Journalism in the Public Interest

Chesapeake Energy Cheat Sheet: What’s Been Uncovered So Far

Reports of alleged price-fixing by the nation’s second-largest natural gas driller is the latest blow to the beleaguered company in recent months


(Flickr photo)

July 5, 4:42 p.m.: This post has been updated.

The last four months have been rather bumpy for Chesapeake Energy Corp., the nation’s second-largest natural gas company behind Exxon Mobil.

Starting in April, Reuters took aim at the company’s flamboyant chief executive, Aubrey McClendon, in a series of articles, prompting his ouster as company chairman (he remains CEO) last month at the behest of disgruntled shareholders. The revelations also triggered an SEC probe.

The company was rocked anew last week when the news agency disclosed a series of email exchanges in which McClendon and other Chesapeake executives appeared to collude with officials at EnCana Corp., Canada’s largest natural gas company, to suppress the price of land leases in Michigan.

Reuters reported on Monday that the Justice Department has launched a probe into whether these communications violated laws against price fixing.

As a prominent player in the national debate over hydraulic fracturing, Chesapeake was hardly a stranger to controversy even before the Reuters investigation. Last May, ProPublica reported that Chesapeake was fined more than $1 million by Pennsylvania state officials -- the largest fine the state had issued to an oil and gas company -- for contaminating water supplies in Bradford County.

The company’s business practices earlier came under criticism when it emerged in mid-2009 that Chesapeake’s board gave McClendon a $112.5 million pay package in 2008 even as the company’s stock dropped 58 percent amid slumping natural gas prices. The contract, which included a $75 million bonus and other generous perks, was brokered as McClendon staved off a personal financial crisis by selling off approximately $552 million worth of Chesapeake shares over a three-day stretch to cover margin calls.

Shareholders expressed their displeasure with the generous compensation package, the highest awarded to any Fortune 500 CEO in 2008, by suing Chesapeake. In 2011, as part of a settlement, McClendon agreed to buy back a collection of antique maps sold to the company for $12 million under the 2008 plan. Today, the 52-year-old, who owns a 19 percent stake in the NBA’s Oklahoma City Thunder, has an estimated net worth of $1.1 billion.

Here are some of the key findings from the recent Reuters series:

· McClendon failed to disclose up to $1.1 billion in personal loans borrowed against his share of company oil and gas wells under a unique company program that gave the former chairman a 2.5 percent stake in the profits of thousands of drilled wells. The program has since been dropped. (First indication of the loans came in a story by the Pittsburgh Post-Gazette, which reported in March that a Chesapeake affiliate run by McClendon was mortgaging its stake in oil and gas leases in West Virginia.)

· For a time, McClendon operated a $200 million hedge fund that traded in oil and gas contracts. Experts have called this problematic since insider knowledge that McClendon gained as head of Chesapeake could have helped boost his personal profits at the expense of the company. Tom Ward, Chesapeake’s co-founder and McClendon’s hedge fund partner, has denied there was a conflict of interest. “We did not use any proprietary knowledge of (Chesapeake) trades to make our own individual decisions,” he told Reuters. Forbes has more on the potential breach of duty created by the fund, the existence of which wasn’t disclosed to shareholders.

· According to Reuters, top officials at Chesapeake and EnCana exchanged emails between June and October 2010, discussing ways to avoid bidding against each other at a Michigan public land auction in order to keep land prices down. The emails discussed dividing up counties to acquire land without competing against each other. McClendon, according to the story, wrote in an email to a subordinate that it was time “to smoke a peace pipe” with EnCana executives “if we are bidding each other up.”

Reuters reported that it was unclear whether the rival energy giants “consummated any collusive agreements,” but an analysis of the auction results showed that “neither company bought any land in the same county as the other.”

A spokesman for Chesapeake had no comment regarding Reuters’ findings or the reports about the Justice Department investigation. A Justice Department spokesman declined to comment on the findings. In a June 25 press release, EnCana officials stated that an investigation into the collusion matter had been “immediately initiated.”

In the event of criminal prosecution, the potential consequences are substantial. Under the Sherman Antitrust Act, price fixing is a felony, punishable by fines of up to $100 million for companies and $1 million for company officials.

The scrutiny of Chesapeake’s corporate practices comes during a prolonged slide in natural gas prices, which reached their lowest levels in a decade in April. Chesapeake has a projected cash flow shortfall this year surpassing $10 billion.

The spotlight on the company isn’t going away: on Monday, Bloomberg reported that over its 23-year history, Chesapeake had paid just $53 million in income taxes on $5.5 billion in pretax profits, a rate of about 1 percent, thanks to a rule that allows U.S. oil and gas producers to postpone payments to account for the inherent costs of well drilling.

