Double-dipping in Pa. gas leases

Posted: August 19, 2013

William A. Capouillez may be the hardest-working man in Harrisburg.

From 7:45 a.m. to 4 p.m. each day, Capouillez works as a director for the Pennsylvania Game Commission, where his responsibilities include overseeing leases for oil and natural gas development on 1.4 million acres of public game lands.

During his lunch breaks, coffee breaks, evenings, and holidays, Capouillez has a profitable side job. He acts as an agent for property owners who lease their land for oil and gas development, signing private deals with the same companies that often work with his state agency.

Business rivals, including other leasing agents and drilling companies, have complained for years to legislators and to the Governor's Office that Capouillez's dual roles represent a conflict of interest. They say Capouillez is in a position to trade on inside information from his public job by signing up private landowners near state game lands.

But Capouillez, who is paid $75,834 as director of the Bureau of Wildlife Habitat Management, says the state has been unharmed by his outside activity. The commission has approved his supplemental employment on the condition that he doesn't exploit confidential information and that he doesn't use state time or equipment for his private practice.

"If you understood the facts, the appearance wouldn't look the way it does," Capouillez, 48, said in a recent interview. "There's nothing hidden beneath the blanket, there's no smoking gun."

The Governor's Office takes a dim view of Capouillez's consulting work.

"This type of conflict, or an appearance of a conflict, wouldn't be tolerated in the Corbett administration," said Eric Shirk, a spokesman for Gov. Corbett.

There is little the governor can do. The Game Commission is an independent agency, much like the Turnpike Commission and the Public Utility Commission. The Game Commission's eight members are gubernatorial appointees, but the governor does not control the agency's activities.

The Game Commission holds Capouillez in high regard.

"I don't know the legalities of this stuff, but I think he's passed muster on everything," said Robert W. Schlemmer, a Westmoreland County businessman who is the commission's president. Schlemmer, who was appointed by Gov. Ed Rendell, described Capouillez's public work as "awesome."

No doubt, the Game Commission and Capouillez have benefited from the Marcellus Shale bonanza. The commission earned $20 million in revenue in 2011-12 from drilling, a tenfold increase in five years. In his private practice, Capouillez earns fees and royalties off tens of thousands of acres of gas leases he has negotiated.

Capouillez's story is emblematic of the new high-stakes world of natural gas, where the arrival of unexpected shale fortunes has utterly transformed the lives of landowners, altered the physical landscape, and refashioned a business once conducted casually in Pennsylvania's hinterlands.

Capouillez's fees were a recurring subplot in a private lawsuit that played out over the last year in Williamsport.

Capouillez in 2012 sued the owners of a private hunting club and the drilling company Range Resources Corp. for cutting him out of a lease that could have earned him millions of dollars in gas royalties.

Although Capouillez's state job was not the subject of the suit, his employment was examined extensively in depositions.

"Many people have talked about Bill Capouillez to me," testified Carl Steinle, a Range Resources land manager. "Some of them like him. Many of them hate him. You know they feel that he's enriched himself."

The dispute took an unexpected turn in April, when a judge in Lycoming County Common Pleas Court threw out the lawsuit.

As an added insult, he ruled that Capouillez had engaged in the unauthorized practice of law when he advised landowners about their gas leases.

How it began

William Capouillez portrays himself as kind of a blue-collar success story. He grew up in central Pennsylvania, enlisted in the U.S. Army at age 17 and then became an officer. He retired in 2004 as a major in the Reserve.

Along the way, he graduated from Pennsylvania State University with a degree in earth and minerals science. He obtained a license as a geologist.

After working at jobs in the private sector and state government, Capouillez was hired by the Game Commission in 1992 as a hydrologist.

Then he saw a business opportunity.

At the time, most oil and gas lawyers worked for industry clients, Capouillez testified in the Lycoming County case. Farmers and private hunting-club owners had few advisers to whom they could turn.

So Capouillez created Geological Assessment & Leasing L.L.C., which he operated out of his house in McVeytown, a small borough on the Juniata River in Mifflin County.

Capouillez did not charge clients an upfront fee, but was compensated only when he successfully negotiated a lease on their behalf. Capouillez got a share of the signing bonus. He also got a share of any future royalties when oil or gas was developed.

