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.

Views: 9700

Reply to This

Replies to This Discussion

RE: "The lack of any setback requirements in PA presents a huge problem to landowners."

PA OIL AND GAS CONSERVATION LAW of 1961 specifies a set back of 330 feet.

But, this only applies to wells drilled to the Onondaga Limestone and below.

For wells drilled above the Onondaga Limestone it would appear that the "rule of capture" might well apply.

But, nothing in PA law directly deals with the situation of frac trespass resulting from long horizontal laterals with multi-stage fracs.

My understanding is that (out of caution) most O&G Operators are NOT running Marcellus horizontal wells closer than 330 feet to a boundary.

Were I to learn of the intention of an O&G Operator to have a horizontal well drilled and fraced closer than 330 feet from my property boundary (and I was not part of the unit):

I would engage an Attorney to draft a letter to the O&G Operator informing them that (should they proceed) I consider them to be guilty of Subterranean Trespass/Frac Trespass.

By virtue of such a letter, I have established a position which might influence the Operator.

If the letter did not influence the Operator, it establishes my position and may come back to haunt the Operator should an adverse future Court determination be made.

All IMHO,

                 JS

It's not the job of landowners to bail out CHK and give them everything they want.  Landowners lived up to their end of the bargain, time for CHK to do the same.

I'd just hold off until gas prices go up again and convince my neighbors to do the same. There's more than one company out there to deal with.

Marcus ...WOW I don't believe I agree with you on this one .I don't believe in cutting any slack to any gas company .They don't when they want from the landowners .

This article was obviously written by a person who is ignorant of any aspect of oil and gas drilling.  The leases in question were taken at a time when horizontal drilling was unknown.   At that time, 40 acres were all that was needed to drill a well, using vertical drilling methods.  The driller typically drilled straight down to "tap" a reservior of oil or gas.  With the advent of the ability ro recoverer oil and gas from shale formations, utilizing horizontal drilling, larger-640 acre to 1280 units-are commonplace for efficiency and productivity.  Many of the older leases did not anticipate this, so there was no provision for unitization or pooling in the leases.  The Landmen are merely attempting to make a resource, that has no value today, productive.  There is nothing insidious in this at all.   By agreeing to add the ability to unitize and pool lands for production to existing leases, a company is attempting to produce and pay royalties to mineral owners who are presently getting nothing for their leases, and whose only compensation thus far has been the pittance paid as a bonus on the original lease.  This article is nothing more than a"hit-piece" on a company that has done more to help the economy of Ohio, Pennsylvania and West Virgina than anyone since Andrew Carnegie. 

Ken you could probably save money on your blood pressure medication by electing not to read some of the landowner posts here.  Inevitably it boils down to a them against us mentality because you're a bad guy when you try to pay them less than what they feel their property is worth.  Forget the fact that the lease bonus prices in some areas have exceeded what an owner could have expected to receive a few years back if he wanted to sell his surface and minerals.  You're still guilty of trying to rob them blind.  Forget the fact that in many other producing states oil and gas lease forms were no more than one, perhaps two pages in length (Producers 88) and didn't provide anywhere near the number of protections to property owners as do the 20 page leases that are popular in Appalachia.  And yet, we never heard anywhere close to the number of complaints we hear now.  The industry is perceived as though they are trying to pee in the landowner punch bowl.  There are a number of very fine people that live in PA that I have dealt with, but unfortunately they are outnumbered by people who act as though they have had the very life sucked out of them and you are there for no other purpose than to continue to make their lives miserable. 

Steve-You are a very astute individual.  

 

Thanks... and I am also apparently a Communist!  :)

 Been reading this battle of intellectual heavyweights and enjoying it from the sidelines as I didn't want to get caught in the crossfire. I don't believe that E & P companies are evil but they certainly play hardball. So there is nothing wrong with a landowner also playing hardball.  The trick is to know what the limits are so that the landowner can get the maximum value without pushing so far as to damage their value.

Many of these leases are older ones written when the landowner, the landman, nor the company itself could have allowed for the new technologies and how they affect leasing. Even leases that are only a couple of years old do not cover all possibilities. This is evidenced by the lease that Mike H holds that allows for 640 acre units. The companies now want 1280 acres as it is more efficient to drill 1280 acres from one pad.  This saves them money and causes less surface damage helping the landowners.  The down side is that the larger unit allows them to HBP more property with a single well.

