Chesapeake Settles Over Royalty Dispute

Yesterday Chesapeake settled a class action lawsuit challenging the company for improperly deducting post-production and transport fees from gas royalties. According to the Daily Review, Chesapeake has agreed to fork over $7.5 million.

The lawsuit, filed electronically earlier in the day, named 14 plaintiffs from Pennsylvania and New York as representatives of the “class”. The plaintiffs claim that post-production fees were deducted from their royalty payments despite terms in their leases that precluded Chesapeake from deducting those costs, and that the fees were in excess of the actual costs. They also claim

that Chesapeake "breached its duty" by basing royalties on the market value of the gas prior to refining – at “below market” price.

However, the leaseholders won’t end up with all the royalties they’d hoped for. They’re still going to have to pay about 72 percent of post-production costs, and cover 100 percent of the costs related to transporting gas through the pipelines.

The settlement proposal still has to be reviewed by a federal judge before final approval.

Read more about this here and here. 

Chesapeake Gives up on Enforcing Illegal Leases in NY

 According to a report from Reuters, Chesapeake Energy has finally given up its fight to hold onto expired NY leases. For the past two years the gas company has been insisting that the leases should be extended beyond their initial termination date because they weren't allowed to use horizontal hydro-fracking in NY State. They pointed to the "force majeure" clause in their leases - a clause that states that the company wouldn't be held liable for not keeping the contract should a flood, hurricane, labor strike or some-such make it impossible to drill. They interpreted that to also include the state's hold on horizontal hydrofracking ... claiming that they "couldn't drill". A claim that US District Court Judge David Hurd rejected back in November.

For the past two years (and more in some cases) Chesapeake has been sending "force majeure" letters to landowners whose leases had expired. These letters claimed that the leases weren't "really" expired, and they offered new leases - with lots less money - to the landowners.

But now, after two years of legal fighting, they are ready to "walk away" from NY, says Reuters. It's not because NY is "fracking unfriendly" or "has a moratorium" - the real reason Chesapeake is tossing their cards on the table and leaving is because the legal battle is getting pricey and there are other, better places to drill. Chesapeake isn't the only player to leave the northeast; A couple weeks ago Hess Corporation and Newfield Appalachia pulled out of their leases in Wayne County, PA. It was a business decision, they told the press - better drilling elsewhere.

Chesapeake in the News Again

Here in NY, Chesapeake has had its run-ins with the Attorney General over the misguided use of "force majeure" to extend leases. Meanwhile, down in PA it looks like they've been taking more cookies from the cookie jar than they're entitled to - at least according to the leases they wrote . Residents have been grumbling about this for months, and now it looks like the lawyers are gonna step up to the plate and see if there are enough cookies left to go around.  Grab your milk and gather 'round the table ...

Federal Judge Tosses "Force Majeure" Out the Window

Just because you can’t “frack” doesn’t mean you can't drill. That’s what U.S. District Court Judge David Hurd told Chesapeake Appalachia the other day. In a decision posted November 15, Hurd rejects force majeure as a reason to hold onto expired leases. Leases, he explain, terminate at the end of their primary terms. His reasoning:

“… The purpose of the leases is to explore, drill, produce, and otherwise operate for oil and gas and their constituents.” And the fact that New York State is still reviewing regulations for high volume horizontal hydraulic fracturing (HVHF) does not stop oil and gas companies from exploring, drilling, producing and otherwise operating, says Hurd.

Even though the state does not allow fracking, “… drilling permits for conventional drilling methods have, and continue to be, issued in the area of plaintiffs’ lands,” wrote Hurd. He clarified that the leases signed by landowners did not limit Chesapeake’s right to drill to a specific type of drilling or a particular formation.

The whole force majeure argument was based on the illusion that the state was preventing the gas companies from drilling. But, notes Hurd, “While defendants submit evidence demonstrating that horizontal drilling combined with HVHF is the only commercially viable method of production in the Marcellus Shale and drilling using conventional methods is impractical,"[m]ere impracticality . . . is not enough to excuse performance." The gas companies “…contracted for access, exploration, and the right to drill for a set period of time.” Not for a specific technique or formation.

This decision brings a sigh of relief to more than 50 landowners in Broome and Tioga counties who were trapped in leases that should have expired years ago.

You can read Judge Hurd's decision here. Read previous posts about the force majeure cases here.

Drilling near Nuclear Reactors gives new meaning to "Energy Boom"

Chesapeake Energy has a permit for hydraulic fracking just one mile from the Beaver Valley Nuclear Power Station in Shippingport, PA. That’s about 30 miles northwest of Pittsburgh.

