Antitrust Law Daily Wrap Up, ANTITRUST NEWS: Oil, gas producers charged with conspiracy to fix price, monopolize market for gathering, transportation services, (Feb 24, 2015)

By Linda O’Brien, J.D., LL.M.

A group of oil and natural gas producers have conspired to fix the price of and monopolize the market for gas gathering and transportation services in order to materially underpay the amount of royalties due to landowners under leases for the production of oil and gas on certain properties, according to a complaint filed in the federal district court in Scranton, Pennsylvania (A&B Campbell Family LLC v. Chesapeake Energy Corporation., February 17, 2015).

Chesapeake Energy Corporation is a publicly traded oil and gas company and one of the largest producers of oil, natural gas, and natural gas liquids (NGLs) in the United States. Chesapeake and other oil and gas producers—Anadarko E&P Onshore LLC, Statoil USA Onshore Properties, Inc., and Mitsui E&P USA LLC—acquired working interests in the leases for the production of oil and gas on properties located above shale formations throughout the U.S., including Pennsylvania. A&B Campbell Family LLC--along with 57 individuals, families, partnerships, limited liability companies, and a corporation—own real property and/or royalty interests under oil and gas leases relating to properties located in Bradford, Sullivan, and Wyoming counties in Pennsylvania.

The complaint states that, beginning in 2006, Anadarko acquired hundreds of oil and gas leases to properties in Pennsylvania. Subsequently, Anadarko entered into joint ventures with Chesapeake and Mitsui and assigned its interest in certain of those leases to those companies. In 2008, Chesapeake entered into a joint venture with Statoil and sold Statoil minority interests in its leaseholds. The companies each used substantially the same form of lease, which provided that the lessee would pay the lessor a royalty of one-eighth of the market value of the gas produced from the respective well.

Following the execution of the various leases, the defendants pooled the leases into production units and commenced drilling of the wells. The defendants started production of gas from the wells and began to pay royalties to the plaintiffs under the leases in which they held royalty interests. However, in the calculation and payment of royalties to the plaintiffs, the defendants have deducted purported post-production costs, including gas gathering and transportation expenses, which were not expressly permitted by the terms of the respective leases. The imposition of such charges breached the terms of the leases, the complaint states.

The complaint also alleges that the defendants do not provide any explanation to the royalty interest holders of the basis of the post-production costs that are deducted in calculating the payment of royalties to the plaintiffs. Instead, royalty checks are accompanied by an abbreviated statement of the deductions without any detail of the nature of the services provided, the basis of the fees, or the identity of the payees.

According to the complaint, Chesapeake has used transactions with its own subsidiaries to artificially construct prices to determine the royalties payable to the plaintiffs. After gas is produced from a well, Chesapeake sells the gas to an affiliate, which aggregates the gas with gas produced from multiple wells, and transports it to a central location. The affiliate determines a weighted average sales price (WASP) for the gas sold from the pool. Then Chesapeake makes royalty payments based on the WASP calculated on sales to various third-party purchasers. In reality, Chesapeake receives a higher effective price for gas produced under the leases than the WASP it uses to calculate royalty payments, the plaintiffs charged.

In addition to acquiring oil and gas leases and producing natural gas, the defendants have ownership interests in the gas gathering pipelines that service the wells drilled under the leases. Chesapeake provides gas gathering and post-production services through its own affiliates. The post-production costs, which are deducted in calculating royalties payable to the plaintiffs, were based on self-dealing, related party transactions and the deductions have been arbitrary, excessive, and unreasonable, the complaint charges.

The plaintiffs assert claims for breach of contract, interference with contractual relations, violations of the Racketeer Influenced and Corrupt Organizations Act, and restraint of trade and monopolization in violation of Sections 1 and 2 of the Sherman Act. The action seeks declaratory relief, an accounting, damages, pre- and post-judgment interest, costs of suit, attorney fees, and any other just and proper relief.

The case is No. 3:15-cv-00340.

Attorneys: Christopher D. Jones (Griffin, Dawsey, DePaola & Jones, P.C.), Taunya M. Knolles Rosenbloom; and Thomas S. McNamara (Indik & McNamara) for A&B Campbell Family LLC.

Companies: Chesapeake Energy Corporation; Anadarko E&P Onshore LLC; Statoil USA Onshore Properties, Inc.; Mitsui E&P USA LLC

News: Antitrust PennsylvaniaNews