Chesapeake Energy is Renegotiating Some Shale Gas Leases in Ohio

Chesapeake Energy Campus in Oklahoma

The article by Daniel Gilbert has been exerpted below, from the Wall Street Journal of July 16, 2012.

Chesapeake Energy Corp. is pushing Ohio landowners to accept revised lease contracts that would help the cash-strapped driller save money while holding on to its prized oil and gas fields.

The company’s actions, documented in scores of property and court records, aren’t the first time that Chesapeake has tried to change the terms of lease deals, or walked away from them. Since 2008, more than 100 lawsuits have been filed across the country by landowners, who claim the company breached contracts. In some cases, settlements have been reached, in other cases the litigation continues.

Chesapeake, the country’s second-largest natural-gas producer, has spent about $2 billion to lease the mineral rights to more than a million acres—about 5% of Ohio’s land mass—in a bet that Ohio’s Utica Shale fields will become a major oil producer. The leases contain deadlines by which the company must drill wells costing millions of dollars apiece or give up rights to the property.

Facing a cash crunch and mounting pressure from activist shareholders to trim spending, Chesapeake is seeking contract changes that would allow it to drill fewer wells while keeping the leases. It is generally required to drill at least one well on a specified group of properties known as a unit; it is trying to bundle leases into much bigger units, which will allow it to drill fewer wells but retain rights to more acreage.

Chesapeake’s agents tell landowners that they will be shut out of the oil and gas boom if they don’t agree to the changes, according to landowners interviewed by The Wall Street Journal, which reviewed more than 100 property records in Ohio filed over the past year detailing the changes.The company says the changes it seeks are minor and that most landowners have been amenable to them.

It says that many of the leases it acquired in Ohio were negotiated by other companies, some going back more than 20 years, and are ill-suited for the horizontal wells needed to extract oil and gas from shale rock; it acknowledges, however, that it stands to save money by combining leases into units that cover two square miles, at least twice the size of most existing units.

Chesapeake carries significant clout in Ohio’s rustbelt, where some landowners are eager to begin receiving royalties. More than 100 landowners in Carroll County alone have accepted the lease amendments so far this year, property records show.

“It kind of makes you mad,” said Karen Hampton, who owns about 10 acres in Carroll County and refused to be part of a larger unit. She is one of eight landowners who last month sued Chesapeake to cancel their leases, alleging the company’s agents, known as land men, warned them their property would become a “hole on the map” if they didn’t agree to change their leases.

The company, in its legal response, said the plaintiffs failed to allege the specific circumstances in which the “hole on the map” comment was made, and that it was legally insufficient to support a charge of fraud. Chesapeake says in court filings that landowners are looking to cancel valid leases to pursue richer offers. Chesapeake has recorded more than 3,000 leases in Carroll County since late 2010.

Chesapeake’s flood-the-zone approach to leasing has helped the company capture coveted oil and gas fields across the country. But the strategy also saddled it with expensive drilling obligations: By the end of last year, Chesapeake had to drill to preserve the leases on more than half of the 15 million acres it controls, an area three times the size of New Jersey.

With the plunge in natural-gas prices, the amount of cash Chesapeake expects to generate from operations this year is less than half the amount it plans to spend on drilling and leasing. The shortfall has prompted the company to try to sell as much as $14 billion of its assets. It has slashed its annual land-leasing budget to $1.6 billion from $4.8 billion last year.

Amid the global financial crisis in the fall of 2008, Chesapeake tried to delay or walk away from lease deals to conserve cash. The moves triggered lawsuits in the Haynesville Shale in Louisiana and Texas. A federal judge in Houston ruled last week that Chesapeake must honor a contract to buy leases from three Texas landowners for more than $100 million, a deal the company refused to close in 2008. Chesapeake says it will appeal. The company is also seeking to overturn a $22 million judgment over a 2008 deal on leases in east Texas.