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Gas Companies Extend Leases, Cite New York Moratorium

Thousands of landowners in New York state, who have received notice that their leases with gas companies are being unilaterally extended, have been given an added bonus: a French lesson.

Force majeure -- French for "major force" -- a legal term generally used to excuse a party from performing its obligations under a contract due to an act of God or government, is being used by gas companies to extend lease agreements. Gas companies believe the de facto moratorium on high-volume hydrofracking in New York gives them cause to declare that a force majeure event has occurred.

And that has some landowners très bouleversé (very upset).

"Force majeure is the impossibility doctrine," Scott Kurkoski, an attorney with the Binghamton, NY, law offices of Levene Gouldin & Thompson LLP, told NGI's Shale Daily. "The moratorium is on drilling with more than 80,000 gallons of water, high-volume hydrofracking. So there's still plenty of drilling going on in New York state with less than 80,000 gallons of water. And there's even [horizontal] drilling going on."

Kurkoski, who is organizing landowners to challenge the actions in court, said thousands of lease extension notices, most of them from Chesapeake Energy Corp., have gone out to landowners across the state.

"In just about every case where the lease has expired, they're sending lease extension notices out," he said. "In some cases landowners whose leases expired last year are just now getting a lease extension notice. And Chesapeake isn't just sending these letters to landowners; they're following through with affidavits and filing them with the county clerk's office. These landowners are really locked up. They're unable to lease their property."

In a statement, Oklahoma City-based Chesapeake said the lease extension notices were "reasonable and legal measures" and blamed the moratorium for making them necessary. The company did not reveal how many lease extension notices were sent out.

"This ill-conceived moratorium has prevented Chesapeake from fulfilling its obligation for natural gas production on these properties under the same lease agreements previously mentioned," the company said.

Last December former Democratic Gov. David Paterson extended a deadline for the state's Department of Environmental Conservation to prepare a supplemental generic environmental impact statement on hydrofracking (see Shale Daily, Dec. 14, 2010). That move essentially extends a moratorium on horizontal wells -- put in place by Paterson in July 2008 (see Daily GPI, July 28, 2008) -- until July 1, 2011.

Dennis Holbrook, spokesman and vice president for Norse Energy Corp., acknowledged that his company had sent out between 1,500 and 2,000 lease extension notices in New York state.

"Norse has been sending out notices of what we believe to be an event of force majeure in New York state, which we have tied to the actions of [Paterson] issuing an executive order," Holbrook told NGI's Shale Daily. "We felt that this was a particularly definitive act on the part of the government to spell out that there was a ban on opportunities to have permits issued before at least the summer."

Holbrook emphasized that Norse and other gas companies involved with the lease extensions were handling the situation differently. One particular distinction, he said, was over ongoing lease payments.

"Our force majeure provision allows us also to suspend payments during this period, [but] we have elected to continue to make them," Holbrook said. "If there is an extended period of time where the primary term has been interrupted by an event of force majeure, we will just treat whatever we have paid as a prepayment for that extension period."

Kurkoski said Chesapeake, in some cases, was delaying making its rental payments. "They are delaying making payments on leases that were originally paid $3 an acre 10 years ago," Kurkoski said. "Those leases have expired and Chesapeake is saying that now they can make a prescribed payment of another $3 an acre and extend that lease indefinitely. We strongly disagree with that. If they're able to do that, then they have set up a contract that could go in perpetuity, and that generally is a concept that is void in all states."

Holbrook said Norse's leases typically last five years. Some contain a provision to renew for another five years.

But force majeure may be a tricky argument for the gas companies to make, as Fortuna Energy Inc. learned in November 2009. Andrew Cuomo, then the state attorney general, fined Fortuna $192,500 and ordered the company to renegotiate terms with landowners who had extended their leases. Fortuna claimed they had the right to extend the leases under force majeure.

Cuomo is now governor of New York.

As for the landowners, "we're in the process of getting those landowners organized right now," Kurkoski said. "We'll be communicating with them within a matter of days, sometime within the next week. And then we'll be making some decisions about how we're going to go forward with these lawsuits."

Kurkoski said the majority of landowners want to terminate their leases but plan to try and get new ones on better terms, with higher bonuses and royalties. "But we do have some landowners who are joining [the lawsuits] solely to get a termination but with no intention of leasing their property afterwards," he said.

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