In October 2012, the class action plaintiffs confronted
Chesapeake Appalachia LLC with allegations that Chesapeake violated
leases by deducting from their royalty checks post-production costs for gathering,
dehydration and compression of the gas taken from their property.
Plaintiffs argued that their leases contained a “Market Enhancement Clause,”
which expressly precluded Chesapeake from charging them for transforming
the gas into its “marketable” form or make the gas ready for sale or use, but
would allow Chesapeake to deduct a pro-rata share of these costs after
the gas had been placed in a marketable form or is ready for sale or use.
Plaintiffs contended that the gas is not actually “marketable” until it meets
the quality and pressure specifications of the interstate pipeline into which
it is delivered; and that, by deducting costs that were incurred prior to the
gas entering the transmission pipeline, Chesapeake underpaid the royalties due
under the lease. In opposition, Chesapeake contended that the gas
produced or to be produced under plaintiffs’ leases was marketable at the
wellhead and thus was entitled to make the deductions.
With an arbitration clause in the leases, the parties hired
retired Judge Edward N. Cahn, a mediator with Blank Room LLP, to help settle
the questions raised. Judge Cahn met with the parties on June 18, 2013,
and then for more than two months negotiated with each side to reach the
proposed $7.5 million settlement. On August 30, 2013, the plaintiffs
filed their Class Action Complaint (attached) and the Unopposed Motion for
Preliminary Approval of Class Action Settlement. The proposed settlement
agreement (attached) requires Chesapeake to pay the class action plaintiffs 55%
of post-production costs for gathering, dehydration and compression prior to
September 1, 2013 and 27.5% of post-production costs until the effective date
of the settlement. After the settlement is approved, Chesapeake will
implement a revised royalty calculation methodology that provides a 27.5%
reduction in costs for gathering, dehydration, and compression borne by the
class action plaintiffs. These plaintiffs will continue to bear 100%, on
a pro-rata basis, of the transportation costs that are incurred after the gas
has entered the interconnect point of a transmission pipeline.
Note that, after many discussions in the Pennsylvania
legislature, on July 9, 2013, Governor Tom Corbett signed into law S.B.259 which requires royalty check “transparency.” Royalty check
statements must provide a range of details, including well identification information,
the price received per barrel, Mcf or gallon, the net value of total sales
after deductions, the owners’ percent of interest in production and share
of the total value of the sales prior to deductions, and the total amount of
taxes and deductions permitted under the lease.
Attachments: (1) Class Action Complaint and (2) Proposed Class Action Settlement
This post was written by Barclay Nicholson (barclay.nicholson@nortonrosefulbright.com or 713.651.3662) from Norton Rose Fulbright's Energy Practice Group.
This post was written by Barclay Nicholson (barclay.nicholson@nortonrosefulbright.com or 713.651.3662) from Norton Rose Fulbright's Energy Practice Group.
