Chesapeake Energy Corp. CHK +2.41% is pushing Ohio landowners to accept revised lease contracts that would help the cash-strapped driller save money while holding on to its prized oil and gas fields.

The company's actions, documented in scores of property and court records, aren't the first time that Chesapeake has tried to change the terms of lease deals, or walked away from them. Since 2008, more than 100 lawsuits have been filed across the country by landowners, who claim the company breached contracts. In some cases, settlements have been reached, in other cases the litigation continues.

Ohio Department of Natural Resources

The company doesn't dispute that it has sought to renegotiate leases in Ohio. In cases in other states where Chesapeake has walked away from deals, it contends that it had the contractual right to do so.

Chesapeake, the country's second-largest natural-gas producer, has spent about $2 billion to lease the mineral rights to more than a million acres—about 5% of Ohio's land mass—in a bet that Ohio's Utica Shale fields will become a major oil producer. The leases contain deadlines by which the company must drill wells costing millions of dollars apiece or give up rights to the property.

Facing a cash crunch and mounting pressure from activist shareholders to trim spending, Chesapeake is seeking contract changes that would allow it to drill fewer wells while keeping the leases. It is generally required to drill at least one well on a specified group of properties known as a unit; it is trying to bundle leases into much bigger units, which will allow it to drill fewer wells but retain rights to more acreage

The bigger units mean that each landowner's stake of any oil or gas produced is smaller, but they could potentially share in production from more wells.

Chesapeake's agents tell landowners that they will be shut out of the oil and gas boom if they don't agree to the changes, according to landowners interviewed by The Wall Street Journal, which reviewed more than 100 property records in Ohio filed over the past year detailing the changes.

The company says the changes it seeks are minor and that most landowners have been amenable to them.

It says that many of the leases it acquired in Ohio were negotiated by other companies, some going back more than 20 years, and are ill-suited for the horizontal wells needed to extract oil and gas from shale rock; it acknowledges, however, that it stands to save money by combining leases into units that cover two square miles, at least twice the size of most existing units.

"Our objective is to employ the unit size that takes full advantage of breakthroughs in technology, and creates efficiencies in the use of capital," said Michael Kehs, a Chesapeake spokesman. Bigger units, he said, improve landowners' odds of sharing in a productive well.

Chesapeake carries significant clout in Ohio's rustbelt, where some landowners are eager to begin receiving royalties. More than 100 landowners in Carroll County alone have accepted the lease amendments so far this year, property records show.

"They've brought some industry to an area that's definitely needed it," said Byron Shankel, a farmer in Carroll County, southeast of Akron.

Others, though, are rankled.

"It kind of makes you mad," said Karen Hampton, who owns about 10 acres in Carroll County and refused to be part of a larger unit. She is one of eight landowners who last month sued Chesapeake to cancel their leases, alleging the company's agents, known as land men, warned them their property would become a "hole on the map" if they didn't agree to change their leases.

The company declined to comment on litigation. The company, in its legal response, said the plaintiffs failed to allege the specific circumstances in which the "hole on the map" comment was made, and that it was legally insufficient to support a charge of fraud. Chesapeake says in court filings that landowners are looking to cancel valid leases to pursue richer offers.

Chesapeake has recorded more than 3,000 leases in Carroll County since late 2010.

Joel Gingerich and his wife leased their 11 acres, which gave them a 7% stake in their original 160-acre unit. Their interest in the new 1,280-acre unit would be less than 1%.

"We all held out a little bit," he said, speaking of his neighbors. "In the end, I think most of us signed. They said if we don't sign, they'll just go around us, and we'll miss out altogether."

Chesapeake's flood-the-zone approach to leasing has helped the company capture coveted oil and gas fields across the country. But the strategy also saddled it with expensive drilling obligations: By the end of last year, Chesapeake had to drill to preserve the leases on more than half of the 15 million acres it controls, an area three times the size of New Jersey.

With the plunge in natural-gas prices, the amount of cash Chesapeake expects to generate from operations this year is less than half the amount it plans to spend on drilling and leasing. The shortfall has prompted the company to try to sell as much as $14 billion of its assets. It has slashed its annual land-leasing budget to $1.6 billion from $4.8 billion last year.

