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Newfield, Hess Terminate Leases in Northeast Pennsylvania

In a blow to oil and gas development in northeast Pennsylvania, Newfield Exploration Co. and its joint venture (JV) partner, Hess Corp., have terminated about 1,500 leases in the region and dashed hopes that landowners could earn about $187.5 million in lease payments.

And while landowners say the decision was not a complete surprise, it increases the likelihood of a lawsuit against the Delaware River Basin Commission (DRBC), which supporters of oil and gas development blame for creating a climate of regulatory uncertainty.

Newfield spokesman Keith Schmidt told NGI's Shale Daily the company, which is based in The Woodlands, TX, began notifying affected leaseholders by mail in early July that their leases would be terminated. "The letter returns lease rights to the landowners," Schmidt said Tuesday. "They now have the option of leasing their rights to other energy companies that might be interested in development in that area of Pennsylvania."

According to Schmidt, about 1,500 leases were being terminated, the bulk of them in Wayne County, but some were in neighboring Susquehanna County.

Schmidt said he couldn't comment for Hess, but that for Newfield, "[it] was a business decision not to continue development due to low gas prices, and a dedication on our part to increasing production of oil and hydrocarbon liquids production." Hess spokesman Jon Pepper did not return a call seeking comment.

"We've got other parts of our portfolio in proven oil reserves areas of the country," Schmidt said. "It just makes good business sense for Newfield and its shareholders to direct our efforts toward those oil reserves."

Asked if regulatory uncertainty in the Delaware River Basin, specifically from the DRBC, was a factor in Newfield's decision to terminate the leases, Schmidt said "it was just a business decision on our part."

But when posed the same question, Peter Wynne, spokesman for the Northern Wayne Property Owners Alliance LLC (NWPOA), had a different answer: "Of course it was."

"To say [the DRBC] was a factor is to be engaging in mild understatement," Wynne told NGI's Shale Daily on Tuesday. "They certainly were a very important factor in it, and we know that. We're in constant contact with these people [Newfield and Hess]. While nobody said it directly, we all know what the game is.

"Why they haven't said that it was the DRBC, I don't know."

Wynne said most of the NWPOA's leases, which were signed in 2009 (see Daily GPI, Oct. 15, 2009), had a primary term of three years with an option to extend it for another five years. But he said Newfield and Hess declared a force majeure several months into the primary term, after the DRBC enacted its current moratorium on gas development in the basin (see Daily GPI, June 16, 2010).

Wynne added that another landowner group that has since folded, the Susquehanna Wayne Oil Gas Group (SWOGG), had similar leases but which contained a provision that did not permit force majeure. According to Wynne, former SWOGG members started receiving notices this spring that their leases were being terminated.

"There had been rumblings for awhile that this was a possibility. We certainly weren't taken completely by surprise by this happening," Wynne said, adding that letters from the NWPOA, Pennsylvania Gov. Tom Corbett (see Shale Daily, July 5), U.S. Sen. Patrick Toomey urging the DRBC to take action resulted in "just one more reiteration of the same sorry story we've been hearing for three years.

"We never questioned the DRBC's good faith. What we have questioned is their inactivity, their lack of coming to a decision. And they're not apparently significantly closer."

Wynne confirmed that about 100,000 acres were being leased to Newfield and Hess, with landowners receiving $100 million up front. He said some of the leases paid $1,100/acre, others were for $1,500/acre. Had the leases gone into production, landowners could have expected another $187.5 million.

Earlier this month, the NWPOA had threatened to file a lawsuit against the DRBC if it did not schedule a vote to consider revising its water quality regulations, or declined to step aside and let its member states regulate shale development in the basin (see Shale Daily, July 8). DRBC Chairman Michele Sierkerka addressed the growing calls for action at the agency's meeting last week (see Shale Daily, July 16).

Asked if a lawsuit against the DRBC was still a possibility, Wynne said, "Absolutely.

"We have to break the logjam. We're not confident that they are conferring in good faith and are going to someday come up with rules. We're plodding along in that direction. We're hoping that we don't have to, of course, [but] the DRBC is going far beyond the mandate in the compact. They're attempting to expand their hegemony to, in effect, be the sole rulers of economic activity in the Delaware River Basin."

The decision by Newfield and Hess to terminate the leases was, according to Marcellus Shale Coalition (MSC) spokesman Patrick Creighton, "simply the latest example of the DRBC's inexcusable inaction having real consequences for Pennsylvania communities. It's time for the DRBC to issue regulations that allow private property owners to responsibly develop the land they rightfully own."

When pressed about Schmidt's comment that Newfield had made a "business decision" to terminate the leases -- implying that the DRBC may not have been a factor -- Creighton told NGI's Shale Daily that the MSC "can't comment on individual companies," but he added "when a government agency prohibits landowners from developing their private property, that discourages business investments and associated economic activity.

"The DRBC has stifled any hope of development in this region, and it's our opinion -- as well as Gov. Corbett's, Sen. Toomey's, and many other leaders -- given the stringent standards in place here in Pennsylvania, that it's time to move forward with issuing regulations."

Schmidt said Newfield had completed an exploratory well program in the area but did not bring any wells into production.

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