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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Whoa, Steve!  You sort of went off on a tangent there.  This thread relates to landowners who already have leased their land for NG drilling and production.  These people are not holdouts.  Not at all.

But then along comes Chesapeake, after all parties have agreed it's a done deal and agreed on the terms of that deal as written into the lease, and wants to alter the deal.  And that unreasonable demand to alter the deal is made beneath threat of "going around" the leased  landowner.  That's the situation I was addressing in my post.  My post is pursuant to this entire thread.

In my view, Chesapeake before buying up existing leases has the option to speak with landowners who are (for Chesapeake at that point) prospective Lessors.  If those landowners are unwilling to re-write their leases, Chesapeake needs to butt out.  You see, Steve, landowners like myself don't take kindly to strong-arm tactics and threats.  Sorry.  It's just not how we roll.

And BTW Steve, strictly FWIW:  I happen to be a leased landowner.  I consider it a blessing from Almighty God Himself that I'm not leased to Chesapeake.  I look upon that company as being the worst of the worst.  Personally, I hope I never have anything whatsoever to do with them.  I regard Chesapeake as being a company rotten at its core.  And let me assure you I'm grateful to be leased and I do not look upon other gas companies that way.  Chesapeake's pariah reputation amongst landowners has been earned over many years and is well deserved.  They're a bunch of skunks.  Pursuant to what I wrote earlier, in this instance they are (in effect) threatening leased landowners unwilling to knuckle under with theft of their gas!!  And that's a crock of crap!

 

Tangents are my specialty... sorry if I went astray on you there!  If you are already leased and a company were to hold out the enticement of your being included in a unit in consideration of your willingness to agree to a lease amendment, you really aren't in a drastically different position than not being leased at all.  You are still being asked to sign a document in exchange for being included in a unit.  The logic isn't much different.  You certainly aren't obligated to amend your lease but then again, the gas company also isn't obligated to include you in their unit. 

And FWIW to you... being leased to Chesapeake is marginally better than not being leased at all.  Assuming there is absolutely nobody else willing to lease your property!  :)

Steve

Yeah, OK.  I'm good with that.  You wrote:

"You certainly aren't obligated to amend your lease but then again, the gas company also isn't obligated to include you in their unit."

I'm good with that for the most part.  I mean, when I signed my lease my gasco never promised to include me in a unit.  They have the right, but not the obligation, to do so.  Of course if gasco does not unitize me and market my gas then they have paid out a bonus for nothing.  I made certain to negotiate for a high enough bonus to where the gasco would not want to lose their investment.  Sure wish all my neighbors had done this.

The thing that gripes me most about CHK, though, is the threats.  If they fail to unitize and just leave my gas in place . . well . . that's my problem.   But when they frack my shale and steal my gas . . well . . that stinks.

Chesapeake does have a tendency to push their weight around, and just so you will know, their intimidation isn't limited to their dealings with landowners.  Other operators are equal opportunity targets!  It's all about leverage, and being the biggest operator out there generally means you have leverage.

Yes, I would concur that leaving your gas in place does stink... especially when you have wells that surround you and your parcel alone would never support a well all by itself.

I could not agree with you more Steve about CHK....I was orginally signed with Range back in 2008 had gotten everything I wanted in my lease was very happy with my bonus and was looking forwared to having Range drill on my land but 1 year ago Range flipped some leases with CHK and one of them was ours I was so disappointed but I understood why they are working heavy in Southern PA and we are up north in pa. About 3 months ago the CHK landman called to change a few things in my lease with Range one was to take out the Pugh Clause and add to our unit size 640 to a 1280 at which I told him no & no. I liked what I worked for and I want to keep it.  He tried to tell me they will drill around me yea yea yea I told him don't try and scare me. Knowing he could do nothing but threaten me he has not called me back. My lease expires in 8 months and if no drilling happens I will feel better I know someone else will pick up my land in time and then I won't have to deal with them. One more thing about this company I just found out I have alot of acres and since the flip they have give 26% of the lease to Statoil 33% to Anadarko 16% to Mitsui (japan company)  that leaving only 25% for CHK and I'm damn sure they got some big money for that It just makes me sick they why they do business

