ARLINGTON — The city is suing Chesapeake Exploration, saying the company underpaid royalties on natural gas pumped from about 1,908 acres of public land.
The lawsuit, filed Monday in a civil District Court in Tarrant County, alleges that the Oklahoma City-based energy company has deducted post-production costs from the city’s royalty payments that are not only unauthorized under the lease agreements but also appear to be “excessive and unreasonable.”
The company has also failed to reasonably market the produced gases from the leases and obtain the best price possible by selling to subsidiaries or affiliates in violation of the lease agreements, the lawsuit alleges.
Arlington said it has not been able to quantify its monetary damages for the contract breach because Chesapeake has withheld lease documents. But the city said in the suit that it expects to seek monetary relief in excess of $1 million.
Neither Arlington City Attorney Jay Doegey nor Chesapeake spokeswoman Leah King could be reached for comment late Monday.
The city’s lease agreements “prohibit or significantly limit deductions,” such as transportation and production costs and taxes, and “provide for cost-free royalties,” according to the lawsuit.
However, Arlington said it found in a recent audit that Chesapeake appears to be basing its royalty payments to the city on proceeds received from sales to affiliates after production costs have already been taken out.
The suit also alleges that these deductions are not apparent from the information that Chesapeake has provided to the city, saying that those statements “misleadingly reflect” that no deductions are being taken.
The city’s allegations are similar to those that led to a suit
filed against the producer by the Dallas-Fort Worth International
Airport, as well as several suits filed by other private owners of
leasehold property in the Barnett Shale of North Texas, where
Chesapeake holds extensive gas producing assets. Chesapeake
agreed to settle the DFW case last November, agreeing to pay
the airport $5.3 million and to recalculate the formula for determining
future royalty payments. (GD 11/2). The settlement established
a formula for calculating royalties based on the first-ofthe-
month index price at Natural Gas Pipeline Co. of America,
Texok, published in Platts’
Inside FERC’s Gas Market Report.
You can bet the Bass Boys had a solid lease and I would think they have friends in very high places that won't let their case get pushed under the radar.
Gas processing contracts with affiliates and sweetheart companies sometimes result in end-of-year, lump-sum kickback payments. Not a very talked-about subject.