The big question is whether blasting away at Marcellus shale might cause a different sort of energy boom at the power station.

The PA Department of Environmental Protection told the press that there are no “required setbacks” specifically related to drilling distances from nuclear facilities. On the other hand, they know of no other well located near a nuclear facility. And the Nuclear Regulatory Commission doesn’t seem to have any guidelines about this matter, either.

One concern is the potential for seismic activity related to injection wells used to store Marcellus drilling wastes. Not a concern now, say the drillers – because this is a gas well, not an injection well. But just three years ago Chesapeake was looking to turn an old gas well in Pulteney, NY into an injection well.

Ever since the earthquake that hit Japan, and the ensuing damage to the Fukushima reactor, seismic activity has been high on the list of “things we oughta be concerned about” for the nuclear facilities managers. As for the folks near Shippingport, PA, a 2010 NRC report found that the Beaver Valley Power Station was ranked the in the top five “most vulnerable” to earthquake damage in the US. Read more here.

Too much Gas + Low Prices = Lease Shenanigans

As gas prices fell, drillers headed west from the dry Marcellus shale region to Ohio where the gas is "wet". Gas containing ethane and propane was, for awhile, bringing in more cash. But now that market, like the gas market, is saturated, notes a report in the Pittsburgh Post Gazette. This might be what you'd expect from an industry that is mired in continuous boom-bust cycles.

So maybe it comes as no surprise that one of those companies - Chesapeake - is withholding royalty payments in blatant disregard of the leases they signed. In January the company notified Pennsylvania landowners of its intent to deduct the costs of production from royalty payments. Those costs range from 70 cents to $1 per 1,000 cubic foot (mcf) of gas produced. Given the all-time low gas prices, that means that some royalty owners have seen their payments slashed by 90 percent or more this year, notes a recent report in Bloomberg.

Which leads me to wonder why Governor Andy Cuomo would be in a rush to allow hydraulic fracturing into the Southern Tier of NY.

Chesapeake Foists Bad Leases (again) on NY Landowners

photo by Tim Ruggiero

Chesapeake Energy is at it again. They recently mailed hundreds of letters to landowners in the Tioga County Landowners Group, letters that contained a “Notice of Force Majeure” and an “Offer of New Lease”.

The force majeure letters should really be called “farce majeure”. There is nothing stopping Chesapeake from drilling in NY. The company could exploit Oriskany and Medina and any number of hydrocarbon-bearing layers. But they don’t want to; they have decided that the only thing worth drilling is Marcellus shale, and maybe Utica, and the only technology they can possibly use is high-volume horizontal hydraulic fracturing.

Then there’s their new lease terms: $500 per mineral acre with a 12.5% royalty – the basement bargain rate. Furthermore, these punitive terms make it possible for Chesapeake to extend the lease indefinitely.

“Chesapeake has been playing the game of holding by production or using delay rental payments to hold the leases in PA,” Nick Schoonover wrote to members of the Tioga County Landowners today. “This is a terrible lease with no serious money for years.”

Oil and gas attorney Chris Denton weighed in on the matter. The new lease is much worse than their old lease he said. Why?

• The new lease has an Arbitration Clause which, in their old leases, they are using to try hold our members into expired leases.   This clause is one of the more egregious provisions in the lease.
• The new lease specifically declares that Chesapeake does not have to drill, prevent drainage, develop or even market the gas during the lease term.  In other words they are effectively "warehousing the landowner".  If they don't drill, then there are no royalties.
• The lease gives Chesapeake the right of first refusal on any top-leasing or renewals.  How many offers is a landowner likely to receive if the offeror knows that someone can outbid him?  This provision takes away the landowner's right to better economic opportunities.
• The Chesapeake lease has an incredibly broad Force Majeure Clause, effectively allowing Chesapeake to extend the lease for a host of bumps in the road for them.  They even require the landowner to waive any damage claims against Chesapeake.  Chesapeake is currently trying to tie up your lease with a weaker Force Majeure claim.  The new clause is worse for the landowner.
• The lease allows gas storage, which likely will effectively bar the landowner from developing and recovering any gas or oil if gas is stored.
• There are no surface rights protections of any substance.  There is no base line water testing.  There are no restrictions on open pits or on site waste disposal.  There are no drainage protections and no pipeline specifications.  There is no audit provision and the royalty is paid after deductions.
• The lease allows Chesapeake to construct compressor stations on the property and to place as many pipelines as it deems convenient.  Also this lease gives Chesapeake exclusive rights to your property, preventing you from measuring or testing your own gas and oil.
• Worst of all, Chesapeake's lease can never be forfeited by them for violating any terms in the lease.  You can never evict them for violating any terms of the lease.  In other words, they can stay there no matter how many times and no matter how large the violation occurs.

