Casualties of Chesapeake’s “land grab” across America

Casualties of Chesapeake’s “land grab” across America by Brian Grow, Joshua Schneyer and Anna Driver, October 1, 2012, Reuters
(Reuters) – Ranjana Bhandari and her husband knew the natural gas beneath their ranch-style home in Arlington, Texas, could be worth a lot – especially when they got offer after offer from Chesapeake Energy Corp. Chesapeake wanted to drill there, and the offers could have netted the couple thousands of dollars in a bonus and royalties. But Bhandari says they ultimately declined the deals because they oppose fracking in residential areas. Fracking, slang for hydraulic fracturing, is a controversial method used to extract gas and oil. Their repeated refusals didn’t stop Chesapeake, the second-largest natural gas producer in the United States. This June, after petitioning a Texas state agency for an exception to a 93-year-old statute, the company effectively secured the ability to drain the gas from beneath the Bhandari property anyway – without having to pay the couple a penny. …

“The principle of it is insane,” said Calvin Tillman, a former mayor of Dish, Texas, a small town north of Fort Worth where drilling has been heavy. “Not only can they take your property, but they don’t have to pay you for it.”

Reporters also examined dozens of lawsuits by land owners in seven states, and interviewed contractors proffering deals for the company. What emerged were approaches to leasing property that land brokers, land owners and lawyers say push ethical and legal limits. … In lawsuits in Texas, Pennsylvania and North Dakota, land owners allege Chesapeake has treated signed leases as mere placeholders for deals that it may later choose not to honor. Two state court judges in Michigan ruled early this year that Chesapeake had the right to reject leases at any time before title to the minerals was finalized. But in the last three months, judges in Louisiana and Texas have awarded nearly $120 million to two land owners – Peak Energy and Preston Exploration – after finding Chesapeake breached contracts by walking away from signed deals. Scores of similar cases in Michigan and Texas have been settled this year.

One group of land owners caught in these retreats was the Witt family. … In August 2008, the Witts were approached by land men working for Chesapeake. The offer: to lease mineral rights for the Witts’ land for $14,000 per acre, according to an amended complaint filed in May 2012. Instead of checks, Chesapeake issued bank drafts, which can be cashed after an owner’s property title is reviewed – typically 30 to 90 days after a lease is signed. When the Witts went to cash the Chesapeake bank draft, they were told by bank officials that the payment would not be honored. A hand-written note on one of the Witts’ bank drafts rescinded by Chesapeake reads, “Cancelled for renegotiating price (per) acre,” according to an exhibit submitted in the family’s lawsuit. The Witts alleged that McClendon told Chesapeake employees “to reduce the already agreed upon bonuses down to no more than $5,000 per acre” and to “take lawsuits” if necessary. The family claimed they were “colddrafted,” a term used to describe an “unethical practice in the leasing industry” in which the land owner is provided a bank draft “in consideration for a valid, enforceable lease,” even though the company’s intent is “not to honor the payment obligation.” The practice allegedly enables Chesapeake to lock up property, block rivals, prevent owners from shopping for better offers, and then later decide if it wants to keep the acreage. “It is unethical by anyone’s standards in the energy industry if the intention was not to pay the draft at the time it was issued,” said Richard Bate, an oil and gas attorney. … Terry Rhoads, an attorney for the Witt family, said their lawsuit was settled on Aug. 17. Terms were not disclosed. …

Some land owners oppose fracking, and New York, Vermont and Maryland have all refused to grant fracking licenses. The technique’s effects on groundwater are still under review by the U.S. Environmental Protection Agency. … The terminology varies from state to state – a Rule 37 exception in Texas, mandatory pooling or unitization in Ohio. But the result is often the same: getting state regulators to enable the company to drill, sometimes against the owner’s will. … That marks a turnabout in Texas. When the state passed the Rule 37 statute in 1919, it was meant to prevent excessive drilling of oil wells and to protect the mineral rights of small land owners, say legal experts. The rule prohibits companies from drilling too close to unleased properties. Today, Rule 37 exceptions “seem to be a new creative use of the statute in a way that was not intended when it was designed,” said Matthew Festa, an associate professor of law at South Texas College of Law. “It’s possible that this amounts to the transfer of private property from one private entity to another private entity.”

Since Jan. 1, 2005, three of the largest oil and gas drillers in Texas have applied for 3,595 exceptions to Rule 37, according to a Reuters review of Texas Railroad Commission data. Chesapeake has been the most active. It has applied for 1,628 exceptions, compared with 1,073 for rival EOG Resources and 894 for XTO Energy, a unit of Exxon Mobil. Chesapeake and its rivals almost always win. Energy companies only have to notify land owners that they intend to apply for  a Rule 37 exception. If the owner doesn’t protest, commission guidelines require the petition be granted. Texas Railroad Commission spokeswoman Ramona Nye said the agency believes there is no evidence that fracking is unsafe. And evaluating the fairness of Rule 37 exceptions is not part of the commission’s mandate, she said. “We are charged by the legislature to make sure hydrocarbons don’t stay underground and go to waste,” she said. … Energy companies and their executives are the dominant contributors to the election campaigns of railroad commission members and candidates, according to a Reuters review of Texas Ethics Commission data. … “I don’t think the state should be able to take a land owner’s rights to generate a profit for a private company,” [Emphasis added]

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