Shale Math: Half Full or Half Empty

Fort Worth has joined the school district, airports, and thousands of individuals in suing Chesapeake Energy Corp., formerly the foremost player in shale drilling in Tarrant County. (The company has all but disappeared from the local drilling picture.) The suits accuse the company of shorting mineral rights owners on royalties through deduction of hidden fees and post-production expenses. The Tarrant County College District is the latest entity to accuse Chesapeake of cheating. The college filed suit last month, seeking $1 million in damages.

Chesapeake officials did not respond to an interview request for this story.

Others who have sued the energy giant include Arlington and its school district and prominent Fort Worth families such as the Hyders and Basses. Leaseholders in other states are suing Chesapeake for similar claims. A class action lawsuit filed this summer in Pennsylvania accuses the drilling company of violating the Racketeering Influenced and Corrupt Organizations (RICO) Act, a law that’s typically used to deal with organized crime. The litigants accused Chesapeake of stealing billions of dollars in royalties by paying exorbitant fees to another company and deducting those fees from royalty checks. The company then invested those fees in Chesapeake in what appeared to be kickbacks. (Chesapeake is also under criminal indictment in Michigan on other  charges.)

“Everybody feels as though they’ve been cheated, and they have,” said Dan McDonald, a Fort Worth attorney who is gathering defendants for a massive lawsuit against Chesapeake. “The little guy on his own really can’t do anything about this.”

Chesapeake isn’t the only company whose actions are being challenged. Similar accusations have been levied at energy companies across the country, including Energy Corp. of America, QEP Energy Co., Exxon, and Shell.

McDonald said he currently represents more than 10,000 royalty owners in claims against Chesapeake. He began recruiting clients in April through a billboard campaign and public meetings.

“It’s hard to get the word out all at one time,” he said. “We’ll be signing up clients all next year, and I suspect we’ll have 50,000 clients by this time next year.”

His first court date is set for next spring in Fort Worth’s 17th District Court.

“There are either going to be trials or settlements next year,” he said.

Falling gas prices in recent years helped shrink royalty checks. In this country the wholesale price was about $4 per thousand cubic feet in 2001 when city leaders began discussing urban drilling. The price climbed to $7 by 2004 and spiked at $11 in 2005 as drilling was ramping up across North Texas and in other parts of the state and county. That’s about when officials were bragging about all the money Fort Worth would earn from drillers.

But all that drilling meant that supplies exceeded demand, driving prices back down to the $8 range for the next couple of years. Continued production combined with a faltering economy took the price down to $6 in 2009. Currently, natural gas is selling for about $5 per thousand cubic feet, less than half of its peak price.

Drilling has slacked off as a result. Meanwhile, the public’s trust in the industry wavered after it became clear that companies could easily manipulate royalties through shadow companies, hidden fees, and other dubious means.

Gary Hogan is a Westside resident who served on the city’s urban drilling task force in 2006, which drafted an ordinance to regulate drilling inside city limits. At the same time, Hogan was helping his Chapel Creek neighbors navigate the confusing process of being courted by oil and gas companies seeking to lease mineral rights. Hogan recalls the exaggerations and perhaps even downright lies that the landmen told his neighbors during the recruiting process. Unlike folks living outside the city on large tracts of land, such as Ferruggia and her neighbors, the residents of Chapel Hill mostly have homes on small lots.

“Gas people were telling them it was going to be substantial mailbox money, something in the neighborhood of $150 a month,” Hogan said. “I have yet to see anybody show me a check for over $100 for the whole year, unless they’ve got substantial land. My last check was for $59 for the whole year, and you have to report that to the IRS.”

The neighbors do appreciate Chuck Silcox Park, which was established in 2011 with a $50,000 grant from Chesapeake. The dismal royalty checks are another matter.

“The consensus is, this is very disappointing to almost everybody,” Hogan said. “We’ve all heard the horror stories that people are going through with Chesapeake all around the country.”

Hogan has received $300 in royalty payments since 2011 — about a tenth of what was predicted by landmen early in the process, he said.

