Total E&P USA agreed to pay $6 million to the city of Fort Worth, TX for underpaying natural gas royalties in the Barnett Shale on leases it co-owns with Chesapeake Energy Corp.

The city council voted 8-0 to accept with settlement on Tuesday.

Fort Worth had a lease agreement in place with Chesapeake covering about 5,800 acres of city property and 260 leases in Tarrant and Johnson counties before the Total SA subsidiary in 2010 bought a 25% stake in Chesapeake’s Barnett holdings (see Daily GPI, Jan. 5, 2010).

Fort Worth officials have contended in court papers that Chesapeake and Total underpaid royalties using “sham sales to affiliates” and then “improperly deducting costs of gas gas gathering, transportation, separation” and treating the gas.

The $6 million settlement represents a 100% recovery of the post-production costs that were subtracted from royalties since Total and Chesapeake became partners, according to city officials. Under the settlement, Total agreed to pay 20 cents/Mcf in additional revenue for the gas that was produced over the past five years.

The settlement also established how Total will pay Fort Worth for Barnett royalties going forward. Beginning next January, Total agreed to pay for its Barnett gas the publicly posted price for gas at the Houston Ship Channel, minus 2 cents. The price is similar to a royalties agreement the city has with ExxonMobil Corp. subsidiary XTO Energy Inc.

Chesapeake and Total have been deducting $1.00-1.28/Mcf from gas sold, depending on the lease.

Total did not admit any liability in its settlement. Chesapeake, which continues to deny underpaying royalties, has argued that royalties were paid to the city based on the weighted average sales price of the gas after the post-production costs

Mayor Betsy Price said the settlement with Total was fair, and while the city had not settled with Chesapeake, “we are optimistic we will.”

Chesapeake attorneys were scheduled to appear in a Fort Worth court on Wednesday to argue against a summary judgment request by the city. The producer also has asked that any agreements regarding royalties be kept confidential.

The Oklahoma City-based producer already has settled several high profile royalties lawsuits in Texas regarding its Barnett gas production, including with the city of Arlington (see Shale Daily, Aug. 21, 2014).

However, the Texas Supreme Court earlier this year denied a request for a rehearing by Chesapeake regarding a royalty underpayment case in which a Fort Worth family was awarded at least $1 million in royalties, interest and fees for gas wells drilled in the Barnett (see Shale Daily, Feb. 3). Chesapeake earlier this month also was sued for apparent underpayments on its Eagle Ford Shale leases (see Shale Daily, March 11).