Drilling Down

Lawsuit Claims Chesapeake Withheld $30M in Royalties

YOUNGSTOWN, Ohio – Two Columbiana County parties and a resident of Summit County have sued Chesapeake Exploration LLC, alleging that its affiliates owe them more than $30 million in unpaid royalties.

Zehentbauer Family Land LP, Hanover Farms, and Evelyn Frances Young filed the complaint as a potential class action suit in Columbiana County Common Pleas Court Oct. 26. The lawsuit alleges that beginning in 2011, Chesapeake Operating, a division of Chesapeake Energy Corp., breached its lease agreements with the landowners by selling oil and gas at below-market value while assessing improper deductions from their royalty checks.

The deductions, say court papers presented as evidence, were related to costs incurred through gas gathering, processing, dehydrating, transporting, marketing, compression, third-party deductions, system fuel and other operations.

However, these charges were not itemized on the royalty payments and violate the leasehold agreements, plaintiffs plead. Chesapeake, the complaint says, was not entitled to deduct any costs from royalty payments other than taxes and fees imposed by the government.

Also named as defendants are CHK Utica, Total E&P USA, Pelican Energy and Jamestown Resources.

Calls to Chesapeake’s office in Oklahoma City seeking comment were not returned.

Plaintiffs also allege that Chesapeake sold gas produced from wells drilled on their property at below-market value to an affiliated company, Chesapeake Energy Marketing LLC. Chesapeake Energy Marketing then resold the gas to a third party at market prices, court papers say.

Since production was sold from the wellhead at below-market value, it reduced the royalties paid the landowners, the complaint says. “Through this scheme, defendants breached a direct contractual duty, including an express[ed] covenant to market, to: either sell extracted commodities at the going market rate for those commodities or to engage in arms-length transactions to third parties,” documents say.

By selling oil and gas below market value, plus assessing improper deductions, plaintiffs say, Chesapeake underpaid the landowners by at least $30 million.

The Zehentbauer and Hanover Farm leases, in Columbiana County, call for 17.5% royalties on total gross production from the wells, documents say. Zehentbauer Family LP leased the mineral rights of nearly 656 acres to Chesapeake, which drilled the land, while Hanover Farms leased 296 acres to Chesapeake, which drilled a well on that property, according to court papers.

Young, a resident of Summit County who owns land in Carroll County leased to Chesapeake, was to be awarded 20% royalties on total gross production, documents state.

The number of lawsuits in the region against Chesapeake could grow because the company incorporated similar language in leases it signed with more than 1,000 landowners across Columbiana, Stark, Belmont, Carroll, Harrison, Jefferson and Tuscarawas counties.

Common Pleas Judge C. Ashley Pike will rule on whether the case can proceed as a class action suit.

Chesapeake is the most prolific driller in eastern Ohio’s Utica shale with at least 674 wells drilled. Most are in Carroll County.

Chesapeake Energy is no stranger to litigation relative to royalty disputes.

In September, Chesapeake was hit with a class-action lawsuit in which 25,000 landowners in Texas accused the energy giant of withholding more than $1 billion in royalties.

Earlier that month, the company and landowners in Texas’ Barnett Shale reached an out-of-court settlement related to allegations of unpaid royalties.

Published by The Business Journal, Youngstown, Ohio.