There are plenty of legally sound business practices that are morally questionable.  One example is creating a shell company– a company that only exists on paper and doesn’t actually hold any assets.  A corporation could create a shell company for several reasons (e.g. dodge taxes*, hide risks from share holders, protect reputation, etc).  In the case of a giant energy company, like Chesapeake, a good reason for creating a shell company is to grab land without drawing attention from competitors.  The tactic could also allow them to lease land for cheaper.

Fraud, however, is not legal; and this has 115 Michigan land owners suing Chesapeake Energy Corporation.  More than 800 frustrated land owners signed a lease, which was later rejected, and never received a dime.  A Reuters investigation went into detail about the affair.  In all, 97% of the leases signed with Chesapeake’s shell company, Northern Michigan Exploration, were rejected.  Actually, Northern Michigan Exploration is a shell company of a shell company of Chesapeake’s, which makes the matter even more complicated.

According to the article, lawyers for the land owners contend that Chesapeake voided the leases after a Michigan well came up dry, suggesting that the company may have never intended to honor their agreements.  Chesapeake denies that it conducted business in Michigan, even though Aubrey McClendon was CEO of Northern Michigan Exploration.

Read the full article “Energy giant hid behind shells in ‘land grab’”…

*If you were wondering, Chesapeake Energy “had a 3-year effective tax rate of -2.1 percent between 2008 and 2010,” meaning they were paid a $173 million rebate on their $8.3 billion profit according to the Institute for Taxation and Economic Policy (ITEP) and Citizens for Tax Justice.  The rebate is at least partially due to tax breaks on infrastructure and equipment investments– investments they may have made, anyway, without the tax break.

Action was taken in one of at least three West Virginia  lawsuits against Chesapeake Energy relating to waste pits and their toxic contents.   A federal judge has issued a temporary restraining order against Chesapeake Energy to stop the company from removing contaminated soil from the area of a buried waste pit on a Wetzel Co. couple’s property.  A lawsuit has been filed by Larry and Jana Rine alleging that Chesapeake created a large lined waste pond, then dug an adjacent pond and deliberately breached the pond to allow the liquids to drain into the unlined impoundment.  ”After disposal of the liquids into the unlined hole, a thicker material remained in the pond with the ripped liner,” the suit says. “Chesapeake placed the lining material over the top of the remnant waste, then covered the entire pond and its remaining contents with soil.”

The attorney for the Rines says that the attempt to remove the contaminated soil to mix with materials to use in the repair of a slip is simply an excuse to haul away the waste and cover up what was dumped in the pit.  ”These cases are common sense and common law,” said Brian Glasser, a Charleston lawyer who represents the Rines and and has filed two other similar cases against Chesapeake.  ”You can’t bury a bunch of waste in someone’s yard.  It’s that simple.”  The grounds for the suit is that dumping and burying waste is not “reasonably necessary” – the legal test for activities allowed by state natural gas laws.

Burying of waste pits is a common industry practice.  Chesapeake denies any wrongdoing.  A company spokesperson said, “Chesapeake does believe that its activities are prudent and entirely within its lease and property rights.”

Public health and environmental groups campaigned during the past legislative session for the use of closed loop systems to eliminate the holding pit system.  Groundwater contamination has occurred in the vicinity of drilling waste pits pits. There is also concern regarding air pollution from volatile organic compounds in the waste fluids.   As a compromise position, groups demanded that law be enacted to require the use of a reinforced liner system and proper disposal of pit liners.   No protective legislation was passed during the 2011 legislative session.

Charleston Gazette story, 4/14/11

Chesapeake Energy now controls 156 gas drilling leases in Ohio County previously owned by Range Resources.  Some confusion has been generated regarding rights and ownership in this shuffle; this confusion has led to a lawsuit by Ohio County resident Melvin Kahle, a former U.S. Attorney for the Northern District of West Virginia, against Chesapeake.  Kahle claims that Range abandoned the 2006 lease he had signed with that company operating as Great Lakes Energy Partners.  The terms were $8.75 per acre for 200 acres plus a 14% production royalty on any gas extracted from his land.  Kahle received a letter from Range dated Aug. 20, 2010 that stated, ”The purpose of this letter is to advise you that we are not accepting any new leases in your area at this time and are consequently returning your lease to you. This letter also confirms that there are no contractual or legal obligations between Range … on the one hand, and you on the other hand, and you may pursue other lease offers with other gas producers as you please.”   Thus Kahle was surprised in October when subcontractors hired by Chesapeake showed up to conduct seismic testing on his land.

Range sold a package of leases to Chesapeake in an agreement dated  August 16, 2010 and retroactive to July 1, 2010.  Although the matter has not been legally resolved, the WVDEP Office of Oil and Gas issued a drilling permit to Chesapeake on February 11 to drill on Kahle’s land.  The permit had been requested in December, 2010 and Kahle sent a letter to WVDEP  stating his objection.  The WVDEP website refects  Kahle’s letter of objection as “Surface owner comment received.  “Surface objection resolved” was noted on the WVDEP record with the issuance of the permit.

Today leases in Ohio County are commanding $3,000-$5,000 per acre and 18-20% production royalties.

Feb. 20, 2011 Intelligencer story regarding Kahle lawsuit

Feb. 27,2011 Intelligencer Story re: Lease Flipping

Damascus Citizens for Sustainability and The Delaware River Keeper Network filed a federal lawsuit against the Delaware River Basin Commission (DRBC), the interstate commission overseeing drilling along the river.  According to the two environmental groups, the commission wrongfully allowed exploratory wells to be drilled in the river basin without its approval and despite its own moratorium against drilling. The lawsuit would require the wells to be removed, all work stopped on other wells, and the sites to be restored.

The Delaware River Keeper Network says that the drilling of a well, even though it may be exploratory, has serious environmental impacts that are a pollution risk to the watershed.

Read the full story in The Times Herald-Record…