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.