Struggling Chesapeake Energy raised $5 billion through scheme to reduce landowners' royalties

For years energy companies have found creative ways to pay as little as possible in royalties to the owners of the land where they drill. Chesapeake Energy even used this tactic to solve its financial struggles, raising $5 billion by aparently cheating landowners out of their entitled royalties, reports Abrahm Lustgarten of ProPublica. He examines how this phenomenon happens, and the ongoing lawsuits as landowners try to regain the money they felt they were owed.

"Boiled down to basics, they worked like this: When energy companies lease land above the shale rock that contains natural gas, they typically agree to pay the owner the market price for any gas they find, minus certain expenses," Lustgarten writes. "Federal rules limit the tolls that can be charged on inter-state pipelines to prevent gouging. But drilling companies like Chesapeake can levy any fees they want for moving gas through local pipelines, known in the industry as gathering lines, that link backwoods wells to the nation’s interstate pipelines. Property owners have no alternative but to pay up. There’s no other practical way to transport natural gas to market." (ProPublica graphic)

"Chesapeake took full advantage of this," he writes. "In a series of deals, it sold off the network of local pipelines it had built in Pennsylvania, Ohio, Louisiana, Texas and the Midwest to a newly formed company that had evolved out of Chesapeake itself, raising $4.76 billion in cash. In exchange, Chesapeake promised the new company, Access Midstream, that it would send much of the gas it discovered for at least the next decade through those pipes. Chesapeake pledged to pay Access enough in fees to repay the $5 billion plus a 15 percent return on its pipelines."

"That much profit was possible only if Access charged Chesapeake significantly more for its services," Lustgarten writes. "And that’s exactly what appears to have happened: While the precise details of Access’ pricing remains private, immediately after the transactions Access reported to the Securities and Exchange Commission that it collected more money to move each unit of gas, while Chesapeake reported that it also paid more to have that gas moved. Access said that gathering fees are its predominant source of income, and that Chesapeake accounts for 84 percent of the company’s business." (Read more)