When a company asks for changes that increases their financial return it is not unreasonable to ask for compensation in return. There are several considerations for the landowner and each must decide which options have higher priority and then try to attain them.


For some, an additional bonus payment may be tops. Be aware that you will not get a large bonus but perhaps $250 to $500/acre is reasonable.  Maybe not. You may not get any money. Maybe you could put in a clause that they must drill at least one horizontal well and include you in the unit within two years or then they have to pay a bonus rental fee. This would allow them to produce your property, which is the claim of companies asking for increased pooling units,  or require another company to do so if the first is just modifying leases to increase the value in a potential sale of leases. 

If you have more than 25 acres I would suggest you also insist on a Pugh Clause if the original lease did not have one. You may prefer to add restrictions like no compressor stations or no regional ponds. Maybe increase the setback from buildings.

In short, you can ask for any clause that getting a new lease would have. But you will have much less leverage so don't expect to get very many.  Prioritize your requests and then try to get the most important.

There have been several discussions on this issue on GMS.  Search in the search box at the extreme top right of the main page  to see some of these discussions.

Hey Jim,

 

Thanks for posting this reply as it applies to a whole lot of folks who may or may not have known that their land was HBP. 

 

In my case (and probably many others), the well currently producing is in a unit that does not include any of my property, but since there were no Pugh clauses back in 1961 (the lease is older than me!...barely), I am stuck with the terms of that lease.  The previous owners were still getting the royalty checks from the shallow well (about $15 a year!).  I will be getting them now but am waiting to hear from Sierra (who bought the deep rights) about renegotiating the unit size.

 

I only have 15 acres so not much leverage.  I hope I can get a little something in return for ammending the lease.  It would be nice if they threw me a little bone as a sign of good faith, perhaps one of the options you mentioned.  The old lease is the old standard of 12.5%...better than a poke in the eye.  Hopefully, they will start drilling sooner rahter than later.

ken & Steve,

There may be a few O&G folks that have a shred of decency, but I certainly remember how this all began in Harrison County, OH, two years ago.  Kenyon Energy shotgunned mailings to every Harrison Co. landowner offering them a $250/ac bonus,12.5% royalty, and a standard lease.  At that time, I received countless calls from the landmen claiming that this was a "once in a life time" opportunity and if I didn't sign up now for $250/ac the ship would sale and I'd be left behind.   Obviously, since that time the offers rose to over $4,000/ac and 20% royalty with many addendums to the lease.  Also, in the past two years I have heard landmen make claims, promises and threats in an effort to get whatever they wanted (incidentally, that whole attitude is now repeating itself with regard to pipeline ROWs),

With this type of history in Harrison Co., you should not be surprised that many landowners consider the O&G folks to be lower than scum.  

We own the land and the gas and oil beneath the surface.  It is our property and our asset and we have every legal right to fight for every dime we can get for this asset.  I completely resent the O&G attitude that the landowners should roll-over and accept whatever the O&G industry considers "fair".  Since we own the gas and oil, why should we settle for crumbs while the Chesapeake shareholders and their clown of a CEO walk away with millions?   We deserve a FAIR piece of the pie.

Billy,

This is my last reply on this topic (I promise).  There are indeed decent O&G people, in fact the vast majority of them are.  Two years ago... think back.  How many producing wells were there in your area.  If you think that it was the general consensus that the Utica was a slam dunk in terms of its productivity you would likely be mistaken.  There might have been "High Hopes" but that doesn't necessarily translate to economic success.  As more knowledge, more results, more seismic data became available the values started to rise.  If you think for a minute that one O&G company had any better inkling of what was in store for the Utica do you not think for a moment that they would have doubled the existing lease bonus amounts then being offered with the thought that they could go in and "clean up".   As with virtually every single play, shale or conventional, values start low and then trend higher as more and more light gets shed on the potential.  Representatives on the ground are often nothing more than waiters/waitresses taking orders... they only can tell you what they are told is "on the menu" for that day.  They generally have zero...and I mean zero discretion on offering more money or better terms.  That doesn't make them scum, that makes them employees that can keep their job for yet another day.  Nobody suggested you "roll over" and take less than what is fair, but the concept of what is fair is not a static concept, it changes daily. 

RSS

© 2024   Created by Keith Mauck (Site Publisher).   Powered by

Badges  |  Report an Issue  |  Terms of Service