Chesapeake Settles Lawsuit With City of Arlington Over Gas Royalties

Chesapeake Energy has agreed to pay $700,000 to the city of Arlington, Texas to settle a lawsuit that accused the energy company of underpaying royalties for gas pumped from under airports, parks and other public property.

The Arlington City Council approved the settlement August 19 by a vote of 8-0, with Mayor Robert Cluck absent while recovering from surgery. The deal was reached between the city, Chesapeake and Total E&P USA, a French company that owns a 25 percent share of Chesapeake’s holdings in the Barnett Shale.

The lawsuit had accused Chesapeake of improperly deducting post-production costs from royalties paid to the city and of basing payments on gas prices below the actual sales price. 

Chesapeake holds leases on approximately 1,900 acres of public property.

The settlement agreement provides that in the future, the royalty rate paid to the city will be based either on the highest sales price received by Chesapeake or on a price established by a formula. Also, post-production costs will no longer be subtracted from royalty payments.

Attorneys for the city initially said they thought damages would exceed $1 million, but the city settled for a lower payment. City Attorney Jay Doegey said that the settlement was fair and that it clarified the methodology for calculating royalties.

Chesapeake did not admit fault in the settlement, and it maintained, in court documents, that Texas law permits the deduction of post-production costs.

The settlement covers 25 separate leases of varying size. 

Chesapeake still faces numerous additional lawsuits filed by other property owners alleging underpayment of royalties. The Arlington school district, which joined the city’s lawsuit, is still negotiating with Chesapeake regarding its claims.

The lawsuit by the city of Arlington made claims similar to those made in other lawsuits against Chesapeake: that in addition to improperly deducting post-production costs from royalty payments, the company used a system of “sham transactions,” such as selling gas to its own affiliates, in order to calculate royalties based on a price lower than the actual sales price.

Gregory D. Jordan is an Oil and Gas lawyer in Austin. To learn more, visit http://www.theaustintriallawyer.com or call 512-419-0684.

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