SALEM, Ohio — Attorneys for a Columbiana County couple have filed an arbitration complaint against Chesapeake Energy and others that they say is the most comprehensive statement of royalty underpayments to date.
The 60-page arbitration complaint, filed Jan. 27 with the American Arbitration Association on behalf of Ronald and Joetta Hale, of Lisbon, Ohio, alleges Chesapeake Exploration, Total E&P USA Inc., Chesapeake Energy Corporation and Chesapeake Operative LLC have underpaid the royalties due the Hales for wells in both Columbiana and Carroll counties.
The Hales have two oil and gas leases with Chesapeake Exploration. The Carroll County well started to produce oil and gas in February 2014 and the Columbiana County well went into production in October 2015.
Owed $9.8 million
Using sale price figures reported in Chesapeake’s quarterly and annual reports filed with the U.S. Securities and Exchange Commission, and composite prices from the U.S. Energy Information Administration, the complaint alleges that by June 30, 2017, Chesapeake will have underpaid more than $9.8 million in royalties to all leaseholders on both wells’ oil, gas and natural gas liquids production, including derivative revenue. The Hales are owed, the complaint alleges, a portion of that total.
The complaint claims the companies understated the amount of the product (oil, natural gas and natural gas liquids) sold; understated the price sold; and deducted nondeductible costs.
The Hales are seeking both compensatory and punitive damages under four counts, including breach of contract, conversion (an unauthorized act that deprives another of his/her property permanently or for an indefinite time) and the Ohio Corrupt Practices Act. The complaint lists breach of contract counts as well as tort claims.
Among other claims, the complaint alleges the energy companies “conspired to deduct, and did deduct, grossly inflated and fraudulent gathering fees from the royalties of claimants and other oil and gas lessors.”
According to Atty. James A. Lowe, of Lowe Eklund & Wakefield Co., Cleveland, the complaint includes the most detailed summary, to date, compiled against the energy companies.
“We have done our best to articulate the claims as clearly and completely as we can,” Lowe said. “This, we believe, is the most comprehensive report of the fact claims, as well as the legal claims.”
The couple is also represented by Atty. Robert C. Sanders, of Maryland.
Among the details included is Chesapeake Energy’s August 2016 report to the U.S. Securities and Exchange Commission that discloses the U.S. Department of Justice, U.S. Postal Service and various states have subpoenaed the company for information on its royalty payment practices.
The complaint also lists detailed descriptions, including 28 tables and charts, of market values, costs and the complicated sales of oil, gas and NGLs, that the Hales claim hides the products’ true value.
The Hales are filing for an arbitration ruling, rather than relief in the courts, as required by their oil and gas leases.
The Hales were among 11 individuals seeking class, rather than individual, arbitration on their royalty underpayment claims against Chesapeake, but in September 2016, Judge Bonita Y. Pearson in the U.S. District Court for the Northern District of Ohio ruled in favor of Chesapeake Exploration’s request to compel individual arbitration.
Individual oil and gas leases may or may not include an arbitration provision; the Hales’ leases do.
The Hales were also part of a class action suit filed in November 2015, Hope Christian Fellowship, et. al., vs. Chesapeake Energy Corp., et. al, alleging corporate fraud. Judge Pearson also ruled to compel individual arbitration in that case.
This is not the first claim that Chesapeake energy companies have underpaid leaseholders’ royalties. Chesapeake Energy Corp. alone is facing royalty lawsuits in Texas, Ohio, Louisiana, Oklahoma, Arkansas and Pennsylvania — including one filed by the Pennsylvania attorney general,
In October 2015, the U.S. Department of the Interior’s Office of Natural Resources Revenue assessed a $2.1 million civil penalty against Chesapeake Energy Corporation, after the company failed to comply with a 2011 order that found “repeated, systemic errors in Chesapeake’s monthly reporting of the amount of gas it produced and sold from Indian leases,” according to an Interior Department news release.
And in January 2015, Chesapeake Energy Corp. agreed to pay $119 million to settle a class action lawsuit in Oklahoma that alleged the company underpaid royalties on nearly 12,000 wells.