Fort worth council agrees to $6 million gas royalties settlement _ the star-telegram

The City Council voted Tuesday to accept a $6 million settlement with Total E&P USA, after accusing the company and its partner Chesapeake Energy of cheating the city out of millions in royalty payments.

Total, a branch of the French energy giant, bought a 25 percent stake in Chesapeake’s Barnett Shale holdings in 2010. The city had signed a lease four years earlier with Chesapeake that covered about 5,800 acres of city property and about 260 leases in Tarrant and Johnson counties.

The $6 million represents a 100 percent recovery of the post-production costs that were subtracted from its royalties since Total joined forces with Chesapeake six years ago, said Ralph Duggins, an attorney at the Cantey Hanger law firm which represented the city.

Under the settlement, Total will pay 20 cents per mcf more in revenue, according to Jay Chapa, an assistant city manager. Mcf is an industry abbreviation denoting 1,000 cubic feet of natural gas.

Total does not admit any liability in settling the lawsuit. Chesapeake has argued in court documents that it complied with the lease terms.

The council voted 8-0 to accept the settlement. Councilman Sal Espino was absent.

Mayor Betsy Price said the Total settlement “is a very fair offer.”

“We’re pleased with where we got on that and a change in future payments,” Price said. “We don’t have one with Chesapeake yet, but we are optimistic we will.”

Chesapeake, which is not close to settling with the city, goes into court Wednesday morning to argue against a summary judgment request by the city.

“We’ll see what that brings,” Price said of the court hearing.

Just as important as the amount of money the city is receiving from past royalty payments, a key part to the Total settlement is the establishment of how the company pays the city going forward.

Under the settlement with the city, starting with January 2016, Total will pay the publicly posted price at the Houston Ship Channel, minus two cents, on its portion of the gas, Duggins said. This new pricing setup is equivalent to what the city gets under its leases with XTO Energy.

Total also will not deduct post-production costs from what it pays. Chesapeake and Total had been deducting $1 to $1.28 per mcf from gas it sold, depending on the lease, Duggins said.

In its lawsuit, the city contended in court documents that Chesapeake and Total substantially underpaid royalty payments through the use of “sham sales to affiliates” and then “improperly deducting costs of gas gas gathering, transportation, separation” and treatment of the natural gas.

The city said its royalty check should be based on what Chesapeake and Total got when they sold the natural gas to a third party.

Chesapeake has argued in court filings that the royalties it paid were based not only on the price of the gas at the wellhead but that it paid a “weighted average sales price” after selling and marketing it. It also argued it could deduct post-production costs.

Shayne Moses, who represented the Dallas-Fort Worth Airport Board when it settled in 2012 with Chesapeake for $5 million, said it is as important to set an “objective standard” of what you are going to get paid in the future as getting back what you weren’t paid in the past.

This kind of detail is what Chesapeake has tried to keep confidential.

When settling with the Fort Worth school district earlier this year, Chesapeake asked the district to sign a confidentiality agreement. The company said releasing the information would be harmful because other plaintiffs suing Chesapeake could use the information in their own litigation.

Chesapeake has asked the state attorney general’s office to keep the district deal under wraps.

Council briefs

The City Council voted 7-1 to approve a $20 million economic incentive for The Outlets at Alliance, a development of Fort Worth’s Woodmont Land Co. and AIL Investment LP, a Hillwood Properties entity. Councilman Jungus Jordan voted against the incentive and Sal Espino was absent. The 580,000-square-foot shopping mall is planned for the east side of Interstate 35, near Cabela’s, in far north Fort Worth. The incentive is a grant of 85 percent of the city’s 1-cent sales tax if the project reaches $100 million in investment. Construction has not yet started.

Greensboro, N. C.-based Tanger Outlets recently announced several tenants for its outlet project nearby at Champions Circle on the west side of I-35 at Texas 114. The city approved a $25 million incentive for the project.

“The Woodmont Co. is committed to developing an outlet center that will best serve the needs of the area shoppers,” said Woodmont Chairman Stephen Coslik, in a statement. “In our experience, the best real estate wins and that is our commitment for this property.”