Amid the global financial crisis in the fall of 2008, Chesapeake tried to delay or walk away from lease deals to conserve cash. The moves triggered lawsuits in the Haynesville Shale in Louisiana and Texas.

A federal judge in Houston ruled last week that Chesapeake must honor a contract to buy leases from three Texas landowners for more than $100 million, a deal the company refused to close in 2008. Chesapeake says it will appeal. The company is also seeking to overturn a $22 million judgment over a 2008 deal on leases in east Texas.

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As Steve has pointed out - in PA the Marcellus is not sibjected to forced pooling.

By virtue of PA OIL AND GAS CONSERVATION LAW of 1961, PA allows forced pooling for the Onondaga Limestone and below. Fortunately for many, The Marcellus Shale lies directly above the Onondaga Limestone.

Doubtless, the O&G industry would very much like to have "forced pooling" for the Marcellus.

The day that forced pooling for the Marcellus comes into play in PA would be a sad day for those who think that they should have the right to decide with whom they wish to associate.

The O&G Industry would love to have the "Club" of forced pooling with which they could bash the landowners.

This was discussed at length a while back, please refer to:

http://gomarcellusshale.com/forum/topics/forced-pooling-do-we-have-...

 

JS

 

Now Jack... those of us in the business prefer to regard pooling as a "tool" as opposed to being a Club to bash landowners with!  But as they say "guns don't kill people, people kill people" and the same can be said for pooling.  In the right hands, and used for the proper purposes it can work for everyone, landowners and operators.  For example, say your crotchety old neighbor refuses to lease and that his property stands between you and a lateral that would otherwise reach your property.  The operator cannot extend the lateral if your crotchety neighbor refuses to lease and potentially you never get to receive royalties from any production, thanks to old Mr. Crotchety. 

RE: " those of us in the business prefer to regard pooling as a "tool" as opposed to being a Club to bash landowners with!"

When an Operator knows that he can "force' a landowner into a pool, the Operator has little impetus to offer the best deal - he will simply push the standard boiler plate lease.

When the Landowner knows that the Operator can force the a landowner into a pool, the Landowner loses the ability to bargain beyond the crappy standard boiler plate lease.

I prefer to stick to the opinion that the "A man's home is his castle."

Fror example, say your crotchety old neighbor refuses to lease and that his property stands between you and a lateral that would otherwise reach your property.  The operator cannot extend the lateral if your crotchety neighbor refuses to lease and potentially you never get to receive royalties from any production, thanks to old Mr. Crotchety.

Well it is old Mr. Crotchety's right to do with his property as he sees fit.

If a private company is given the right to force an individual to surrender his property, that is a major erosion of the liberties of American citizens ... this goes far beyond Eminent Domain (which itself has been abused, as of late).

As one of those in the business, would you personally sign on your land the first standard boilerplate lease shoved in front of you?

All IMHO,

                JS

 

 

Actually Jack... a pooling does not impose a lease, nor lease terms upon a landowner.  In Oklahoma for example a forced pooling only provides for the drilling of a single well bore and it does not result in a "lease".  A forced pooling only provides for a lease bonus to a landowner which corresponds to exactly what was paid to the adjoining landowners and a royalty which also corresponds to what was offered to adjoining landowners...no more, no less.  If an operator wishes to drill an additional well in the drilling and spacing unit...the operator files another pooling and pays another bonus to the landowner. 

So, in your world it is OK for a crotchety old neighbor to impose his desire to not see a well drilled upon you... is that truly any more equitable to allow him to impose his will upon you should you choose to desire to see a well drilled than the other way around.  I personally fail to see the equity in that result. 

RE: "In Oklahoma for example a forced pooling only provides for the drilling of a single well bore and it does not result in a "lease"."

That may be either the Law or how things work by regulation or custom in Oklahoma.

It would seem that the problem is the Marcellus and Utica gold rush has resulted in a bunch of dumb Okies heading North - kind of like reverse Carpetbaggers.

Toto, we are not in Oklahoma anymore.

What is the first thing that two Landmen say when they first meet?

.......... What part of Oklahoma are you from?

