Fort Worth says Chesapeake Energy violated natural gas leases

A day after agreeing to a $6 million out-of-court settlement with Chesapeake Energy’s partner, an attorney representing the city of Fort Worth asked a judge to rule that the Oklahoma City energy giant violated its natural gas leases, cheating the city out of millions of dollars.

Ralph Duggins, seeking summary judgment in the lawsuit, said Wednesday that he found parts of Chesapeake’s arguments “astonishing.” To come to any other conclusion after reviewing the evidence, he added, would render Chesapeake’s promises to the city “meaningless.”

For the city to discover that Chesapeake had been selling the natural gas to affiliates for years — in direct contradiction to lease terms under which the city had to approve such an action — officials would have had to read the small print in records filed with the state in Austin, Duggins said.

Chesapeake “makes astonishing arguments that it can do what it does,” Duggins said. “The city had no duty to go to Austin and root through the records” to protect its interests. In previous court documents, Duggins suggested that Chesapeake owed the city more than $33 million.

Chesapeake’s attorney Craig Haynes parsed words and phrases in one lease the company signed with the city, covering wells on 822 acres near Spinks Airport in far south Fort Worth. He argued that the company was within its rights to do what it did.

Nowhere does the city prove that Chesapeake failed to comply with either the Spinks lease or Texas law, and for that reason the summary judgment should be denied, Haynes argued.

“It was hardly a secret that Chesapeake was selling to affiliates,” Haynes said.

Mayor Betsy Price, who attended the hearing and sat at the attorney’s table, disagreed. She said Chesapeake appeared to be “grasping at straws” to defend its behavior.

“I hope that my presence said that [the lawsuit] is important to the city and that we are dead serious about recovering the citizens’ money,” Price said.

The hearing was conducted in state District Judge David Evans’ court one day after the City Council voted to accept a $6 million settlement with Total E&P USA, the French energy firm that has owned a 25 percent stake in Chesapeake’s Barnett Shale holdings for about six years.

In its lawsuit against Chesapeake and Total, the city argued that the companies substantially underpaid royalties through the use of “sham sales to affiliates” and “improperly deducting costs of gas gathering, transportation, separation” and treatment. Similar allegations have been made against Chesapeake in hundreds of lawsuits filed by other cities, school districts and property owners.

Duggins, who negotiated the settlement with Total, said the city’s royalty check should be based on what Chesapeake and Total got when they sold the natural gas to a third party. The contract spells out that if Chesapeake sells to an affiliate, it had to receive permission from the city.

Duggins hammered the point home that Chesapeake, by its own admission, neither received that permission nor did it inform the city, in writing and through certified mail, as required. He also repeatedly said that according to the contract, the city would not be hit with post-production charges.

He said the city didn’t discover what Chesapeake was doing until after an audit was completed in 2013, seven years after the first leases were signed. The city filed its lawsuit against Chesapeake about two months later, he said.

“It is assumed when you sign a contract that you’ve got everything you need in it,” Price said after the hearing. “Clearly the contract said they weren’t going to deduct or sell to a third party.”

Duggins also said Chesapeake cheated the city out of at least $2 million in natural gas that the company lost or used as fuel.

Chesapeake, at the hearing Wednesday and in court documents, maintained that the royalties it paid were based not on the price of the gas at the wellhead but were a “weighted average sales price” after selling and marketing it. It also argued it could deduct post-production costs.

He suggested that the city is upset that its royalties have dropped because natural gas prices have “tanked.”

Evans asked Haynes several pointed questions about Chesapeake’s sales to an affiliate when the contract seemed to say it was not allowed. He also wanted to know when the decision was made at the corporate level to build its own transmission line to make it easier to do so.

Evans, who took the matter under advisement after the hearing, also wondered if using another company’s pipeline was ever considered.

“I thought his questions were pretty spot-on,” Price said. “He was looking for more depth in their answers and that he needed to ask more pointed questions to get there.”

This story was originally published March 23, 2016 at 6:00 PM with the headline "Fort Worth says Chesapeake Energy violated natural gas leases."