The city of Fort Worth appears headed toward settling a portion of a lawsuit it filed more than two years ago against Oklahoma City-based Chesapeake Energy alleging that the oil and gas producer shorted the city out of millions of dollars in natural gas royalties.
The City Council is scheduled to vote Tuesday to accept a $6 million settlement from Houston-based Total E&P USA, Inc. and Total Gas & Power North America Inc. Total, a branch of the French energy company, owns a 25 percent stake in Chesapeake’s Barnett Shale holdings. It became a partner with Chesapeake in 2010.
The city signed a gas lease with Chesapeake in 2006 that covered about 5,800 acres of city property, with the largest portion of that lease covering the 822-acre Spinks Airport in far south Fort Worth. The city also has leases with Fort Worth-based XTO Energy.
The lawsuit, filed in October 2013, is still pending against Chesapeake. It is unknown what impact the settlement with Total will have on Chesapeake. The city has said in court documents it is owed more than $33 million.
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Deputy City Attorney Gerald Pruitt said Monday that the city is not close to settling with Chesapeake, but a hearing seeking a summary judgment from state District Judge David Evans is scheduled for Wednesday.
Under terms of the proposed settlement with Total, Fort Worth will pay $2 million in legal fees to the Cantey Hanger law firm as part the $6 million settlement, the city said. Fort Worth attorney Ralph Duggins represented both the city and the Fort Worth school district in suing Chesapeake.
“We were pleased we were able to reach agreement on repayment of the expenses that were deducted and, further, an agreement to not charge them going forward,” Duggins said.
Jeff King, the Fort Worth attorney representing Total, also was not available for comment.
Gordon Pennoyer, a spokesman for Chesapeake in Oklahoma City, declined to comment.
The city’s lawsuit against Chesapeake is one of hundreds of such suits the company faces amid allegations that it improperly subtracted post-production costs from royalty checks through sham sales to affiliated companies. Most of the lawsuits are in Tarrant and Johnson counties.
Chesapeake has denied the allegations and says it complied with lease terms.
Chesapeake recently settled a lawsuit filed by the Fort Worth school district, but the settlement was not disclosed. The school district has kept the settlement secret at Chesapeake’s request. Chesapeake argues the settlement amount is a trade secret.
The Star-Telegram, the city and others have asked the Texas attorney general to require the school district to release the settlement amount.
Chesapeake also faces similar accusations of cheating landowners in the Eagle Ford Shale in South Texas. Earlier this month, lawsuits were filed in McMullen County south of San Antonio accusing Chesapeake of breach of contract involving oil and gas leases covering 15,900 acres and 85 wells, court filings said.
Chesapeake and Total have been quietly settling lawsuits with large landowners, businesses and government institutions in North Texas. Besides settling with the Fort Worth school district, last month they also reached agreements with a partnership that included Traders Village and Thomas G. Hall and TLH Realty Investments.
Attorneys are reluctant, and often prohibited, from discussing their settlements except to say that they worked out terms favorable for their clients. But some admit Chesapeake’s troubling financial fortunes, made worse by the plunging price of oil, may convince some plaintiffs to make a deal in case the company’s situation gets worse.
The first of the trials concerning smaller leaseholders, many of them represented by Fort Worth attorney Dan McDonald, is set to go to trial next month.
George Parker Young, an attorney working with McDonald on his cases against Chesapeake and Total, said the potential settlement between the city and Total sets a floor for what Chesapeake may have to pay the city in the same lawsuit.
“You got to assume that sets a floor of three times that amount, or $18 million,” Young said. He said for the city of Fort Worth “it is a good first step for them to get what they are owed.”
The settlement may show that a different dynamic is emerging in lawsuit negotiations with Chesapeake. He said the practice, as he has understood it, was that Chesapeake would take the lead in settling cases and then ask Total for a check covering one-quarter of the amount.
“Given their [Chesapeake’s] financial situation, Total may not be comfortable with that arrangement,” Young said.
David Drez, the attorney who successfully sued Chesapeake in the Hyder case that went to the Texas Supreme Court, declined to speculate on the case.
“At the end of the day there can be a variety of reasons why a party chooses to settle a lawsuit,” Drez said.