If someone from Ohio (where I believe they do have forced pooling) will interject - in Ohio the landowner subjected to forced pooling gets the minimum 1/8th royalty and is hit with the boilerplate lease. In Ohio I do not believe that the Operator is required to provide "for a lease bonus to a landowner which corresponds to exactly what was paid to the adjoining landowners and a royalty which also corresponds to what was offered to adjoining landowners...no more, no less."

I am happy to have someone knowledible correct me if I am wrong wrt. Ohio. In any case, what might be the case in Oklahoma has no bearing on either the Marcellus or Utica.

Again, we are not in Oklahoma anymore.

I hope that none such rule is imposed upon PA Landowners; we like to personally decide who we associate with. I feel sorry for Ohio Landowners, forced pooling is a bit like "forced sex" = another form of rape.

RE: "So, in your world it is OK for a crotchety old neighbor to impose his desire to not see a well drilled upon you..."

Please show me where I made such a comment; as I do not recall saying anything like that, nowhere have I said that anyone (including a neighbor) has the right to tell me what I can or should do on my property (as I have no right to dictate to others).

In my world it is OK for a crotchety old neighbor to impose his desire to not see a well drilled upon his land. I see that as related to verbiage in such documents as the "Bill of Rights". Sorry, it is just an American thing - I never really was attracted to the dictates of either Socialism or Communism.

If through the exercise of his rights, I lose out - so be it. I may deeply regret his decision, but I respect his right to determine what he considers to be in HIS best interests with regards to HIS property. Just as I would expect him to allow ME to decide what is in the best interests regarding MY personal property. Sorry, it is just an American thing - I never really was attracted to the dictates of either Socialism or Communism.

All IMHO,

                 JS 

Jack,

When confronted with a discussion/opinion that differs from your own why do individuals on this forum typically digress into making fun of or denigrating industry people that happen to come to your state for the purposes of furthering the goals of an industry that is poised to reinvigorate your entire rust belt?  I have to say "I don't get it".  Is it the fact that we have a southern drawl?  Is it the fact that we may have contrary views?  It's not exactly a "Hun invasion".

I'm not sure why you quoting what happens in Ohio as being any more applicable to PA than Oklahoma rules and regulations are, but in response I suppose I could say that Toto...we were not talking about Ohio either.

I never stated that you said it was OK for your crotchety old neighbor to impose his desires not to see a well drilled, I merely provided you with a real life example of how your neighbor could in fact end up precluding your land from being drilled and asked if you found that any more palatable than an oil company being able to make a decision that forced a landowner into a drilling situation when he was opposed to it.  The obvious answer is that you do find it more palatable in the name of free will and democracy.  Taking it another step further I am assuming that if old Mr. Crotchety desired to open up a rehab clinic for convicted sex offenders that in your view of things what he does 1000 yards from a home you might have with two pre-teen daughters is probably OK too. 

Even our founding fathers had the foresight to understand that expressions of free will could impose unwelcome restrictions on the rights of others.  Its a stretch of the imagination to correlate pooling to Communism Jack. 

Here is a good link on forced pooling in Ohio. They have to prove they offered the land owner a fair lease, the dates, why it was rejected, the whole trail of why they are asking for a forced pooling. Also in Ohio an operator can only ask for this 5 times in a year so they better want what they want. It seems very frowned upon to ask for forced pooling here.
I cannot get the link to work here which is weird. Just google MANDATORY POOLING PROCEDURAL OUTLINE and the PDF file will be one of the first ones listed. Sorry about the link.

Hi Kathleen

To add a link that splits into two or more lines on the GMS forum, you have to press delete on a hidden character injected between each line.  

http://www.ohiodnr.com/portals/11/oil/pdf/mandatory_pooling_procedu...

and then add a enter after the last character of the link. 

...and Jack, just to make sure I understand your argument, you object to a private company forcing an individual to surrender his property (of course he really doesn't surrender it, he is given what sworn testimony has established is the "going rate for both bonus and royalty") but you are fine with a private individual forcing you to to surrender your right to see a well drilled on your own property which would pay you and your heirs royalties over the next 30 years???  And this is different HOW?

