Chesapeake CEO says Verdict could endanger future gas exploration

By David Hedges, Publisher

A $404 million verdict returned by a Roane County jury could endanger future natural gas exploration in the county, according to the head of one of the nation's largest gas companies and a defendant in the lawsuit.

Aubrey McClendon, CEO of Chesapeake Energy, appeared on television this weekend to discuss the outcome of the class action suit. After three weeks of testimony, a six-member jury awarded the plaintiffs $134.3 million in actual damages, and $270 million in punitive damages.

After the verdict was announced, the company threatened to halt plans to build a regional headquarters in West Virginia. In the latest interview, McClendon also threatened to stop drilling activity in Roane County.

McClendon said Chesapeake had undertaken an expensive project to find new locations to drill for gas. But he said unless the verdict is overturned, those plans might be scrapped.

"Right now we are just finishing the first large three-dimensional seismic survey ever shot in the state of West Virginia, which ironically is in Roane County," McClendon said. "We are kind of scratching our heads about what to do with it.

"We own most of the acreage already it's called 'held by production by shallower wells'," according to McClendon.

"In terms of timing, if we want to sit on this for the next 20 or 30 years we can certainly do that," he said. "I'm not willing at this point to commit to a big, new, large exploration program in the state of West Virginia when I don't know how the leases that I've inherited are going to be interpreted by judges across the state. We've got to get a definition on this."

The lawsuit filed on behalf of more than 8,000 gas well royalty owners alleged that Columbia Natural Resources (CNR), NiSource and related companies defrauded royalty owners out of royalty payments for gas taken from their wells.

The suit was filed in 2003. Chesapeake was aware of the pending case when it acquired CNR in 2005.

McClendon was interviewed by Bray Cary, president and CEO of West Virginia Media, for the weekly program "Decision Makers," which airs on several television stations in the state. The interview was conducted at Chesapeake headquarters in Oklahoma City.

The program, usually 30 minutes in length, was expanded to an hour to accommodate the interview and a rebuttal by Charleston attorney Scott Segal, one of the lawyers who represented the royalty owners.

Segal agreed with Cary that the verdict could be the largest ever in the state.

"It may be indeed," Segal said.

But in terms of the punitive damages, Segal said the verdict was well below the maximum of five to nines times the actual damages set by previous court rulings.

Segal said every award of punitive damages in West Virginia must be reviewed by the trial judge to see if the amount is justified and reasonable. He said he expected the punitive damages to be upheld.

"I don't have any doubt in my mind it will stand," Segal said, "because it doesn't approach any case that has been reversed by our court or the U.S. Supreme Court."

Cary told McClendon that the verdict came in what was considered a conservative county, and the presiding judge was a conservative Republican.

"Lord help us if we get before a liberal Democratic judge, I guess," McClendon said. "It really boggles the mind and makes us even more determined to press for change in West Virginia.

"I think it sends an even more chilling message that, from a businessperson's perspective, that if this is the most sympathetic forum we could have found in West Virginia and this is what happened, imagine what would have happened in an unsympathetic forum."

Former Roane prosecuting attorney Tom Evans, one of two judges in the circuit, presided over the trial and must review the case before the jury's verdict is finalized.

Shortly after the jury verdict was returned on Jan. 27, Chesapeake officials said they were reconsidering their previously announced plans to build their eastern regional headquarters in Charleston.

McClendon said Chesapeake's drilling activity in the eastern U.S. encompassed several states, from New York to Alabama, and the company could locate a regional headquarters in any of those states.

"We're within six months of having to make a decision about whether it's Pittsburgh, Richmond, Knoxville or any other place along the East Coast," he said.

McClendon said he hoped that the judgment would get the attention of officials around the state.

"It needs to be repudiated politically, it needs to be repudiated legislatively and frankly, legally, when it goes to the Supreme Court," he said. "If it's not overturned at this judge's level, which seems unlikely, it needs to be addressed in all three branches of government."

McClendon said Chesapeake was eager to drill new wells in the state.

"We really came (to West Virginia) to find new reserves of natural gas," he said. "If we're going to create tens of millions of dollars of new value for royalty owners and vendors across the state, we need to find new reserves of natural gas."

A check of records at the Roane courthouse showed 13 Chesapeake leases were recorded last week. However, those leases had been signed by royalty owners between September and November of last year, well ahead of the jury's verdict.

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