Update: This story has been updated to include a link to a March 2012 Pittsburgh Post-Gazette story.

Gee, ProPublica - I’m tempted to accuse you of picking the low-hanging fruit.

I daresay it is rather more difficult to find an honest energy company than a dishonest one.

Timothy R. Ruggiero

July 5, 2012, 4:14 p.m.

I’d like to hear who those ‘honest’ energy companies are. The article failed to mention the recent $1.6M settlement with 3 Pennsylvania families for contaminating their water well, unrelated to the $1 million fine imposed by the state.

I’m fond of our public utilities here in Washington State. They don’t have to serve the interests of stockholders - instead serve their customers.

What responsible town board (or governor) would allow this company to drill and count on them to do it safely?

The sad part is—none of these things surprise me anymore. What fools we have all been. That funny feeling that something isn’t right, well we should be listening to those feelings. What do we have to do to have something done about this ongoing pillaging of the public trust and the environment. Thank goodness for ProPublica, what would we do without you.

Chip Northrup

July 5, 2012, 8:12 p.m.

Good summary -might as well kick them while they’re almost dead . . .

Plus they write the darndest regulations . . .

Sue the towns don’t have much choice with regard to the drilling. The state issues the permits. In fact, with the new Impact Fees,communities had to even give up their zoning rights to block drilling if they.wish to receive any monies from the Impact Fees.

These energy companies can’t be trusted, most of the state legislature is corrupt, local officials are too easily impressed with a few bucks and bought-off on the cheap, and none of the above can be trusted. We know this. This is not news. Therefore, it’s up to the people to stand up and end this insanity. After all, we are the one’s who continue to elect, and re-elect these crooks. There is no negotiating with the industry, or the politicians, so we have to look to ourselves. At the end of the day, we are going to end up living with whatever we are willing to tolerate. When we, as citizens, decide we’re not going to put up with this kind of abuse and refuse to tolerate it any longer, then, and only then, is it going to stop. Our state and local elected officials were elected to look out for our interests. They are here to serve us. We are NOT here to serve them. If they don’t do their job, fire them! Think about it.

The problems do not exist in the drillings or contaminations but the dishonest tricks through which those company-heads make money for themselves. In Canada, the big bosses (who are mostly from UK origin or associates of original British law-book handlers, modifiers, makers etc.) of Gas, Water and Hydro companies get salaries in millions of dollars with ‘Debt retirement plan for themselves’ where premiums for such plans are collected from even consumers that have no guarantee what will happen to them after retirement and have no savings left after paying too high gas, water, hydro bills and insurances.
Visit S.V.P. for details.

How long will it take for Governor Cuomo to admit that those who dabble in fossil fuels care nothing for the health and safety of residents and workers nor the economic viability of our communities? 

How much longer will our governor flirt with the likes of Aubrey McClendon while businesses that make this region economically sustainable, i.e. farms,  wineries, recreation, tourism, wonder whether they will be “sacrificed”?

Eat The Babies!

July 6, 2012, 9:28 a.m.

I have a long, solid track record of fighting frackers. So lest anyone think that I am an apologist of some kind… I’m really not. I’ve been one of the full time organizers in PA fighting them for four years now.

This question of price fixing is interesting, though… is it really price fixing for two big players to just divide up territory? That’s an interesting question… I bet there are all kinds of examples where people either explicitly or implicitly do that and no one thinks twice about it.

I’m just going to be interested in what the courts say on that one, I guess…

Fracking Comics on Eat The

Juanita Sneeuwjagt

July 6, 2012, 9:14 p.m.

I’ve been fighting the frackers for nearly six years and agree with all the above comments.  Gas industry is the only gainer from all the corruption and contaminating of air, land and water.  Since gomernment and bought and paid for politicians will not help; it is indeed up to the people to take back their rights.  Josh Fox is right!  We must stand together against the atrocity felled upon us by gas industry and their assissants.

Fed up in Appalachia Virginia.

@ Sue Rapp

The town board in Pulteney, NY, voted against a fracking/drilling moratorium. They are the only town on Keuka Lake, the source of water for thousands and vital economic resource, to not vote for a moratorium.

Shame on them.

Appears to be a little back-story to that Pultenay, NY vote above and beyond their miniature replication of the nation’s Congress and its prioritization of party doctrine over their jobs.

It would appear that the board had been well-snowed by unchallenged industry representatives flaunting the to-be-anticipated credentials (but unequipped with polygraph wiring, which is always a mistake) while the anti-fracking speaker at the June meeting out-and-out betrayed (whether intentionally or not, I cannot say) his announced purpose by adopting the Fox style of discourse.

It is a sad-but-true reality that only the right is allowed to adopt the belligerence and arrogance of the right.

