Chesapeake is appealing a 2014 ruling by a San Antonio appeals court that upheld a decision by a state district court awarding at least $1 million to a Fort Worth family. The Hyder family argued that its lease with Chesapeake was heavily negotiated and specifically tailored to be “cost-free,” but Chesapeake has altered its interpretation of its obligations, attempting to deduct post-production costs.

The case is being closely watched by the oil and gas industry in Texas. The National Association of Royalty Owners-Texas and the Texas Land and Mineral Owners Association are backing the Hyders, saying that this case is one of many in which Chesapeake has sought to improperly deduct costs from royalty payments.

Observers say that the impact of the case will depend on whether the high court addresses its previous ruling in Heritage Resources v. NationsBank, which permitted the deduction of post-production costs even when contracts appear to disallow it. The Hyder lease included a provision stating that the findings in the Heritage case do not apply. The Fourth Court of Appeals in San Antonio agreed that the contract provision served to modify the general rule set forth in the Heritage case.

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

For their part, oil and gas producers usually claim they are following the terms of their leases. However, many producers have agreed to higher payments in response to demands or lawsuits by lessors.

The current wave of lawsuits and other disputes may owe its origin in some part to one Texan who made a mission of uncovering alleged fraud in oil and gas royalty payments. In 1996, Harrold Eugene Wright filed lawsuits against some of the largest oil companies in the United States, claiming contract fraud. He battled the producers until his death in 2008.

Elizabeth Ann Wright, Harrold Wright’s stepdaughter, told Thomson Reuters that the man began his career as a “wildcatter,” prospecting for oil by digging wells in untested areas.  

Wright testified numerous times in Washington before the Senate Finance Committee; at one session, he claimed to have overheard an oil executive say that lessors were often unaware of what royalties they were owed, and that companies could pay whatever amount would satisfy them.

According to his stepdaughter, Wright took what he heard to heart. ExxonMobil had wells on land that Wright owned, and with his industry experience he was able to roughly calculate the royalties he was owed. He asked ExxonMobil for more money and was sent a check for $25,000. According to his stepdaughter, he then asked for more money and received another check. Wright was not placated but outraged at the scale of what he considered to be fraud.

In 1996, Wright sued over a dozen large oil and gas companies on behalf of the U.S. government under the Federal False Claims Act, which allows citizens to file such fraud actions and share in the recovery. Wright’s lawsuits alleged that producers were underpaying royalties to the government from wells on federal and tribal land. Several of the suits were settled for tens of millions of dollars.

Today, lessors who are considering filing underpayment disputes may wish to thank Wright for some of his pioneering efforts in this area.

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

Dallas-based Energy Transfer Partners filed the lawsuit against Houston-based Enterprise Products Partners and Enbridge Inc. of Calgary, Alberta. Energy Transfer Partners claims that a business partnership had been created between itself and Enterprise to jointly construct a pipeline from Cushing, Oklahoma to Houston, but that Enterprise conspired with Enbridge to cut Energy Transfer out of the deal.

In a motion to dismiss the case, Enterprise and Enbridge claimed that no partnership or joint venture was actually created between Energy Transfer and Enterprise. The motion to dismiss was denied by Dallas County District Judge Emily Toblowsky, and jury selection has now begun.

The case is noteworthy because it involves important business litigation issues and pits prominent Texas trial attorneys against one other. The case is also expected to reveal information about the business strategies of three large, fast-growing oil companies. Testimony from executives of all three companies is expected to be given.

Energy Transfer Partners, which has approximately $50 billion in gas and oil assets, claims that Dan Duncan, the chairman and majority owner of Enterprise, approached Energy Transfer Partners about forming a joint venture before his death in 2010. Enterprise, which has about $38 billion in assets, signed a nonbinding agreement with Energy Transfer Partners in spring 2011.

Energy Transfer Partners claims that over the following few months, the two companies jointly made operational decisions, met with potential customers and marketed the partnership, calling the venture Double E Pipeline and even signing a deal with Chesapeake Energy in August 2011 to ship oil on the installation.

However, Enterprise announced that it was terminating the business relationship less than a month later. Allegedly, the company then started a similar venture with Enbridge, which has annual revenue of about $11 billion and assets of approximately $30 billion.

Energy Transfer Partners claims that Enterprise and Enbridge conspired to end the existing partnership and is suing for $1.2 billion in damages. Enterprise claims that no partnership had been finalized, pointing to language in an April 2011 letter that states that no obligations would exist between the two companies until the parties received approval from their respective boards. Energy Transfer Partners argues that Texas law has a liberal definition for the existence of a business partnership, even sometimes finding a partnership in cases in which the parties claim there is none.

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

The company has been sued several times previously by other leaseholders over the same issue. The most recent lawsuit also alleges that Chesapeake used sham transactions to its affiliates to lower the reported price for natural gas production, and did not pay royalties at all for some natural gas liquids.

