Utica Pipeline Hookup Halted by Legal Dispute
KENSINGTON, Ohio -- One thousand feet, a landowner and now a U.S. District Court stand in the way of Chesapeake Energy Corp.’s plan to connect a finished Carroll County well with a proposed $900 million network of pipelines, processing plants and compressors under development in eastern Ohio.
“They’re bullying us,” Joseph Coniglio says of Chesapeake, the second-largest natural gas producer in the United States. Coniglio, his wife, Christine, and his brother Frank own 570 acres that straddle Carroll and Columbiana counties near Kensington, an area that’s emerged as the most productive source of natural gas liquids from the Utica shale.
It’s also the area where a former subsidiary of Chesapeake, Chesapeake Midstream Partners L.P., now owned by Global Infrastructure Partners, and M3 Midstream/Momentum are looking to construct a massive natural gas processor that’s part of the $900 million infrastructure project.
“All we’re doing is just standing up for our rights,” Coniglio states.
On July 9, a Carroll County Common Pleas Court issued a temporary restraining order that halts for 14 days the construction of a pipeline across 1,000 feet of Coniglio’s property, which leads to a completed well on his land. Without this connection, the well can’t pump natural gas to compressor stations, and then to larger lines where it’s transported to processing plants across the country.
Coniglio says his lease stipulates that neither Chesapeake nor any of its subsidiaries or contractors has the right to build a pipeline without the consent of the landowner. In 2008, the Coniglios signed a lease covering 63 acres with Anschutz Exploration Corp., and that lease was then assigned to Chesapeake.
He also contends that a subsequent surface use agreement is not only invalid, but contains a provision that prohibits Chesapeake from constructing a pipeline to its well. “That surface use agreement does not give them the right to do a pipeline,” Coniglio asserts.
Notwithstanding, Chesapeake’s pipeline contractor, CBC Services Inc., started unloading pipe at the site July 8, a Sunday. Coniglio then alerted his attorneys, who on Monday requested and were granted the temporary restraining order. That afternoon, the sheriff presented the contractors with the court order and the company complied.
The case has since been moved to U.S. District Court in Akron because CBC Services argues that value placed on the project exceeds $500,000, and that the company could lose investments, revenues that “far exceed $75,000,” according to court papers.
On July 12, about 1,000 feet of pipe were placed across a curved driveway leading to the well pad. The pipeline would then tie into another section under construction across Mecca Road on land owned by another party.
The sticking point, Coniglio says, is the absence of a separate agreement signed with Chesapeake regarding the construction of a pipeline. Often, pipeline leases are signed in addition to initial lease agreements that cover royalties and bonus payments, and some landowners in Carroll County have received as much as $15 a foot in exchange for their easement rights to pave the way for pipeline construction.
“If Chesapeake wants to make us an offer, let’s see it,” Coniglio says. “We’re open. We’re not trying to stop the pipeline or progress. But we will not do it for nothing.”
Chesapeake contends it has every right to construct a pipeline through Coniglio’s property, according to documents filed in Carroll County Common Pleas Court. Chesapeake alleges that the Coniglios’ claims for relief are “barred by the provisions of the oil and gas lease and the surface use agreement between plaintiffs and Chesapeake.”
However, Coniglio points to an addendum in the lease signed with Anschutz that states, “No rights to use the surface of the leasehold to drill, maintain or operate wells, construct roads and/or install pipelines and related facilities are granted to the lessee,” meaning Chesapeake.
Also, in a letter dated June 27 to Chesapeake attorneys, Coniglio attorney Gary Corroto states there are no provisions in the surface-use agreement that authorize Chesapeake or its contractors to construct a pipeline.
And, he contends that the surface use agreement covers just 11.4 acres, which excludes the land Chesapeake has pegged for the pipeline.
Coniglio adds he was never provided with a copy of the Anschutz lease and was unaware of the precise language in the agreement that pertains to the 63 acres in question. Thus, when construction was begun on the well, Coniglio didn’t think he had the power to stop it.
