HARRISBURG, Pa. (CN) - Chesapeake Energy Corp. and its subsidiary Access Midstream Partners cheated Pennsylvania landowners of more than $5 billion in gas and oil royalties through inflated and unreasonable fees, a RICO class action claims in Federal Court.
Lead plaintiff, the Suessenbach Family Limited Partnership, seeks damages for racketeering, unjust enrichment, mail fraud, wire fraud, honest services fraud, conversion and civil conspiracy.
Chesapeake is the nation's second-largest producer of natural gas.
The complaint states: "Since at least 2010 Chesapeake engaged in unlawful conduct to improperly extract billions of dollars in royalties owed to plaintiffs and other lessors by artificially manipulating and deducting from royalty payments the cost of 'marketing,' 'gathering,' and 'transporting' natural gas. The marketing, gathering and transportation deductions at issue in this action were both unreasonable and inflated."
The Suessenbachs claim that "Chesapeake's subsidiaries have paid fees, which are then charged to lessors, for gas pipeline transport to Access Midstream that are many multiples of Access Midstream's actual costs."
In one case, the family claims, the markup was more than 3,000 percent.
"These deductions were inflated, improper, completely unrelated to the 'cost of services,' did not serve to enhance the marketability of gas, and instead, merely served to enrich the co-conspirators who devised the scheme," the complaint states.
It continues: "The benefit to Access Midstream is clear. Access Midstream's predominant source of revenue is gathering fees and Chesapeake accounts for approximately 84 percent of Access Midstream's business."
Under the Guaranteed Minimum Royalty Act, the complaint states, there are two kinds of land leases entered into for natural gas extraction with landowners that promise a royalty to the landowners based on oil and gas price realized by Chesapeake's subsidiaries. By law, the leases allow search and extraction of natural gas with royalty deductions for production, transport, treatment and process of gas, "but nowhere does either lease permit deductions in excess of actual cost or which are unreasonable."
Through the leases, companies purchase or lease mineral rights to gain access to natural deposits of gas and build profitable wells. Once gas is accessed, it is moved from well through gathering pipes and transported through an interstate transmission pipeline which connects to major interstate transmission pipelines and transports natural gas throughout the United States.
According to the complaint, "While federal rules limit fees that can be charged on the interstate pipelines to prevent gouging, drilling companies levy fees on local pipelines known as gathering lines. However, even where such fees are deducted, they must be reasonable and actual."
While processing can include certain services to make gas suitable for entry into the interstate pipeline system, such as dehydration when the natural gas has a high water content, the Suessenbachs say that Access Midstream conceded, "[i]n general, the natural gas in the northern Marcellus Shale is lean and typically requires little to no treatment to remove contaminants."
The Suessenbachs claim that "defendants, under the guise of Chesapeake's subsidiaries' agreements with lessors, exploited deductions language from the lease agreements to, among other things, shift repayment of Chesapeake's off-balance sheet loan from Access Midstream to the lessors."