The lawsuit claims that Chesapeake and co-defendant Total E&P USA used an accounting system that led to lower royalty payments, making sales to its affiliates to arrive at a lower reported price from which royalties would be calculated and conducting sham transactions as a way to impose post-production costs. The suit alleges that for some natural gas liquids, Chesapeake simply did not pay any royalties at all.

Natural gas liquids, which are separated from the gas after production, can command a higher price per unit of energy than dry gas.

Previous lawsuits against Chesapeake Energy over royalty payments were filed by a group of Tarrant County landowners and by the city of Arlington. According to news reports, similar cases have been brought against the company in at least six other states.

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

In August 2011, Chesapeake Energy sent notices to royalty owners saying that the company would begin subtracting “post-production costs” from the prices for natural gas used to calculate royalty payments. Chesapeake claimed that it had always been permitted to deduct such costs, but had foregone the deductions in the past. In the notices, Chesapeake said that landowners with lease clauses prohibiting such deductions would not see a change.

Today, Chesapeake is involved in multiple lawsuits in different states over alleged underpayment of royalties. One class action lawsuit has been filed by Johnson County, Texas landowners. The royalty owners claim that Chesapeake deducted costs even though their leases prohibited such deductions. On the other hand, a neighborhood association in Arlington, Texas was successful in convincing Chesapeake to reinstate higher royalty payments based on the “no deductions” clause in their lease.

Chesapeake Energy took the action at a time when natural gas prices were dropping precipitously. The price of natural gas dropped below $2 per 1,000 cubic feet (mcf) in 2012. The fall in prices meant that the post-production costs for processing and transporting natural gas, which can sometimes amount to $1 per mcf or even more, constituted a large percentage of what the landowner believed they should receive.

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

Beginning in August 2011, Chesapeake began deducting “post-production costs” from the prices for natural gas used to determine payments to royalty owners. These costs include expenses such as compressing and treating natural gas to prepare it for sale. According to Chesapeake, the company previously had the legal right to charge for those costs but had chosen not to do so. At the time, the company stated that the costs would not be deducted if a royalty owner’s lease prohibited such charges. The Warrens claim that although their lease did prohibit charging for post-production costs, they were charged anyway.

Post production costs can be about 80 cents to $1 per 1,000 cubic feet (mcf) depending on what must be done to the gas, which is significant when natural gas prices drop to around $2 per mcf, as they did in 2012. According to the Warrens, by March 2012 they were being paid as low as 42.4 cents per mcf for the natural gas Chesapeake extracted from their eight wells, and the difference in payments ran to six figures.

Several other lawsuits have been filed by Texas landowners against Chesapeake over the reduced royalty payments. The Warrens’ suit seeks class action status, a rarity for this type of lawsuit.

Chesapeake has scrambled to adjust to falling gas prices, which reached $1.90 per mcf by April 2012, a 10-year low.

Gregory D. Jordan is a business lawyer and business litigation attorney in Austin, TX. To learn more, visit http://www.theaustintriallawyer.com or call 512-419-0684.

Charles and Robert Warren, along with a Johnson County couple, filed the lawsuit against Chesapeake Energy after they claim they saw significant reductions in their royalty payments.

Chesapeake had informed royalty owners in August 2011 that it would begin subtracting “post-production costs” from the sales prices for natural gas that it used to determine royalty payments. The company said then that if a royalty owner’s lease prohibited such charges – for expenses such as compressing and treating gas to ready it for sale – then the costs would not be deducted. However, the Warrens allege they saw such deductions even though their lease does contain a provision prohibiting charges for post-production costs.

Post-production costs can amount sometimes to between 80 cents and $1 per 1,000 cubic feet (mcf), which is significant when gas prices are around $2 per mcf, as they were last year. The Warrens claim that by March 2012 they were being paid as low as 42.4 cents per mcf for natural gas from the eight wells operated by Chesapeake. According to Charles Warren, the difference in payments ran to six figures.

The Warrens’ lawsuit joins several others against the company over reduced royalty payments, including a suit filed by Tarrant County landowners. The Warrens’ suit is now before Judge Barbara Lynn in U.S. District Court in Dallas. The fact that class action status is being sought is unusual for a Texas gas royalty lawsuit.

Chesapeake’s action in reducing royalty payments came at a time of extremely low natural gas prices. Prices began falling in 2008 and reached $1.90 per mcf in April 2012, a 10-year-low.

Some landowners have achieved results without legal action. A neighborhood association in Arlington, Texas questioned Chesapeake’s reduced royalty payments to residents, pointing out that their lease had a strong clause prohibiting the deduction of post-production costs. In that case, Chesapeake adjusted the royalty checks and residents have seen their payments more than doubled. Debbie Moore, the president of the neighborhood association, said that the group had insisted on the clause during the 2008 leasing process, upon the advice of another neighborhood group.

Chesapeake Energy is the second-largest natural gas producer in the Barnett Shale. The company has experienced cash flow and debt problems in recent years and has sold approximately $2 billion in assets. Chesapeake also recently dismissed its former CEO and Chairman Aubrey McClendon.

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