Perhaps I am missing something here, but that private company pays you for the privilege of producing your oil and gas... that crotchety old neighbor...he won't pay you a red cent for precluding you from being able to produce your own oil and gas rights. 

RE: "just to make sure I understand your argument, you object to a private company forcing an individual to surrender his property (of course he really doesn't surrender it, he is given what sworn testimony has established is the "going rate for both bonus and royalty")"

Using the situation in Ohio as an example; please direct me to the Ohio Law or Regulation that states that a landowner forced into a pool receives the "going rate for both bonus and royalty". Could you direct me to where the official "going rate for both bonus and royalty" is published? Also, what entity establishes the "going rate for both bonus and royalty"?

Yes, I do object to a private company forcing an individual to surrender his property.

RE: "you are fine with a private individual forcing you to to surrender your right to see a well drilled on your own property"

Please explain how a neighbor choosing not to lease their land is "forcing" me to do anything. Your argument that "force" is in play is a specious argument.

I have sufficient respect for my neighbor's rights that I would not wish to see them forfeited by fiat; for, once my neighbor's rights are stolen, who do they next come for?

RE: "Perhaps I am missing something here".

Yes, I do believe you are missing something.

The Private ownership of Land and O&G and Mineral Rights that exists in the United States is an inconvenience to O&G Operators.

And, what a neighbor might do (or not do) as a result of the Private ownership of Land and O&G and Mineral Rights that exists in the United States might indirectly affect me. But, I do not want someone to tread on my neighbor's rights - just as I do not want someone to tread on my rights.

Having all these "rights" in America can be a bit messy/complicated - but I do not want to give up a single one of them. World history suggests that one a right is lost, it is usually very difficult to subsequently regain that right.

 

All IMHO,

                 JS

 

Amen.

Unbeleivable the verbal ploys others take to justify  the taking of anothers property.

The detestable comment about a sexual offenders rehab as your neighbor, as if that is a comparable topic to a neighbors oil and gas rights. These are same tactics applied by many in the political parties today, trying to link unsavory acts to denigrate anothers position on a completely different topic. 

 

I think you competently and coherently addressed those specious and denigrating comments. 

Jack,

I couldn't even begin to proffer what the "situation" is in Ohio.  I've not done any research regarding pooling rights in Ohio, but it is my understanding that as presently structured it is virtually worthless in terms of a viable procedure.  I am, however, intimately familiar with the force pooling provisions in Oklahoma and have participated in the process many times.  There is no "published rate" for either bonus or royalty.  The governing authority in Oklahoma (The Oklahoma Corporation Commission) takes sworn testimony, which can be made available from either a landman who has taken leases on contiguous properties or from a landowner who can testify that his brother in law received "X".  The commission then sets what the company is required to pay to the reluctant property owner.

I already explained to you how it is that a neighbor could inadvertently impact your ability to see a well drilled onto your property and thus deprive you of royalty income.  Simply draw a straight line which represents a horizontal lateral.  Now draw a series of six boxes up and down the length of that lateral... those boxes represent individual tracts of land owned by different individuals.  Lets say that everybody but the guy that is the next to the last box has leased and is anxious to see a producing well drilled that will pay them royalties.  Now assume you are the final box at the end of the lateral.  Because the operator cannot "trespass" under or through the next to the last box, either the operator abandons the idea of drilling his lateral, or he drills it shorter than he would otherwise like... meaning he stops short of the next to the last box.  In this example, you, being the last box don't get a lateral underlying your property and thus you get excluded from the producing unit and derive no royalty income, even though you were agreeable and entered into a lease.  Laterals, and you know follow a specific orientation, and perhaps at some point in the future a lateral approaching you from the opposite direction ends up being drilled under your property and maybe it doesn't.  Under the first scenario, your crotchety neighbor, by choosing to enforce his property rights has effectively made a decision for you, one that you might not be too happy about.  All I am saying here is that there are pluses and minuses to pooling, and that if utilized to protect correlative rights (which is the stated intention of the Oklahoma version of force pooling) then the landowner who does have a desire to see his property developed isn't left at the mercy of his neighbor.  Again, force pooling isn't analogous to communism.  In a communist country you don't even have the right to own minerals under your property. 

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