The Tribune Democrat, Johnstown, PA

February 14, 2014

Gas driller under fire


HARRISBURG — Gov. Tom Corbett and the chairman of the Senate Environmental Resources Committee have asked the attorney general to investigate whether the second-most active drilling company in Pennsylvania’s fracking industry is shortchanging property owners.

In a letter dated Thursday, Corbett told Chesapeake Energy CEO Robert D. “Doug” Lawler that he is urging Attorney General Kathleen Kane to examine the issue.

Corbett noted in his letter, provided by his office on Friday, that the deductions are causing a “significant erosion of trust and goodwill the gas industry has established” with landowners.

The governor sent his letter as state Sen. Gene Yaw, R-Lycoming, publicly requested that the attorney general intervene in the dispute.

Kane’s staff is reviewing the matter.

Yaw said he’s heard complaints from constituents for at least a year. In his letter to the attorney general, Yaw noted that landowners have described the company’s actions as “cheating,” “stealing” and “fraud.”

“I’m tired of being told one thing and having something else happen,” Yaw said.

Yaw said that, at one point, the company  indicated it was going to open an office in Bradford County specifically to deal with the complaints from landowners.

The office never opened, Yaw said.

A Chesapeake spokesman refused comment on Friday.

Jackie Root, president of the Pennsylvania chapter of the National Association of Royalty Owners, has been advocating for state action on the matter for months.

“It’s exciting,” that Corbett has stepped forward on their behalf, she said.

Root said she had just spoken to a landowner who had a well operating since the middle of last year and the property owner still hasn’t seen any royalties.

The problems with royalty deductions didn’t surface until 2012, after a state Supreme Court decision determined the drillers could legally take some of the royalties for the costs of bringing the gas to market, according to Senate testimony provided by Towanda attorney Christopher Jones. At that time, landowners began receiving notices from Chesapeake announcing that the company was going to begin making deductions from royalties. And in cases where wells had been operating, the deductions would be taken retroactively, he said.

At a Senate hearing on the issue last summer, Jones submitted a Chesapeake royalty payment stub that showed that the landowner’s original payment would have been $931. After deductions were taken, the landowner got $136.63.

The numbers can be much larger. The Pennsylvania Farm Bureau compiled examples, including one in which a landowner had a royalty of $41,861 whittled down to $13,611 by Chesapeake.

Yaw said he thinks the attorney general’s consumer protection unit could intervene. The partnership between a landowner and a drilling company is not a typical business relationship, he said.

He compared it to a case where a gold buyer is purchasing precious metals from an individual. If the gold buyer is cheating people, it’s considered a consumer protection matter, Yaw said.

Post-production charges are common in the drilling industry. However, Yaw said the complaints about Chesapeake’s practices are unlike anything he has heard about other drilling companies.

In some cases, people have negotiated leases that include language explicitly barring the company from taking post-production deductions. In some cases, Yaw said, Chesapeake has allegedly taken the reductions anyway by using another name for it such as a “market enhancement” charge.

Yaw’s office received 45 complaints about this issue.

“At some point, you think, ‘Where there’s smoke, there’s fire,’ ” Yaw said.

Only Range Resources has drilled and operates more fracking wells in Pennsylvania than Chesapeake, according to state data on industry activity.

Chesapeake drilled 714 unconventional wells in the commonwealth between 2007 and 2013, DEP records show. Range Resources drilled 788 wells during the same time period.

In addition to seeking help from the attorney general, Yaw also is introducing a package of bills intended to protect the rights of landowners. One bill would force gas companies to explain how they are calculating deductions. Another would prevent gas companies from retaliating against landowners who ask for an explanation of deductions.