Chesapeake Energy and Its Royalty Deduction Dilemma

In the last few years, property owners in similar circumstances to the Warren Plaintiffs began to take their claims to courts nationwide, citing significant deductions in royalties. In August 30, 2013, suit was filed against Chesapeake in the U.S. District Court for the Middle District of Pennsylvania (Demchak Partners Limited Partnership et al vs. Chesapeake Appalachia LLC, U.S. District Court for the Middle District of Pennsylvania, No. 3:13-cv-02289-MEM). Within hours of filing, Chesapeake's counsel submitted a proposed settlement order to the Court outlining a $7.5 million settlement with the Plaintiff class of property owners. The complaint alleged that Chesapeake’s calculation of royalty payments to property owners wrongfully “deducted costs for various “post-wellhead” activities, including costs for gathering, dehydration, compression, and otherwise placing the Gas onto the interstate pipeline system.” The Plaintiffs alleged that the cost deductions imposed on property owners were wrong in that “Under the express terms of the Pennsylvania Leases, Chesapeake is not permitted to deduct from Royalty payments to Plaintiffs and the Class Members the costs Chesapeake incurs to transform Plaintiffs’ and the Class Members’ Gas into marketable form.”

According to the settlement documents submitted to the Court, “To the extent Chesapeake and/or its Affiliates incur Post-Production Costs, Settlement Class Members will no longer bear one hundred percent (100%) of those Post-Production Costs on a pro rata basis but will, instead, bear only seventy-two and one-half percent (72.5%) of those Post-Production Costs on a pro rata basis actually incurred by Chesapeake and/or its Affiliates.” The settlement will bar Chesapeake from deducting certain percentages of fees from Plaintiffs’ royalty checks in the future. The wider implications of this settlement on Chesapeake’s future practices with regard to its royalty agreements under its leases are not known at this time. TheDemchak settlement will eliminate the imposition of post-production costs on Pennsylvania landowners doing leasing with Chesapeake. Additionally, the suit has spurred legislative action in the state to clarify the existing law on royalty payments in order to stop this practice. 

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Permalink Reply by Inchworm antenna on October 11, 2013 at 3:33am

When leasing it's important to consider PURR: (in no particular order of importance)

Property

Upfront Bonus

Royalty

Reputation

OK so the acronym is a bit corny, but how does Chesapeake's deductions make you feel about them being reputable when it comes to royalty payments?  In leasing far too many people just look at Royalty and Bonus only.  Which in the end could be a huge mistake.  I think Ohio Legislatures need to be paying attention.  I wonder if CHK will try similar royalty deductions in Ohio too.

Permalink Reply by Joseph-Ohio on October 13, 2013 at 8:53am
Seems to me that if the terms of the lease specify that the producer gets 80% of the value of the production and the landowner gets 20% and the leases say no deductions shall be taken from the landowner's royalty payments and there are post production costs that impact the value of the production that the landowner should receive 20% of the net value of the production and the producer 80% of the net value of the production plain and simple.

Just my opinion.

Good luck PA landowners.

Let's keep it out of Ohio.
Permalink Reply by Joseph-Ohio on October 13, 2013 at 11:41am
Also seems to me that the lease would necessarily specify who pays any post resource recovery / post production costs incurred to 'enhance marketability'.

Guessing here that the leases weren't clear in these regards and hence went to court with the described settlement agreed to.

Once again only my opinions / interpretations.
Permalink Reply by Joseph-Ohio on October 13, 2013 at 10:24pm
Also seems to me that the best way to avoid the issue would be for the lease to clearly spedcify that the producer (lessee) be bound to pay any 'market enhancement' costs that the producer (lessee) may choose and exclude the landowner from any such charges / costs.

All once again only my opinion on this.

Read elsewhere on these pages where landowners were successful in this regard.

Don't know if their lease agreements were with CHK or another, however.

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