State Regulators Take Aim at Chesapeake Energy

Dirty Money


In February, Pennsylvania Gov. Tom Corbett wrote an open letter to Chesapeake Energy Corp. (NYSE:CHK) CEO Doug Lawler, questioning and criticizing the firm for its failure to resolve complaints of unfair and possibly illegal deductions of post-production costs from natural gas production royalties owed to private landowners in the state.

“Despite communicating these concerns several times, I remain disappointed that the complaints of my constituents continue to go unheeded,” wrote Corbett. “It defies logic that, in some cases, leaseholders are being advised that they may actually owe money, rather than receive the fair and just royalty to which they are entitled.”

The letter was a big move bearing particular significance because Corbett, a Republican, is a longtime supporter of the natural gas industry and has received campaign contributions from Chesapeake. Natural gas is big, big business in Pennsylvania, which is the second-largest producer of the fuel in the union. Much of this production occurs on private land owned by residents and leased by energy companies like Chesapeake, Anadarko Petroleum Corp. (NYSE:APC), Mitsui E&P USA LLP, and Statoil ASA (NYSE:ASA).

“Development of natural gas has been a tremendous economic boon for the Commonwealth, particularly at a time when our nation continues to emerge from the economic recession,” Corbett wrote to Chesapeake. “We have worked hard, and collaboratively, in Pennsylvania that we develop this resource in a manner that protects our environment and natural resources, respects the rights of our citizens and communities, and allows us to maximize the economic and energy security potential of this great resource.”

However, with Chesapeake paying land owners as little as 10 cents in royalties, there has clearly been some breakdown of the system.

In the letter, Corbett requested that the Pennsylvania attorney general investigate the issue. If the investigation finds evidence that Chesapeake is making abusive or illegal deductions to royalties owed landowners, there could be a lawsuit — and it wouldn’t be the first. Landowners successfully sued Chesapeake last year for at least $7.5 million in royalty reimbursements (the settlement is ongoing).

Pennsylvania isn’t the only state that is less than happy with Chesapeake right now. Last week, Michigan Attorney General Bill Schuette announced that his Corporate Oversight Division is filing criminal charges against the company “for their alleged 2010 collaboration to avoid bidding wars against each other in Michigan public auctions and private negotiations for oil and gas leases that caused prices to plummet.” Collaboration of this sort violates both federal and state antitrust laws, and if found guilty, those involved could face prison time on top of a financial penalty.