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Chesapeake’s Post-Production Costs Again Scrutinized in Pennsylvania

Post-production cost deductions taken from royalty checks by Chesapeake Energy Corp. again are being questioned by Pennsylvania officials, with the governor calling for an inquiry.

A spokesman for state Attorney General Karen Kane confirmed that the office has been asked to launch an inquiry at the request of State Sen. Gene Yaw of Lycoming County. Yaw's request was supported by Gov. Tom Corbett and State Senate President Pro Tempore Joe Scarnati.

Corbett last week said he wrote Chesapeake CEO Doug Lawler about complaints concerning practices that "strike many as unfair and perhaps illegal." Although he's contacted the Oklahoma City producer "several times," Corbett said he remained "disappointed that the complaints of my constituents continue to go unheeded...

"It defies logic that, in some cases, leaseholders are being advised they may actually owe money, rather than receive the fair and just royalty to which they are entitled." Chesapeake officials were asked to restore "fair treatment" to those with natural gas leases in the state.

Yaw said his office had received complaints by many constituents holding leasehold agreements with Chesapeake. The state's attorney general "is the appropriate third party entity to officially review these claims from a consumer protection aspect."

Chesapeake declined to comment.

Most leasehold contracts include standard provisions to deduct some expenses from royalties. Deductions for transportation and marketing typically are 5-10% and set at the discretion of operators. Chesapeake last year began to deduct higher fees from the Pennsylvania royalty checks, which it claimed was allowed under the Pennsylvania Guaranteed Minimum Royalty Act of 1979. The Appalachia region holds an estimated 25% of the company's 10.93 Tcf of proven reserves.

Other operators have made similar moves, and landowners have sued to recover what they believe to be underpayments. In October, a federal judge certified class action cases against EQT Corp. and Consol Energy Corp. that allege the operators cheated them of millions in royalties (see Daily GPI, Oct. 4, 2013). Range Resources Corp. was sued by landowners in West Virginia more than three years ago (see Shale Daily, Oct. 20, 2010).

Chesapeake has been questioned about its royalty agreements for years, in Pennsylvania as well as Texas and Ohio (see Shale Daily, May 30, 2013; Oct. 5, 2010).

Chesapeake hasn't dodged all of the under-payment claims. Last September the operator agreed to a $7.5 million settlement with Pennsylvania landowners to resolve a complaint that a unit improperly had charged post-production fees (see Shale Daily, Sept. 4, 2013). Plaintiffs in Pennsylvania's Susquehanna, Northampton, Lehigh, Lancaster and Montgomery counties, and Cortland County, NY, sought the past payments (Demchak Partners LLP et al, v. Chesapeake Appalachia, LLC, No. 3:13-cf-02289-MEM).

Of that settlement agreement, Yaw said at the time, "The legislature cannot alter the existing contracts of thousands of leaseholders. I believe there is a way we can protect those landowners and not interfere with current contract language."

A source told NGI's Shale Daily that the call for another investigation into Chesapeake may simply be election year politics. Corbett, a Republican, is facing a tough re-election battle and low polling numbers.

Chesapeake was the second biggest leaseholder in the U.S. onshore after ExxonMobil Corp. until it was forced to pare its operations. The land grab resulted in landmen combing the most promising leaseholds for land and securing some of the first leasehold agreements in the Marcellus and Utica shales, well before the drilling boom.

Scarnati said the gas industry is an asset to the state, but "it has become apparent that...Chesapeake Energy has undertaken some disturbing actions relating to post-production costs."

State Rep. Tina Pickett (R-Towanda) last September introduced legislation to ensure landowners were given information to ensure they receive accurate royalty payments (see Shale Daily, Sept. 16, 2013). Yaw also has legislation on the table to protect landowners in royalties claims.

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