“When I get a payment, and it’s got all the data listed on there, there is no way on earth I can verify all that and determine whether I’m being paid accurately,” he said.” It’s very confusing. So most people rip off the bottom part of the check, deposit it, and say, ‘Oh well I guess that’s what I get.’ ”

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Cities around North Texas have begun standing up to gas drillers, alleging that the royalties don’t make up for the myriad problems associated with urban drilling. Toxins released into the air near homes and schools, gas leaks, the industry’s heavy demand for water, damage to residents’ water supplies, loud noises, earthquakes, use of eminent domain laws to take land for pipelines, and the wear and tear on local roads not designed for 80,000-pound tanker trucks have drawn major opposition to fracking, in shale development areas all over the country. City governments are waking up to the fact that that gas drillers rely on lax regulation, threats of litigation, and compliant government officials to force drilling on citizens whether they want it or not.

While there is no Perryman-type study to quantify the toll the trucks have taken on roads, the degree to which the value of properties around pad sites have plummeted, or the overall health effects of poisonous fracking chemicals seeping into the air and groundwater, the anecdotal evidence of what residents have seen and experienced would fill an encyclopedia set.

Cities such as Dallas, Colleyville, Flower Mound, and Southlake have all passed strict ordinances limiting where drillers can set up shop and have generally made it more difficult for companies to develop minerals. For instance, Fort Worth’s 600-foot setback, or the distance between wellheads and structures, is much less than the requirement in those other cities, where the setback is 1,000 feet or more.

Few people know more about the drawbacks of drilling than former DISH Mayor Calvin Tillman. He saw drillers consume his little town, laying down pipelines relentlessly and establishing massive compressor stations that spewed carcinogens into the air and made people ill. Tillman’s own children suffered recurring headaches and nosebleeds, and he later moved his family away from DISH to protect their health. In 2010 he co-founded ShaleTest, a nonprofit organization that tests the air in communities affected by oil and gas extraction.

DISH, with Tillman at the helm, tried to stand up to the rich and powerful drillers that tend to roll over anyone or anything in their way. Any benefits from drilling, such as royalties and increased tax revenue, were far outweighed by associated problems such as pollution, property devaluation, and extensive water usage, Tillman said.

But the townsfolk quickly learned that gas companies keep plenty of lawyers around to fight their battles.

“We had to spend [so much] in legal fees just trying to get them to be reasonable,” Tillman said. “They fought us on just about everything. We were always threatened and bullied and pushed around.”

DISH’s two square miles are so crisscrossed with pipelines that little land remains available in the city for development, he said.

“Cities like Fort Worth have a little more influence, but the smaller cities are the ones that are absolutely run over,” he said.

Denton’s recent ban showed it isn’t afraid to take on the industry, and other cities will follow suit, he said.

“Instead of learning from this and asking why someone would ban their activities, they run to Austin and cry and whine that they’re not able to keep running over people,” Tillman said of the industry. “If the industry had been more reasonable, you would never have heard of me. Their bad actions led to these issues.”

The 3,000 residents in the town of Reno in Parker County grew worried about the earthquakes that began occurring with regularity after drillers flocked to the area and established compressor stations and disposal wells. Reno didn’t go as far as Denton in banning drilling, but it passed an ordinance in April that requires energy companies to provide scientific proof that earthquakes can’t be caused by drilling. So far, no gas company has tried to provide the required proof and get a permit.

“We’ve had well over 300 earthquakes,” Mayor Lynda Stokes said. “We have foundation damages, cracks in walls and doorways, sinkholes in yards. What’s the benefit to us?”

More strict ordinances and outright bans could be coming as elected officials in other cities observe how places like Denton and Reno have fought back. The tougher ordinances and bans being established in small cities also illustrate a collective frustration with the Texas Railroad Commission, the so-called regulatory agency that comes across more like a public relations firm for the energy industry.

“When you reach out to the people you’re supposed to reach out to, and nothing happens, you do things yourself,” Tillman said. “That will continue to grow.”

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