Penny,

Chesapeake didn't exactly flip your lease.  The Joint Venture with Statoil is a longstanding deal that involved literally every single lease that Chesapeake acquired in the Marcellus.  Statoil did pay a "promote" on the acreage, but at the end of the day, their promote on the acreage wasn't as profitable as you would expect, since it covered all the acquisition costs (land/title work, recording fees, etc).  As for Anadarko/Matsui... they are in an AMI (Area of Mutual Interest) with Chesapeake/Statoil and they all contribute leases and cross convey to make ownership equivalent.  There was no money changing hands with regard to Anadarko/Matsui. 

Thanks Steve I still would like the lease to expire because I don't care for their business practices at all. Question for you if they are all intertwined with each other does that give them right to unit size seperate companies land? I own 320 acres and not alot of land is leased right by me there is land over 1 mile from the farm and I felt as if I was kinda worry free about being put in a larger unit to hbp as my lease expires soon  Thanks

 

The lack of any setback requirements in PA presents a huge problem to landowners.  All other states enforce a setback of hundreds of feet for a horizontal well from the edge of the production unit or from land not leased.  This provides some protection for landowners in adjacent units and not yet leased landowners that their gas will not be taken without any payment.

The Conservation Law in PA is what provides this and it also has provisions for forced pooling.  The drillers could have this law apply by simply checking a box on the drill permit application.  They would get forced pooling but they would have to comply with the rest of the law which includes setback requirements and rules for forming production units.  They would much rather have the present situation where they can do anything they want.  My personal feeling is that this was a trade for the impact fee - go ahead and charge us a fee, but no laws about setbacks and units.  The state gets their money and landowners pay.

    Furthermore the state of PA claims that the land under streams is public land and requires a gas lease.  Yet here in Bradford County many production units include land under Wyalusing Creek, Wysox Creek, Towanda Creek and Sugar Creek to name a few, and nowhere in the unit declarations is this land mentioned.  We are talking about thousands of acres here with many millions of dollars going to DCNR.  If the state of PA is giving away the public land under the streams, I suspect it will never do anything to help private landownewrs

John,


That's a new one on me (your statement that PA has forced pooling).  I genuinely wish that were the case but I fear you are mistaken on that fact.  As for State ownership of streams.  I am fairly sure that is the case for streams and rivers that are classified as "navigable" versus "non-navigable" with the latter category being owned by the adjoining property owners (to the center point of each stream/river).

John,

Just so you will know with some certainty, I have uploaded the PADEP Well Permit Application Form for your review.  The provision you generically referred to is at the bottom of the first page and it poses the question "Will the well be subject to the Oil and Gas Conservation Law"?  This isn't something that an operator gets to choose...either the well is or is not subject to the conservation law.  If the well isn't going to be drilled to the Onondaga Formation then it is not a "Conservation Well".  Even if the Marcellus formation were to be below the Onondaga formation (it isn't) the line below the first question simply asks... is the location in an area subject to a spacing order.  A spacing order does not confer "forced pooling rights" to an operator.

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I have to agree with you, Steve.  My best understanding is that there is no forced pooling of any kind in PA.  I also believe fracking of unleased land, either totally unleased land or land leased to another gasco, is legal here.  There is no setback requirement, at least not for Marcellus shale drilling.

This is the dilemma posed by the OP when the concept of "drilling around" comes up.  Sure, CHK can "drill around" a person's land.  But they still have access to that person's gas without having to pay for it.

I was told by a Pa Game Officer in the '80's that all streams are governed/owned by the State. If you have a stream running through your property anyone can legally walk/boat in the stream through your property and the landowner can't stop them. Now he didn't specify how big the stream had to be.  Of course it was a State official, so maybe he didn't really know the law!...and I'm not joking in saying that! IT would be interesting to find out the truth nowadays.

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