The First Rule of Negotiating With Energy Companies: They Lie

By Charles Pierce, Esquire

29 August 13

ne of the great selling points used by the extraction-industry grifters in selling their two major current projects - fracking and more pipelines - is all the money that will fall from the skies upon the poor people of the land if we just let them frack away happily or build all their death-funnels. Except that, maybe, not so much.

It seemed promising. Two wells drilled on his lease hit as sweet a spot as the Marcellus shale could offer - tens of millions of cubic feet of natural gas gushed forth. Last December, he received a check for $8,506 for a month's share of the gas. Then one day in April, Feusner ripped open his royalty envelope to find that while his wells were still producing the same amount of gas, the gusher of cash had slowed. His eyes cascaded down the page to his monthly balance at the bottom: $1,690. Chesapeake Energy, the company that drilled his wells, was withholding almost 90 percent of Feusner's share of the income to cover unspecified "gathering" expenses and it wasn't explaining why.

Of course it wasn't explaining why. It got what it wanted. The wells are dug. What's Feusner going to do, fill them with concrete in the dark of night? How could something like this happen? Well, once again, the federal government passed a law to prevent it from happening, only to have the briefcase elves show up to shred the law when nobody was looking.

In 1982, in a landmark effort to keep people from being fleeced by the oil industry, the federal government passed a law establishing that royalty payments to landowners would be no less than 12.5 percent of the oil and gas sales from their leases. From Pennsylvania to North Dakota, a powerful argument for allowing extensive new drilling has been that royalty payments would enrich local landowners, lifting the economies of heartland and rural America. The boom was also supposed to fill the government's coffers, since roughly 30 percent of the nation's drilling takes place on federal land. Over the last decade, an untold number of leases were signed, and hundreds of thousands of wells have been sunk into new energy deposits across the country. But manipulation of costs and other data by oil companies is keeping billions of dollars in royalties out of the hands of private and government landholders, an investigation by ProPublica has found.

And, sometimes, the grifters just say, screw it, we have more money than you do, and more lawyers.

In Oklahoma, Chesapeake deducted marketing fees from payments to a landowner - a joint owner in the well - even though the fees went to its own subsidiary, a pipeline company called Chesapeake Energy Marketing. The landowner alleged the fees had been disguised in the form of lower sales prices. A court ruled that the company was entitled to charge the fees. Costs such as these are normally only documented in private transactions between energy companies, and are almost never detailed to landowners. "To find out how the calculation is done, you may well have to file a lawsuit and get it through discovery," said Owen Anderson, the Eugene Kuntz Chair in Oil, Gas & Natural Resources at the University of Oklahoma College of Law, and an expert on royalty disputes. "I'm not aware of any state that requires that level of disclosure."

If we really are going to be the "Saudi Arabia of natural gas," and I'm not entirely sure that the slogan is entirely worth the earthquakes, then this is the kind of thing that needs to be slapped down hard, lest we wind up with both Saudi jurisprudence and social policy. We need oversight and we need a recognition of what ought to be Rule No. 1 in these transactions - Energy Companies Always Lie. About Everything. Forever.

Charlie has been a working journalist since 1976. He is the author of four books, most recently "Idiot America." He lives near Boston with his wife but no longer his three children.