BHP's shale division faces claims
The two claims were lodged in the Arkansas court system this month, and focus on contentious issues surrounding royalty payments to landowners and a series of seismic events that coincided with fracking activities run by BHP subsidiary Chesapeake Energy.
BHP has previously been taken to court in Arkansas by other plaintiffs raising similar complaints, and the two claims - lodged separately on March 6 and March 11 - suggest both issues could continue to plague the company.
The more financially significant claim, which seeks more than $US5 million in damages, is a class action that alleges landowners have been underpaid royalties for hosting shale wells. The claim says a group of companies that both produce and market gas - namely BHP, Chesapeake, BP and Arkansas Midstream - entered into sales arrangements that resulted in "a fraudulent scheme" that reduced the amount of royalties paid to landowners.
The plaintiffs claim this was done by a variety of methods, including intentionally reporting false information around the quantities of gas sold, deduction of fees, taking gas from wells that was never reported and several other "improper deductions".
A similar claim was lodged in Arkansas courts last July, when plaintiffs Denny and Diane Brown claimed BHP and XTO Energy "wilfully withheld" royalty payments.
BHP's Melbourne office was unable to offer further context to the new legal claim on Tuesday, but reiterated previous declarations that the company honours the terms of its lease agreements, and prefers to work with landowners to resolve disagreements.
The second new claim, lodged in the Little Rock division of the US District Court, involves a claim for at least $US75,000 damages from two married couples living in the Arkansas town of Greenbrier. Both couples live about 1½ kilometres from the epicentre of an earthquake that registered 4.7 on the Richter scale in February 2011, and the claim links disposal wells in the fracking process to seismic activity in the area.
That link has not been definitively proven, but fracking has been deemed to cause seismic activity elsewhere, including Britain.
The couples claim they have suffered physical damage to their homes, losses in the value of their real estate and emotional distress.
The distress was claimed to be "so severe ... no reasonable person could be expected to endure it".
The new legal claims come as BHP's controversial $US20 billion punt on shale gas is looking better value than at any time over the past 17 months. The benchmark US gas price hit $US3.99 per unit on Tuesday, and has not breached $US4 since September 2011.
Importantly, the price is now higher than it was when BHP bought the Fayetteville shale from Chesapeake on February 22, 2011.
That $US4.75 billion acquisition was written down by $US2.84 billion in August 2012 on the back of a slump in the gas price, so a rising gas price raises the prospect BHP could reverse that impairment.
Frequently Asked Questions about this Article…
Two legal claims were lodged in Arkansas this month. One is a class action seeking more than US$5 million that alleges landowners were underpaid royalties. The other was filed in the Little Rock division of the US District Court and seeks at least US$75,000 from two couples who link local seismic activity to nearby fracking disposal wells.
The class action names a group of companies that produce and market gas: BHP, Chesapeake, BP and Arkansas Midstream. Plaintiffs say these firms entered sales arrangements that reduced royalties paid to landowners.
The class action claims a range of methods reduced royalty payments, including intentionally reporting false gas quantity information, deducting fees, taking gas from wells that was never reported, and other 'improper deductions.'
Two married couples from Greenbrier, about 1.5 kilometres from the epicentre of a 4.7 Richter earthquake in February 2011, claim disposal wells used in fracking caused seismic activity. They allege physical damage to homes, loss of property value and severe emotional distress; the complaint seeks at least US$75,000.
The article says the link has not been definitively proven. It does note that fracking has been deemed to cause seismic activity in other places, including Britain, but the Arkansas connection remains a legal claim to be tested in court.
BHP’s Melbourne office was unable to provide further context on the new claims, but reiterated previous statements that the company honours lease terms and prefers to work with landowners to resolve disagreements.
Possibly. The class action seeks more than US$5 million and the other claim seeks at least US$75,000, and the article notes the new claims could run into the millions of dollars. The ultimate financial impact will depend on legal outcomes and any damages awarded.
Investors should monitor the progress of these Arkansas court cases (royalty and seismic claims), BHP’s public statements and any settlements, and US gas prices. The article highlights that rising gas prices—now higher than when BHP bought the Fayetteville shale—could affect the value of BHP’s US shale assets and the prospect of reversing past write‑downs.
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