"My business model was unlike anybody else's business model," he testified. He called it a performance-based model.

Capouillez said he did not mention his state affiliation when he pitched his services as a consultant but inevitably questions would arise.

In 2001, long before the Marcellus discovery turned some rural landowners into virtual lottery winners, Capouillez was invited as a Game Commission official to speak to farmers in Washington County. Afterward, hay farmer Craig Sweger asked Capouillez whether he knew anybody who could help private landowners lease their land to gas drillers.

"He said he might be able to work with us," Sweger said.

Sweger was troubled that Capouillez's side business closely resembled his day job. But Capouillez produced a document from the wildlife agency approving his outside employment.

"I felt if the conflict of interest wasn't a concern for the Game Commission, it wasn't a concern for me," said Sweger, then the head of the Washington County Farm Bureau. He signed up and introduced Capouillez to other farmers.

"In a way, I helped to create Bill," Sweger said. "The activity I got him involved with made him a millionaire many times over."

Capouillez's side job rubbed some people the wrong way. Rival leasing agents felt Capouillez had more credibility with potential clients by virtue of his state job.

"This guy's a snake in the woods as far as we're concerned," said Mark Thompson, president of Horizontal Exploration L.L.C., an Indiana, Pa., drilling firm. He protested to legislators about competition from the state employee.

"When does he have his state hat off, and when is it on?" asked Jim Bourbeau, a Crawford County land agent who works with drilling companies. "I think he has inside information from his role managing state game lands, and that gives him a big foot forward."

Range Resources often worked with Capouillez, both in his public and his private capacity. It now faces the awkward situation in which the public official is also its private courtroom adversary.

"We were always troubled with the fact that a state employee was engaged in this sort of outside activity, even if it's permissible under the law," said Matt Pitzarella, a spokesman for Range. "Unfortunately, however, we can't control who a landowner chooses to work with."

The Johnstown Tribune-Democrat raised questions about Capouillez's work in 2008, but the Game Commission said Capouillez had fully disclosed the outside job, and it dismissed the controversy. "It's not new," the commission's spokesman said at the time.

Pennsylvania's ethics law prohibits state employees from using confidential information or the "authority" of their employment for "private pecuniary benefit." It also requires employees to declare the sources of the outside earnings.

Disclosing outside work does not immunize an employee from conflict, said Robert Caruso, executive director of the State Ethics Commission. But the appearance of a conflict is not a violation. There has to be an actual conflict.

Caruso said the Ethics Commission had no record of ruling on a complaint about Capouillez.

After the Marcellus discovery broke onto the public stage, Capouillez's work attracted more attention.

The amount of gas produced from Marcellus wells far exceeded early expectations. Land that had leased for $5 an acre in 2000 fetched more than $500 an acre by 2008. Prices eventually topped out at more than $5,000 an acre.

At the height of the Marcellus frenzy, when drilling companies were bidding to amass the best shale deposits, Capouillez was traveling across Pennsylvania, Maryland, West Virginia, and New York to deliver seminars to landowners about shale gas.

Capouillez said he sometimes worked past midnight, arranging leases for his private clients. He said he was careful to do his consulting work when he was off the state clock.

Landowners say Capouillez exuded confidence - he had a firm handshake and military bearing.

"He's got an attitude, there's no doubt about that," said William Brooks, 72, whose family owns a Lycoming County logging company. "He impressed me, I know that."

Landowners said before the shale boom, they had little knowledge about negotiating with drilling companies, which typically offered a standard take-it-or-leave-it industry lease. Capouillez used a lease modeled on the Game Commission's, which included more environmental safeguards. "He protected us," Brooks said.

But as Marcellus prices escalated, some landowners began to resent the amount of money Capouillez would reap under their earlier agreements. Capouillez would capture a share of the cash flow for as long as the wells produced - perhaps decades.

Some resentment

The Laurel Hill Game and Forestry Club was created in the early 20th century from the cheap, deforested land remaining after the Pennsylvania timber boom. Over time, the club's members expanded the holdings to 5,199 acres.

The club signed several natural gas leases during the last 50 years for nominal amounts of $1 or $2 an acre, according to Lycoming County land records. As was typical for the area, no gas was ever produced, and the leases expired.

