be reviewed by a federal judge, indicates that the proposal is the most efficient way to resolve the dispute and would save leaseholders the expense and time of filing individual lawsuits against Chesapeake. O'Brien said as many as 1,000 other leaseholders may have the option to take part in the settlement or opt out.
In response to the proposal, Pennsylvania state Sen. Gene Yaw (R-23) said the settlement plan was the best way to go. In similar cases, the courts, not the state's legislature, needed to resolve leaseholder disputes, he said. "The legislature cannot alter the existing contracts of thousands of leaseholders," Yaw said. "I believe there is a way we can protect those landowners and not interfere with current contract language."
However, some state legislators believe leaseholders deserve a guarantee for their royalties. Republican state Rep. Tina Pickett said she plans to introduce legislation this month to update the 1979 royalties law to guarantee landowners a minimum 12.5% royalty payment, regardless of costs.