If allegations put forward this week are true, one of the nation’s largest fracking companies may have to pay millions in Pennsylvania for underpaying royalties to landowners.
Chesapeake Energy Corporation and others connected with their operations in Pennsylvania allegedly defrauded thousands of landowners, including seniors, Pennsylvania’s Attorney General Kathleen G. Kane charged in a lawsuit filed Wednesday. The attorney general is seeking restitution for at least 4,000 victims, mostly from northeastern counties of Bradford, Sullivan, and Cayuga — rural communities located on top of the Marcellus Shale, the largest producing shale gas basin in the United States.
The number of affected parties could grow as many more victims are likely to come forward, said Jeffrey Johnson, deputy press secretary for the state attorney general.
“We expect that number to grow significantly,” because any Pennsylvania resident “who has signed [a lease] with Chesapeake … would be covered under this lawsuit,” he told ThinkProgress.
Chesapeake Energy, based in Oklahoma, denies the allegations. “We strongly disagree with Attorney General Kane’s baseless allegations and will vigorously contest them in the appropriate forum,” said Gordon Pennoyer, Chesapeake Energy director of strategic communications, via email.
The state attorney general accuses Pennsylvania’s largest producer of natural gas of negotiating leases promising royalties that then went underpaid, according to court documentation, which alleges that defendants took deductions from landowners’ royalties even though leases contained language prohibiting those deductions. Johnson said fines could be in the “tens of millions.”
The lawsuit against the fracking giant is the most recent blow to a corporation and an industry that in recent times has gotten heat from activists and landowners in the press and the courtrooms. Fracking has been accused of polluting land, air, and water, and of harming wildlife and public health. In 2011 Pennsylvania’s Department of Environmental Protection fined Chesapeake Energy more than $1 million for contaminating water supplies for 16 Bradford families, ProPublica reported. At the time, the fine was the largest the state had ever issued against an oil and gas company.
Despite concerns, fracking, which involves pumping large quantities of water mixed with sand and chemicals at high pressure to release gas and oil from rock, has continued in Pennsylvania and elsewhere. Meanwhile, Pennsylvania’s rural landowners living on top of gas reservoirs were enticed to lease their lands for royalties. But in recent years royalties too became controversial. Many landowners have filed lawsuits saying that companies were taking advantage of them. About a year ago, Chesapeake said it would pay $11 million to settle what some locals call the Demchack lawsuit, a class action lawsuit that was centered on royalties, according to published reports.
Plaintiffs in the case claimed that Chesapeake’s royalty deductions stemming from costs associated with the transportation and refinement of natural gas extracted from Marcellus Shale was illegal, because terms in their leases prohibited it. The recent allegations against the nation’s second-largest natural gas producer in the United States are starkly similar — so much so that the state attorney general asked the court to reject the $11 million settlement, which Johnson said is ongoing. “We think that our lawsuit may be a better deal in the end for landowners,” he said.
Penn State Law Professor Ross Pifer said the litigation could be lengthy, and explained that royalty deductions, which are permitted by law depending on the lease agreement, have become more contentious.
“The issue … has become magnified as gas prices have continued to drop,” he said. That’s because deductions for processing and transporting gas don’t necessarily increase with commodity prices. “Landowners are much more focused on the deductions when gas prices are low.”
And yet the recent lawsuit doesn’t just accuse Chesapeake, which has been facing a mounting debt, of “artificially” inflating or creating “unreasonably” excessive costs of post-production that were passed on to landowners. It also alleges that Chesapeake’s “landman” used deceptive negotiation techniques such as failure to disclose information important to signing a lease and lying.
Some negotiators, the lawsuit alleges, gave landowners last chances to sign leases which noted that “the company would extract the gas one way or another.”
Bradford county resident Carol French, a dairy farmer and activist from the Landowner Group for Awareness & Solutions, favors the lawsuit but notes that it is the ongoing lack of proper laws what created an opening for the alleged offenses. “Why is Bradford county the epicenter? Why is Chesapeake so freely of taking the post production costs out? It’s our local and state representation … our local officials really don’t know what’s going on.”
According The Guaranteed Minimum Royalty Act of 1979, landowners have to get at least 12.5 percent of the profits made from their land. Otherwise, a lease is invalid. However, the State Supreme Court ruled in 2010 that deductions charged to landowners coming from the cost of moving the gas to market were allowed, in part because the word royalty wasn’t defined in the law, which means the the industry could rely on its own interpretation.