Austin, TX (Law Firm Newswire) October 2, 2012 – Chesapeake Energy, the Oklahoma City-based oil and gas producer, has apparently begun reinterpreting contracts with thousands of royalty owners, passing certain costs on to them, even when many lessors believe their leases contain no-cost clauses.
Chesapeake claims that other contract provisions allow the company to deduct costs from royalty payments. At least a dozen lawsuits have been filed against the driller by royalty owners.
“It largely comes down to the language of the initial lease,” says Gregory D. Jordan, an Austin oil and gas attorney. “Royalty provisions in leases can be very sophisticated. A lessor who reads over a contract produced by the drilling company’s lawyers, and decides for himself that everything is OK is asking for trouble. Unfortunately, it is now coming back to bite some landowners.”
Costs, said Jordan, may include production, marketing, compression, dehydration, transportation and other expenses. Many contracts explicitly prohibit such costs from being passed on to the landowners, but as Chesapeake’s actions have shown, some contract clauses are subject to “reinterpretation.”
“The solution,” noted Jordan, “is to have your lease drafted or reviewed by an experienced oil and gas attorney who is on your side.”
Chesapeake took action in April, as gas prices neared a 10-year low, 30 percent lower than 2010 prices. The company lost market value of $9 billion and ousted its CEO, Aubrey McClendon, over conflict of interest issues. The company has allegedly sought to save money by charging costs to royalty owners from Texas to Pennsylvania. Chesapeake has the rights to drill on more than 15 million acres in the United States.
Now the gas producer is facing lawsuits by landowners in at least five state courts, alleging that Chesapeake underpaid their royalties. Two of the lawsuits were filed as class actions, intended to represent multiple royalty owners.
Earlier this year, Chesapeake argued in federal court in Louisiana that a clause that it pay royalties based on the “market value” of the gas, permitted the deduction of costs. Donna Thornton, a Texas accountant, told Bloomberg News that she had the exact same contract with Chesapeake and with Plains Exploration & Production Co., to drill on her property in Louisiana. She discovered she was being charged for costs when Plains refunded her money.
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