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Chesapeake Energy loses another royalty fight in Texas

Mar 15, 2019 |

Oklahoma City’s Chesapeake Exploration LLC has lost a major royalty battle in south Texas where it had been sued boy several royalty owners of mineral leases.

The Fourth Court of Appeals in San Antonio reversed a lower court ruling and said Chesapeake should have paid a penalty for underpaying tens of millions of dollars in royalties. The decision came in what was considered the first major battle between South Texans and the pioneering shale driller in the Eagle Ford Shale.

The ruling applied to a lawsuit filed in 2017 by nearly 130 plaintiffs against Chesapeake and the Chinese National Offshore Oil Corp. which invested more than $1 billion in Chesapeake’s drilling efforts started in 2010.

 The royalty fight involved the drilling of adjacent wells as well as the impact of vertical and horizontal wells.
“The gist of Chesapeake’s argument is that calculating Compensatory Royalty according  to the plain language of the Leases is a bad deal. regardless, that is the deal the parties made and this court is not permitted to rewrite it under the guise of interpreting it,” wrote Justice Rebeca C. Martinez in the ruling.

The unhappy mineral owners in Dimmit, La Salle and McMullen counties signed leases with Chesapeake starting about 2009, the early days of the Eagle Ford boom when shale pioneer Aubrey McClendon was running the company according to the San Antonio Express News.

Chesapeake was one of the first companies in the Eagle Ford and at one time had more acreage than anyone else — leasing 785,000 acres in the region at the peak, company investor presentations stated.

There are several allegations in the Chesapeake Eagle Ford lawsuits.

Some of the key ones are that Chesapeake underpaid by basing the royalties on improper volumes and prices for oil, gas and natural gas liquids and that the company charged post-production costs for things such as moving products to market, which was not allowed under the terms of the lease.

So-called post-production costs often are a point of contention between mineral owners and energy producers, though the details of what can and can’t be charged to royalty owners are listed in mineral leases that can vary widely across the region.

Some people signed a “Producer’s 88” — a decades-old lease form that gives oil and gas companies wide latitude.

South Texas mineral leases, however, are notorious for their complexity, and considered the toughest of all U.S. shale fields. It’s common for Eagle Ford leases to stipulate all sorts of things: forbidding a company from deducting post-production costs; demanding continuous drilling of new wells every 90 days to “hold” a lease; regulations on the speed limit trucks can travel on vast ranches; or forbidding oil and gas activity during prime hours for hunting during deer season.

One of the more complex — and potentially lucrative — aspects of the South Texas lawsuits is “drainage,” the idea that a well drilled on another property but within a certain number of feet of your lease line is considered to be “draining” your oil too, requiring a royalty to be paid, or a well to be drilled on your property to capture the oil instead.

At least 54 draining wells were included in the first group of Dimmit County cases that went to trial. Chesapeake’s attorneys noted that drainage claims mushroomed in 2018, an impact that resulted in the delay of state trials.

 

While mineral owners often assume their royalty payments are correct, Texas courts have made clear they have the burden of discovering any problems and taking legal action.

The Texas Supreme Court doesn’t like “stale claims” — people have four years to make a contract complaint or that opportunity is gone for good.

Chesapeake has faced royalty lawsuits in other states, too.

In 2015, Chesapeake settled a lawsuit involving gas royalties in Oklahoma. It paid $119 million to royalty owners there. Royalty owners in Pennsylvania, where the Marcellus Shale is located, also have sued Chesapeake.

The Texas Supreme Court last year ruled in Chesapeake vs. Hyder, a Barnett Shale case, that Chesapeake could not deduct post-production costs from a lease that had language that shifted those costs to the company. The Hyder family won nearly $1 million.

 

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