Chesapeake sued for fixing prices, underpaying landowners

Chesapeake Energy Corp. allegedly manipulated prices and unlawfully passed on its drilling expenses to landowners, shortchanging them on royalty payments for drilling on their land, according to a lawsuit filed in federal court in Dallas.

The landowners are led by the billionaire investors Ed Bass and Robert Bass, each of whom have royalty or other interests in all of the land involved in the lawsuit.

“We are seeking millions in damages,” attorney Daniel H. Charest told FuelFix.

Chesapeake spokesman Michael Kehs declined to comment on the case, citing ongoing litigation.

Oklahoma City-based Chesapeake is the nation’s second-largest natural gas producer after Exxon Mobil and has faced a series of allegations of wrongdoing over the last year.

The landowners hold mineral rights over 3,290 acres of land in the Barnett shale of North Texas, where Chesapeake has been involved in the leases since 2007, according to the complaint, filed in U.S. District Court for the Northern District of Texas.

Chesapeake has produced and continues to put out “plenty” of hydrocarbons from the land, Charest said.

But the company has engaged in an effort to underpay landowners and unlawfully charge them for expenses related to drilling and production, according to court documents.

Though Chesapeake produces fossil fuels from the land, the company sells the resources from one subsidiary to another, depressing prices and violating terms in the leases, according to the complaint.

Chesapeake also made royalty payments that included “part, if not all,” of its production expenses, though those expenses were forbidden to be conveyed to landowners, the complaint said.

The leases do permit Chesapeake to pass on production costs in some circumstances, but those terms were not met, according to court documents.

The landowners previously approached Chesapeake with their concerns, but were not able to reach a new agreement or settlement, Charest said.

“The parties engaged in a dialogue that ultimately didn’t bear fruit and we had to proceed with the lawsuit,” he said.

Chesapeake continues to produce hydrocarbons from the land and has not altered its payments to the landowners since the issue was raised, Charest said.

“We don’t think anything’s changed,” he said.

Chesapeake is currently under investigation by both the U.S. Department of Justice and the U.S. Securities and Exchange Commission because of several allegations of impropriety.

Though the company has said its internal investigations of the incidents have shown no wrongdoing, its CEO is accused of colluding with another company to depress lease values and of taking large personal loans from lenders to which the company was in debt.

Chesapeake has struggled through a period of falling revenues and a dwindling stock price since natural gas prices plummeted last year to their lowest levels in a decade. The company had to take out extra loans last year to keep it afloat as it attempted to grow profits by aggressively expanding its nascent oil production business.

Investor frustration with Chesapeake’s leadership led to the ousting of several members of its board of directors and the eventual departure of CEO Aubrey McClendon, who said in January that he plans, by April 1, to leave the company he co-founded.

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Read ongoing FuelFix coverage of Chesapeake’s troubles: