Chesapeake Energy, the once hard charging shale gas company who took the Pennsylvania Marcellus by storm back in 2009, is losing its hold as the market leader within the state. New state production reports out this week show Chesapeake does not own any of the top producing 25 wells in Pennsylvania. All 25 of the best wells are now owned by either Cabot Oil & Gas Corporation (COG), who owns eight of the top ten wells, or private Citrus Energy. State records further show after drilling an average of 235 wells each year for 2010 and 2011, Chesapeake has drilled just 64 wells in Pennsylvania so far this year.
While the company blames its recent actions on what it calls the low price for natural gas, it remains deep in debt as it struggles to sell off an estimated $9 billion in critical shale gas assets in order to meet its immediate debt obligations. It faces several federal investigations including one by the U.S. Department of Justice for allegations of price fixing in Michigan while increasingly besieged with landowner lawsuit claims of underpayment of gas royalties and related leasehold disputes.
Even as the company decreases drilling operations within the state, last week controversy arose when, according to state officials, it filed an error filled production report with the Pennsylvania Department of Environmental Protection. This caused great confusion within the state regarding actual production and has called into question oversights as to how accurate such production data might be. Such recent reversals and missteps are now combining to make the company a shadow of itself in Pennsylvania even as it tries to assure state landowners all is well. The same Pennsylvanians who just a few short years ago were told by Chesapeake Energy Pennsylvania was a key part of its self-proclaimed, ‘Shale Gas Revolution’.
Steep declines in drilling new wells in Pennsylvania
Chesapeake Energy has dramatically reduced its drilling operations in Pennsylvania since 2009. State records show the company has a total of 648 wells in the state drilling 219 of those in 2010 and and addidtional 251 wells in 2011. But through of May 2012 Chesapeake has only drilled 64 new wells and given how quickly it has fled Pennsylvania in favor of the Utica Shale formation in Ohio, it’s doubtful they will drill more than a handful of new wells, if any at all in the state for the remainder of this year. New well permit applications are down dramatically by virtually all shale gas companies across the Pennsylvania Marcellus, Chesapeake Energy included.
Steep declines in Chesapeake Energy royalty payments to landowners
Currently Chesapeake Energy is leading the way in taking the position with Pennsylvania leaseholders it has the right to deduct certain post production costs from a landowner’s royalty check payments if it can show such costs “enhance” the value of the shale gas. The company’s position is the cost of gathering and transporting the gas from well head to the point of entry into the large natural gas hubs makes the gas more valuable thus “enhancing” its value which Chesapeake claims allows it to deduct these moving costs from landowners.
This has left Pennsylvania landowners scratching their heads as they understood and insist their royalty payments agreements were represented to them by Chesapeake to be based on the volume of the gas produced at the well head. Some state courts outside of Pennsylvania have declared this practice by Chesapeake to be legal.
Dory Hippauf, who has followed the development of the shale gas industry in the northeast since its early days recently reported that, “Bradford County Commissioners Doug McLinko and Daryl Miller said at the end of their regular meeting on Aug. 2 that they have been fielding concerns from county residents, who have leases with natural gas companies, that mounting post-production costs are eroding their royalties. This, paired with the low market price of natural gas right now, has dropped some monthly payments by landowners by as much as 90 percent.”
Doug Clark of the Clark Law Firm recently stated Chesapeake Energy’s position it’s allowed to make such “enhancement cost” deductions to royalty checks appears to be the exception in the industry. He further stated, “It appears that legal action may ultimately be necessary to obtain a definitive answer as to the proper interpretation of the Market Enhancement language and its impact on landowner royalties. This issue simply involves too much money not to be addressed.”
No slowdown in public relations by Chesapeake
Last week Chesapeake held a “landowners relations” meeting with landowners living in the Towanda and North Towanda townships. Landowner Relations Manager Andy Travis said, "As some of you may already know, we reduced our rig count in the area to pursue more wet gas areas, which are more profitable right now than the dry gas of the Marcellus Shale,". The Towanda townships are located in Pennsylvania’s Bradford County, the state’s largest and most active producer of shale gas since the drilling boom began. Travis assured anxious landowners, Chesapeake would return just as soon as the prices for natural gas increased. He did not say by how much or when this would occur.
The company recently donated $46,000 to the Bradford County Conservation District to ensure the realization of six watershed projects throughout the county. However some have expressed concerned that such donations may influence how the industry is regulated at the local level.
The company just paid $50,000.00 to be a Platinum sponsor of the upcoming “Shale Gas Insight 2012” sponsored by the Marcellus Shale Coalition, the leading instate gas industry front group of which Chesapeake Energy was a founding member back in 2008 and remains so today. The conference will be held at Philadelphia Convention Center this month far from upstate PA Marcellus landowners.
While Pennsylvanians are left to wonder where exactly Chesapeake Energy is heading regarding their land and what its paying them in the process, Ohioans are the new recipient of Chesapeake’s lavish largess. Fracktracker.org reports that Ohio state drilling records show, “Not only does Chesapeake hold 71 percent of the permits, but their total of 227 permits issued is over 15 times more than their nearest competitor in Ohio’s Utica, HG Energy.” Ironically the company's 271 well permits in Ohio today is about the same amount of wells Chesapeake drilled in Pennsylvania in 2011.
Disclaimer: The writer holds no U.S. securities in any shale gas company nor is he a member of any environmental group or anti-fracking group. He holds no financial arrangements with any of the entities and/or individuals listed in the article. He is not being paid to write by any shale gas industry group, pro or con.
To learn more about royalty payment issue, go to: http://www.pagasleaseattorney.com/
To learn more about the Marcellus Shale Coalition Shale Gas Insight 2012 conference, to to: http://shalegasinsight.com/
To learn more about drilling permits and wells drilled in Pennsylvania and Ohio, go to: http://www.fractracker.org/
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