But in 2006, landmen were stalking northern Pennsylvania, offering breathtaking prices of $50 or more an acre. The target of the exploration was the Trenton Black River formation, a limestone deposit deeper than the Marcellus.

Laurel Hill's members voted to sign up with Capouillez, who had enlisted the owners of more than 15,000 acres in Lycoming County. He solicited bids and negotiated an agreement with the drilling company that later became Range Resources. It provided for payments totaling $139 an acre over five years. Capouillez's share was $10 an acre - a little more than $50,000 from Laurel Hill's acreage alone.

Capouillez also got half of any royalty above the 12.5 percent minimum mandated under state law. Because Range offered to pay 16.5 percent, Capouillez would receive 2 percent of any revenue generated over the life of the wells. The club would get 14.5 percent.

In later years, the club's leadership grew increasingly vexed at the terms of their original deal. Their e-mails, later submitted into court evidence, spoke about Capouillez's "greed" and his "horning in" on their share.

As the original lease neared its expiration in 2011, another drilling company was dangling more than $20 million at the club to take over the drilling rights, according to court documents. But Range Resources broke ground on the first Laurel Hill well two days before the lease lapsed, locking in the deal.

Nevertheless, the club sued Range in federal court, alleging the first lease had expired. The parties settled out of court. The terms: A new lease, providing for the same 16.5 percent royalty.

But this time, Capouillez was excluded.

Capouillez sued in 2012 to recover the 2 percent royalty he lost. The share was potentially worth millions from the gas underlying the club's eight square miles of forest.

'Unclean hands'

The Laurel Hill club owners countersued, claiming that Capouillez had engaged in the unauthorized practice of law in 2006 when he advised them on the gas lease.

In depositions, Capouillez was questioned extensively about the legal documents he used in his private work. In his defense, Capouillez testified that he paid lawyers informally to review some documents.

"I gave people money, cash, to do stuff," he said. "Lots of times they didn't want it, but I would give them cash anyway. Did I get an invoice? No."

He said he "possibly" paid the Game Commission's chief counsel, William Pouss, to review private leasing documents. That would be the same Game Commission lawyer who would have been in a position to decide whether Capouillez's outside work amounted to a conflict of interest.

Pouss, now retired, said he did no such work for Capouillez because that would have been a conflict. And Capouillez, after reflecting on his testimony, said it was another instance where there appeared to be a conflict, but none existed.

In the end, Capouillez's testimony about his work practices did not win over Judge Richard A. Gray.

In April, Gray threw out the suit, saying Range Resources had the legal right to surrender the original 2006 lease.

He also ruled Capouillez's testimony showed he was practicing law when he signed up the landowners in 2006.

But Gray turned down the club's demand for damages. He based his ruling on a legal principal known as the "doctrine of unclean hands."

As the judge wrote later, the club's own behavior could not be constituted as "honest and fair dealings."

'Higher mission'

Capouillez is circumspect about how much money he earns from consulting. Asked by a lawyer how much leasing he did before the Marcellus discovery, he simply replied: "A lot." But when pressed about revenue, he offered no specifics.

"I have a tax accountant that handles that stuff," he said.

In an interview, Capouillez said he no longer needed his state salary, but worked for the Game Commission because he was passionate about protecting wildlife.

"It's not about the money," he said. "It was never about the money."

Capouillez frequently questioned the character of his critics and invoked the "moral and ethical values" he learned in the military. He said public criticism of his outside work had only been good for business.

"Every time anybody has run a story," Capouillez said, "I get people who call up and say, 'I read that story. If you've made this gas company mad, or this person mad, you're the person for us.' "

With some of the money earned from his consulting business, Capouillez and his wife, Tracy, established a nonprofit corporation in 2010, the McVeytown Community Local Mission Service Foundation.

The Christian-based amateur sports organization is building ball fields and a community center in McVeytown to advance the evangelical mission of the church where Capouillez is a deacon.

In the nonprofit's first two years, according to its federal tax returns, it recorded $132,000 in donations from Capouillez.

"What I'm telling you is that the bulk of the income that I'm getting from the consulting business has a higher mission, and that mission is religious outreach," Capouillez said.

"The foundation is the vehicle to make that happen."


Contact Andrew Maykuth at 215-854-2947, amaykuth@phillynews.com, or follow on Twitter @Maykuth.

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