PA and Chesapeake Energy Reach Settlement Regarding Royalty Payments

Chesapeake Energy has reached a settlement agreement with the Pennsylvania attorney general’s office for allegedly withholding royalty payments from lessors in the northeastern region of the state, as well as using unethical methods when negotiating leases with landowners.

The agreement ends a five-year-old lawsuit against bankrupt Chesapeake Energy, which was alleged to be underpaying lessors by wrongfully deducting processing and transportation costs from royalty payments. Additionally, Chesapeake Energy was accused of “act(ing) unlawfully by using deceptive, misleading, and unfair tactics, and committed antitrust violations” in negotiating leasing agreements with landowners. In a statement about the settlement, PA AG Josh Shapiro further alleged that Chesapeake attempted to use bankruptcy protections to “wipe out their debt to Pennsylvanians”.

There has been a great deal of debate in the state about the relationship between post-production costs and royalty payments, particularly in whether royalty payouts should be calculated by the price of gas at the wellhead vs. at the point of sale post-production. The Guaranteed Minimum Royalty Act of Pennsylvania is the law that regulates royalty payments, defining a minimum royalty payment as “at least one eighth of all oil, natural gas, or gas of other designations removed or recovered from the subject real property”. But, it was a 2010 Pennsylvania Supreme Court case, Kilmer v. Elexco Land Services, that discerned that, depending on the specific language of the lease agreement, post-production costs, such as transportation and gathering of gas, are costs that are to be shared by the lessor. In the case of Chesapeake, it was accused of inflating post-production costs in order to minimize royalty payouts as much as possible.

The settlement includes $5.3 million in restitution for lessors and the appointment of an ombudsman to investigate landowners’ complaints, among other details. This is not the only lawsuit that Chesapeake Energy has faced over the same issue. In previous years, Chesapeake has been ordered to pay millions to landowners who filed class action lawsuits against the driller.

The actual amount of royalty monies withheld or diverted by Chesapeake from landowners is unknown, though some estimates reach over $100 million. This reality has left some displeased with the $5.3 million settlement figure.

The case highlights a crucial linkage between the natural gas industry and the Commonwealth: landowners. Without mineral rights-holding landowners agreeing to lease their land to companies like Chesapeake Energy, the industry would have been inhibited in Pennsylvania. During the ‘shale boom’ beginning in 2012, natural gas drillers were quick to offer seemingly attractive lease and royalty agreements to landowners across Pennsylvania, with terms that could potentially deleverage landowners in certain circumstances. As such, it is imperative for landowners to be fully educated and counseled when entering into a lease agreement with a natural gas company. There are several landowner advocacy groups that assist with such matters, including the National Association of Royalty Owners and the Pennsylvania Oil and Gas Landowners Alliance.

As always, the Center for Energy Policy & Management is always available as a resource for landowners and citizens of Pennsylvania.