United States District Court, W.D. Pennsylvania
Stewart Cercone Senior United States District Judge.
Edward Ostroski and Kathleen Ostroski (the
“Ostroskis” or “Plaintiffs”)
initiated this action against Defendants, Chesapeake
Appalachia, LLC (“ChesApp”) and two (2) related
companies, Chesapeake Operating, LLC (“ChesOp”)
and Chesapeake Energy Corporation
(“CEC”)(together the “Chesapeake
Defendants”) by filing a Complaint to Vacate
Arbitration Award. The Ostroskis filed an Arbitration
Complaint and Demand against the Chesapeake Defendants
alleging the underpayment of natural gas royalties under a
Paid-Up Oil and Gas Lease they entered into with ChesApp.
After the filing of cross motions for summary judgment, the
arbitrator entered a Final Award in favor of the Chesapeake
Defendants. By their Complaint, the Ostroskis now seek to
vacate the Final Award.
Statement of the Case
about September 15, 2007, the Ostroskis entered into a
Paid-Up Oil and Gas Lease (the “Lease”) with
ChesApp pursuant to which the Ostroskis leased oil and gas
rights to real property in Bradford County, Pennsylvania.
Plaintiffs' Appendix (“Pl. Appdx.”) Ex. 9, p.
Lease provides for a royalty payment for natural gas as
(B) ROYALTY: To pay Lessor as Royalty, less all taxes,
assessments, and adjustments on production from the Leasehold
as follows . . .
(2) GAS: To pay Lessor an amount equal to one-eighth (1/8) of
the revenue realized by Lessee for all gas and the
constituents thereof produced and marketed from the
Leasehold, less the cost to transport, treat and process the
gas and any losses in volumes to point of measurement that
determines the revenue realized by Lessee. . .
Pl. Appdx. Ex. 12, pp. 214-215. Plaintiffs contend that
ChesApp breached the lease by paying the royalties on the
wrong price. Complaint ¶ 19.
admit that ChesApp is a gas producer, not a gas marketer.
ChesApp Resp. Ex. 2 ¶ 9. In order to market its gas,
ChesApp transfers title to the raw gas at the well to its gas
marketing affiliate, Chesapeake Energy Marketing, L.L.C.
(“CEM”). Complaint ¶ 20, ChesApp Resp. Ex. 2
¶ 10. CEM processes the raw gas into marketable natural
gas and markets the processed gas to third-party buyers in
downstream markets. Id.
letter to Plaintiffs describing how it markets its gas, CEC
stated as follows:
By way of background, gas produced from the Lease is in
marketable form at the well, and is sold by [ChesApp] to
[CEM] at this point. [CEM] is a marketing company, which
takes title to and possession of gas at the well and
aggregates it with gas from multiple other wells into a
downstream pool typically on an interstate pipeline. The
volume of natural gas aggregated in this pool is then sold to
many different buyers, at different prices. On a monthly
basis, [CEM] determines a weighted average sales price for
the gas sold from the pool at the downstream, value-added
points of sale. The weighted average sales price is
calculated by averaging the price received from the
individual sales from this pool across the entire volume
contained in the pool. [CEM] pays [ChesApp] 97% of this
weighted average sales price ([CEM] retains a 3 percent
marketing fee which is born solely by [ChesApp] and is not
passed on to the Lessor), less costs [CEM] incurs between the
point of sale at the well and the downstream points of sale.
The costs incurred by [CEM] are itemized in your royalty
ChesApp Resp. Ex. 2 ¶ 14.
argue that ChesApp is calculating the royalties based upon a
“theoretical well head price, calculated as the price
paid by the third-party buyers less the costs incurred by
[CEM] between the well and the sale to the third-party,
including the costs of gathering, compression and interstate
transportation through the interstate pipeline system[, ] but
should be paying royalties on ...