Johnson County Landowners Accuse Chesapeake Energy of Skimming Shale Gas Royalties

A family of Johnson County landowners is suing Chesapeake, the country's second-largest natural gas company, for allegedly cheating them out of royalties. Their lawyer, Dallas-based attorney James Holmes, says they can thank endlessly indulgent Texas laws and a taxing authority more inclined to look the other way.

The complaint filed Tuesday in federal court accuses Chesapeake of using its gas-gathering and purchasing subsidiaries to "suppress the wellhead gas prices on which it pays royalties" to "imbed" post-production costs -- something the landowners say their lease agreement forbids. Under the contract, Holmes says, Chesapeake is required to pay royalties based on the market value of the gas. Instead, he alleges, the company deducted costs for things like gas compression.

In other states, Holmes adds, Chesapeake would have to fear the prospect of a class-action lawsuit brought by aggrieved landowners for royalty underpayment. Not so in Texas. The Texas Supreme Court has for years been unwilling to certify royalty owner class actions. In fact, they've been downright hostile to anyone claiming an oil or gas company shorted them. When a Dallas man sued Shell because he found out through the Texas Land Commission that he wasn't getting his fair share of royalties on gas beneath his land, the Texas Supreme Court tossed his case, basically telling him that he should have figured out Shell was screwing him sooner.

What's more, Holmes says, the Texas comptroller won't pursue the lost tax revenue. Ever since the price of natural gas tanked, Chesapeake has been navigating choppy waters, offloading billions in assets. Last month, it put its Fort Worth headquarters on the market. To add to its financial stresses, the company has been the target of a series of Reuters investigative reports, beginning with the discovery of Chesapeake Chief Executive Officer Aubrey McClendon's $200 million hedge fund, which bet on the very commodity Chesapeake produces. McClendon was subsequently removed as chairman of the Chesapeake board. Most recently it was in the news for allegedly colluding with a rival natural gas producer to suppress land prices at an auction in Michigan.

"Chesapeake, I suspect, is doing this because it's a debt-laden company and it's gotten itself largely steered by CEO Aubrey McClendon into a tight financial spot, and their in-house lawyers say, 'Hey, in Texas they can't get you with class actions, so let's squeeze royalty owners by paying a quarter or a fifth of the market value of the hydrocarbon production -- while we're at it, we can minimize our severance taxes and some ad valorem taxes as well," Holmes says.

Julie Wilson, the company's vice president for urban development in the Barnett Shale, said she had not seen the suit.