“When they decided to drill, we didn’t get a copy until two or three days later,” Coniglio recalls. “They had already constructed the driveway and the pad.”
Conigilio and his brother have signed seven separate leases that cover the entire 570 acres. Four were with Anschutz, two others were signed through the Associated Landowners of the Ohio Valley group with Chesapeake, and another with Eric Petroleum, a deal in place before the Coniglios purchased that land.
The Anschutz lease called for bonus payments of $12.50 per acre for four years and 12% royalty payments. The Coniglios and 25 other landowners have sued Chesapeake and Anschutz in a separate suit in Carroll County, asserting that their leases stipulate that they have the right to annul the agreements and consider a better offer from a third party.
Some landowners in the region have received upfront payments as much as $5,800 an acre and 20% royalties on production.
“We’re not trying to change something,” Coniglio says. “If we’re going to abide by the lease, then let’s abide by the lease.”
The Coniglio well could become a highly productive unit for Chesapeake, Coniglio says. One well has been drilled, and he says the company intends to drill five more on that well pad. “They’ve got a permit to drill a second one.”
Coniglio’s brother Frank says that the well is already producing some oil. “I’ve seen them fill at least three trucks with oil,” he says.
Pipelines are beginning to stretch across Carroll County and portions of Columbiana County as more wells start production. In April, Chesapeake reported that nine of its wells were online, five of them commercially. In May, another Chesapeake well, the Sanor well in Columbiana County’s Knox township, started production.
The Coniglios aren’t the only parties suing Chesapeake. Hundreds of landowners in Columbiana and Carroll counties have cases filed in the county courts requesting their leases be declared invalid.
In Harrison County, Kenneth Buell has requested a judge issue a permanent restraining order against Chesapeake and order the company to discontinue operations at what is today the most productive well in Ohio.
Buell is suing Chesapeake, alleging that the company has no right to the surface use of his property or to mine or extract minerals from adjacent land.
These lawsuits notwithstanding, the potential of oil and natural-gas reserves in the Utica shale stands to attract billions of dollars worth of pipeline, processing and infrastructure projects over the next decade as evidenced by the robust interest from several major companies.
Global Infrastructure, M3 Midstream and EV Energy Partners plan to construct their $900 million pipeline and processing system to connect gathering lines to wells throughout Columbiana, Carroll and Harrison counties. The pipelines will transport natural-gas liquids to two larger processing plants, one in Kensington in southern Columbiana County, the other in Harrison County.
MarkWest Energy Partners, based in Denver, is targeting Harrison and Noble counties in southeastern Ohio and is investing $500 million into a pipeline and processing network there.
Other midstream companies are also getting into the Utica play, a play that specialists say remains in its infancy.
On July 10, Houston-based Hilcorp Energy and NiSource Inc., the parent of Columbia Gas of Ohio, announced its intention to construct new pipelines across northeastern Ohio and western Pennsylvania and a processing center in Ohio, requiring an initial investment of $300 million.
One day later, Caimen Energy II, Williams Partners LP, EnCap Flatrock Midstream and Highstar Capital announced a joint venture to develop an $800 million crude oil and natural gas liquid gathering and processing network in eastern Ohio and northwestern Pennsylvania.
“The idea is to develop the midstream infrastructure within the Utica shale,” says Jeff Pounds, spokesman for Williams Partners. Exactly where these new processing plants or pipelines would run is speculative at present. “As this goes along,” he continues, “as the JV puts together commercial deals, and what type of infrastructure will be required, we’ll get more specifics.”
For families such as the Coniglios, dealing with these larger energy interests comes at a price, they say.
“They’re a big company,” Coniglio says of Chesapeake. “They don’t get their way. So they’re just going to push their way.”
EDITOR'S NOTE: This story was first published in MidJuly edition of The Business Journal. CLICK HERE to subscribe.
Copyright 2012 The Business Journal, Youngstown, Ohio.
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