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Chesapeake Energy Gas Royalty Underpayment Class Action

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This class action lawsuit alleges that Chesapeake Energy Corporation intentionally and systematically miscalculated and underpaid natural gas royalties to individual lessors within Pennsylvania.

The plaintiffs in this lawsuit are Pennsylvania owners of natural gas royalties under oil and gas leases with Chesapeake Appalachia, L.L.C., an entity which produces gas, but does not calculate royalty payments. This function is performed by parent corporation and defendant Chesapeake Energy Corporation. The royalties owned by the plaintiffs and similarly situated prospective class members are a portion, generally one-eighth, of the revenue realized from the sale of gas on a monthly basis.

In order to drill wells and ultimately produce gas, natural gas producers enter into oil and gas leases with the owners of the desired gas rights. Under these leases, the owners of the rights (lessors) convey their rights to the producer in exchange for monthly royalties on the gas that is produced and sold. Leases may provide that producers are able to deduct "post production costs" from the royalties owed to the lessors. These costs are those incurred between the well and the point at which the producer transfers title to gas to its buyer. However, costs incurred after title has been transferred from producer to purchaser are not to be considered as post production costs, and cannot be deducted from royalties. 

The plaintiffs' leases stated that Chesapeake Energy was required to pay a royalty on the "revenue realized" from the sale of the gas, and that this figure consists of the revenue paid by the third-party buyer and also the revenue from derivative contracts. However, it is now alleged that defendant converted royalties owned by plaintiffs and others by failing to pay royalties on third-party revenue and failing to pay for derivative contract revenue.

According to the complaint, royalty statements provided to plaintiffs indicated that post-production cost deductions were made from payments for things such as "gathering costs," "third-party transportation costs" and "line variance"/"fuel" costs. However, it is alleged that these expenses were in fact incurred after defendant transferred title to the gas to another entity. Plaintiff argues that even if Chesapeake Energy had the right to deduct costs incurred after title had been transferred, the costs they actually did deduct for gathering and interstate transportation were grossly inflated and far above market rates. 

Finally, the plaintiffs allege that Chesapeake Energy deducted marketing fees that were in fact never incurred and that the company calculated royalty payments on a portion of the gas without actually determining the price paid or the costs deducted, contrary to the lease agreement. According to the complaint, this amounts to acts of conversion which caused significant damages to the plaintiffs in that they received smaller oil and gas royalty payments than those due to them.

As a result of the alleged conduct, plaintiffs are seeking compensatory and punitive damages, pre-judgment and post-judgment interest, attorneys' fees and costs as well as preliminary and permanent injunctions enjoining Chesapeake Energy from engaging in the acts of conversion described.

 

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We will continue to review the docket in 2016 and provide updates as necessary.

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