All of which suggests to me that those who are against fracking need to line up credentialed experts for the purposes of testimony before such town boards for without those experts on hand, what happens is exactly what you see in the comments on ProPublica - that is, Big Carbon’s mouthpieces employ the parable of the elephant:

Four blind men encounter an elephant. One grabs the leg and concludes it is a tree trunk. One holds the tail thinking it is a whip. Another touches the elephant’s trunk and decides it’s a hose and the fourth man pats the side concluding it’s a wall.

The wise man tells them, “All of you are right.”

I.e., the industry experts are paid to avoid thinking - or discussion - outside of a specific tunnel (about the size of a cased well, in fact) that paints a “best case” scenario; to that end they will attempt to restrict the focus of the public by drowning them in detailed minutiae that carefully excludes all physical conditions and events that would yield any outcome other than that “best case” outcome.

I.e., the industry’s experts are only there to ensure that the public believes that the “best case scenario” is the only possible outcome.

So you need to bring horsepower to refute that - horsepower that includes not just geologists but experts in groundwater movement, plate tectonics, materials science, toxicology, and so on.  And even experts in seemingly exotic subjects such as paleontology who can answer questions like “Well, if Big Carbon’s ‘best case’ scenario is not the reality 100% of the time from now until the end of time, for how many thousands of years can we expect the aquifers to remain contaminated?”.

If you don’t, the paid-to-be-amoral (at best) industry experts will attempt to focus the public on the elephant’s leg to ensure that the public doesn’t realize that Big Carbon’s gigantic fracking butt will sit on their heads at the least little physical provocation.

We live in Wellston Oklahoma, and suffer each day with the gas site behind us. Inside the house we have BTEX and are sick daily. The media, government, law, EPA, DEQ, none want to know anything about it, cause this hole state is nothing but crooks. All they care about is $$$$$$.

7years ago gas rig went in behind our quiet country home on forested lot.let the nightmares begin,first threatened with imminent domain for refusing them on our property,they put rig in Barry 250 feet behind us and planned on using 3000 feet of our property to run line. Meanwhile rig is on 80 acres but land owner did not want rig by his we are losing trees a a great pace, scary.sounds like an industrial area 7 days a week 24 hours a day. Lost all bird activity for 2years,only now are they returning.just now put up 8 foot wood fence, has decreased property value greatly, no one in their right mind would buy this place.

Worse of we receive no Money ,we never would have bought this place with rig behind home.tried many avenues to get answers on things.pretty much got laughed in our face and stated that we couldn’t afford to fight the gas rig. Only good thing is we stuck to our convictions and did not sign on. Rig went in ,changed our lives,we don’t even have family BBQ in yard because of constant loud noise. I am not a mean person ,but I hope the land owner chokes on his greed,or contracts something that money can’t fix,just for laughing at us.neighborhoods beware ,it can happen to you.

It’s tragic for all of us who have witnessed Chesapeake’s corporate ethics played out in our communities all across North Texas.  We were here first, but that doesn’t matter, if we haven’t cooperated they have punished us. This is their handiwork and the damage is permanent. We pray this, or many things worse with shale gas drilling and fracking, don’t happen to you or to your community.  Amen.

How can Governor Cuomo even begin to consider trusting a company like this to drill in NYS!  The Governor must not allow Chesapeake or any other company to begin drilling in NYS.

Chesapeake has been promoting many myths.  For example, the myth that gas drilling will boost employment in NYS.  The fact is that the gas industry routinely exaggerates the numbers of jobs it creates.  In PA, the industry claimed to have created 48,000 jobs.  It turns out the real number is more like 6,000 net new jobs – and most of them went to workers imported from out of state.  (See Drilling Deeper into Job Claims, The Actual Contribution of Marcellus Shale to Pennsylvania Job Growth by Stephen Herzenberg published by the Keystone Research Center in Harrisburg, PA.)

The conclusion is that several thousand jobs (that go to mainly transient, out-of state-workers) will do little to lessen New York’s unemployment rate.

New Yorkers beware!

Conflict of Interest, With a side of Racketeering, Perhaps they forgot to read the R.I.C.O Act,(Prosecutors)

For years the leases on inherited mineral rights in Oklahoma were paying a monthly check of about enough for a 2 weeks supply of groceries. Without any notification to mineral owners, Chesapeake bought up many leases from small oil companies.  We ceased receiving monthly checks but, rather checks quarterly…they won’t buy a week’s supply of bread and milk.  No one who owned these mineral rights have any say in Oklahoma as to who can buy the leases which were originally signed by the royalty owner.  We never signed, nor would any Oklahoman I know, with Chesapeake….They have always be known to be thieves as far back as my great grandpa, who originally signed the first drilling lease on my inheritance.  He is definitely turning over in his grave over this corporation!!!!

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