“This is a lease that no one should sign,” says Denton. “There is not one good element in this lease for the landowner. It shifts the economic risks and burdens to the landowner when they should instead be borne by Chesapeake.”

3355 Marcellus violations in four years

Yesterday the PennEnvironment Research and Policy Center released a new study documenting 3,355 violations by gas operators in the Marcellus over the last four years. Between 2008 and 2011 energy companies drilled a total of 4,596 new wells in Pennsylvania and, says Erika Staaf of PennEnvironment, they “are either unable or unwilling to comply with basic environmental laws.”  

The research and policy center has called on state leaders to halt additional shale gas drilling until operators can demonstrate that they can extract gas in a manner that is safe for the environment and public health – “a threshold that, to date, they have not met,” says Staaf.

As if to underscore the gravity of this situation, today the PA Department of Environmental Protection (DEP) announced that the agency has fined Chesapeake Appalachia $565,000 for multiple violations:

• $215,000 for a March 2011 incident in West Branch Township, Potter County, where sediment discharged into a stream classified as high quality
• $190,000 as part of a consent order and agreement after the operator lost control of a well head during hydraulic fracturing of the Atgas 2H Well in Leroy Township, Bradford County, on April 19, 2011. Fluids from the well mixed with rainwater and entered a nearby unnamed tributary to Towanda Creek and Towanda Creek itself.
• $160,000 as part of a consent order and agreement resulting from violations in 2010 of impacting a wetland and allowing sediment to enter Sugar Creek in North Towanda Township, Bradford County.

You can download the Chesapeake consent orders here

You can read PennEnvironment’s study here

Shale Gas Over-hyped, Under-performing

Over-exuberance about the promise of shale gas is overshadowing the falling profitability and declining productivity of shale gas wells. That’s the message Deborah Rogers is bringing to communities scattered across the Marcellus shale region, and she should know – she’s been analyzing productivity of Barnett shale gas wells around her home in Fort Worth, TX.

Rogers, a former stockbroker for Merrill Lynch, has served on the Advisory Council for the Federal Reserve Bank of Dallas since 2008. She became concerned when the numbers didn’t add up: estimates of reserves didn’t match the actual production-generated tax revenues that Fort Worth and neighboring municipal governments received.

When she started digging into the data she learned that less than six percent of Barnett shale wells met “minimum economic thresholds”. The industry claims that natural gas offers a cheap and abundant energy source that will last 100 years. But data from the Barnett shale gas play show a well failure rate that is increasing over time, says Rogers.

Even as companies drill more wells, the amount of gas produced has been declining. She points to audited records from the City of Fort Worth: in 2008 the city took in $50 million in income from wells drilled on city-owned properties. By 2010 the income was $38 million – based on four times as many wells.

Geologists are finding shale gas reserves to be less homogeneous than once thought.

Unfortunately, all those wells bring heavy environmental and health costs to the communities. Air quality data collected by the Texas Commission for Environmental Quality (TCEQ) show high levels of  two carcinogens, benzene and formaldehyde. Air tests also measured hydrogen sulfide, a potent neurotoxin, at levels 400 times what is usually found in urban air. TCEQ’s conclusion: gas drilling “contributes more air toxins than all cars, trucks and airplanes in the region combined,” says Rogers.

The gas industry continues to promote the conversion of vehicles and power plants to natural gas, claiming this domestic source of energy will result in a cleaner environment. At the same time they are quietly pursuing an export market, seeking permits to convert import terminals to expert terminals. This is happening just as American companies are looking to bring production back home, says Rogers. The promise of cheaper energy costs has car manufacturers ramping up production of gas-powered vehicles and other manufacturers bringing their factories back to the US.

It’s a squeeze play, Rogers says. “It’s only a business transaction for the companies. Their job is to find, extract and sell minerals to the entity paying the highest price.”

But, hey – if you don’t believe her analysis you just have to look at the recent news from the US Energy Information Administration (EIA). On January 23 the agencylowered its estimates of recoverable shale gas reserves in the US and slashed their estimate of  Marcellus reserves by 66 percent. That same day Chesapeake announced that they are cutting drilling andproduction of gas – due to low prices. 

You can read more about what Rogers said here.