Chesapeake Energy, the gas driller, has allegedly begun reinterpreting thousands of contracts with royalty owners from Texas to Pennsylvania. The company is now deducting costs from the royalties it pays, even in contracts that arguably contain a no-cost clause. Royalty owners have filed at least a dozen lawsuits alleging unpaid royalties, with two of them seeking class action status.
The dispute comes down to the language of the contracts, which can be very complex. Even with a no-cost provision, Chesapeake has argued successfully in the past that another provision to pay royalties based on “market value,” allows it to deduct costs, including production and marketing expenses, from the royalties it pays to landowners.
Chesapeake instituted the changes in April, with gas prices nearing a 10-year low, a drop of 30 percent from prices in 2010. The company dismissed its CEO, Aubrey McClendon, citing conflicts of interest, and Chesapeake lost $9 billion in market value. Declining profits allegedly drove the firm to reinterpret its contracts, passing costs on to royalty owners. Chesapeake has drilling rights on more than 15 million acres of land.
One Texas accountant told Bloomberg News that she has the exact same contract with Chesapeake and with Plains Energy, to drill on property she owns in Louisiana. She only discovered that she was being charged for costs when Plains refunded the charges and Chesapeake did not.