Natural gas production companies beware Landowners are watching you

Blog Post

It’s common practice for landowners in natural-gas-rich areas to lease their rights in the gas to production companies. Such leases typically run for years and convey the right to extract, produce and sell the gas in exchange for the payment of a royalty on the amount of gas sold each month. And although disputes sometimes arise between landowners and their production-company lessees, perhaps due to the complicated nature of the production and royalty-calculation processes, the disputes usually focus on relatively simple matters, such as the validity of the lease or the defendants’ alleged misuse of the land.

Landowners Ed and Kathleen Ostroski of Bradford County, Pennsylvania have a different concern. Earlier this week, they filed a class-action complaint in the U.S. District Court for the Middle District of Pennsylvania that accuses Chesapeake Energy Corp. of depriving area landowners of natural-gas royalties to which they are entitled. Ostroski v. Chesapeake Energy Corp., 4:15-cv-02324-JEJ (M.D. Pa. Dec. 2, 2015).

According to the Ostroskis, the leases provide that leaseholders are entitled to a portion – ordinarily one-eighth – of revenue realized from Chesapeake’s sale of gas extracted from the land each month, but Chesapeake is using several tactics to “unfairly and illegally” reduce payouts. In particular, the Ostroskis allege that Chesapeake:

  • Used suppressed revenue figures to calculate and pay royalties;
  • Failed to pay royalties on proceeds of derivative contracts;
  • Deducted certain costs from its revenue that were improper, inflated, and in some cases fraudulent;
  • Deducted marketing fees that were never actually incurred; and
  • Simply calculated the royalties using incomplete or inaccurate data.
At this early stage of litigation, we cannot assess the merit of the Ostroskis’ claims or predict how the dispute will be resolved. But we can say that the lawsuit – meritorious or not – is a stark reminder to production companies that landowners are watching you.
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