Chesapeake Energy Corporation (NYSE:CHK), the second largest natural gas producer in the United States, is facing accusations that it is underpaying royalties for landowners for the oil and gas pumped out of their properties, according to reports from the Wall Street Journal.

Chesapeake Energy

Doug McLinko, a commissioner at Bradford County, a rural area in northern Pennsylvania where the majority of oil and gas drilling is happening, said the sentiment against Chesapeake Energy Corporation (NYSE:CHK) is growing.

“Bradford County is a pro-gas part of the country where we support hydrocarbons 100%, but we don’t support everyone who’s doing it,” said McLinko.

Governor requests investigation

The growing complaints by landowners against Chesapeake Energy Corporation (NYSE:CHK) for allegedly shortchanging royalty payments prompted Republican Governor Tom Corbett to write an open letter requesting the attorney general in the state to investigate the issue last month.

Chesapeake Energy Corporation (NYSE:CHK) responded to the governor and emphasized that it is following the terms of its contracts with landowners.  Its CEO Doug Lawler explained that the majority of the leases in Pennsylvania allowed costs deductions, and the company tries to reach an agreement with landowners when royalty disputes arise.

Royalty disputes common in the energy industry

According to the Wall Street Journal, disagreements regarding royalty payments between landowners and energy companies are common in the industry. Landowners generally receive a monthly royalty from companies drilling oil or gas from their properties. They normally receive a fixed rate based on the market value of the oil and gas extracted from their land and sold by the energy company.

Some energy companies subtract expenses such as transportation, marketing, and processing the oil and gas. The reason behind the royalty disputes is the amount of the deductions and if Pennsylvania’s regulation can limit such deductions.

Chesapeake making higher deductions

Based on the review conducted by the Wall Street Journal, Chesapeake Energy Corporation (NYSE:CHK) seemed making deductions and fees that are higher than its peers in the energy industry such as Anadarko Petroleum Corporation (NYSE:APC), Statoil ASA (NYSE:STO), and Mitsui E&P USA LLP

Mary Moon, one of the landowners in New Albany Township told the newspaper that the deductions of Chesapeake Energy Corporation (NYSE:CHK) is double compared with the deductions by other energy companies that are also drilling oil and gas in their property.

Chesapeake Energy Corporation (NYSE:CHK) subtracted 37% for expenses based on Mrs. Moons recent check for royalty on one well. Her royalty payment for one well declined from $2,207 to $1,372 (recent check). Anadarko Petroleum Corporation (NYSE:APC) and Mitsui deducted 18% for expenses from her royalty payments while Statoil did not make any deductions based on the checks she received from the companies.

Energy companies are required to pay landowners at least 12.5% royalties for oil and gas extracted from their properties under Pennsylvania law. A State Supreme Court made a decision allowing energy companies to deduct expenses. The state legislature introduced a bill to clarify the vague language in the law and reinstated the 12.5% minimum royalty payment for landowners.