In a landmark agreement announced Thursday, a drilling unit of Chesapeake Energy Corp. will allow more than 4,400 New York landowners locked into natural gas leases the opportunity to renegotiate their contracts, said New York Attorney General Eric T. Schneiderman.

Chesapeake Appalachia LLC also agreed to reimburse the state $250,000 for the costs of the investigation.

"Make no mistake about it -- this agreement will provide a safety net for thousands of landowners by allowing them the opportunity to negotiate fairer lease terms, both financial and environmental, regardless of their existing contracts," said Schneiderman.

Chesapeake came to agreement with New York law enforcement officials that landowners with leases that were extended as a result of the New York Department of Environmental Conservation's (DEC) environmental review into high-volume hydraulic fracturing (fracking) had the right to negotiate leases with other natural gas operators for more favorable environmental or financial terms (see Shale Daily, March 3, 2011).

Chesapeake agreed to either match other operators' terms or release the landowners' original leases, including leases that have expired or would expire before Dec. 31, 2013. Under terms of the settlement with Schneiderman's office:

Chesapeake also is required to make quarterly reports to New York Attorney General's office on the number of leases it has renewed, matched and released including the 50 leases to be released outright (8,604 acres); 4,365 leases subject to being matched (255,579 acres); and 1,865 leases with an option to be extended (96,524 acres).

Three years ago Chesapeake officials sent letters notifying New York lease owners whose terms were set to expire that the company was electing to extend those leases.

"In these letters Chesapeake adopted the position that it could not perform any exploration and development operations for shale wells until the DEC completed preparing a supplemental generic environmental impact statement (SGEIS) for high-volume hydraulic fracturing," Schneiderman said, referring to the SGEIS that the state was preparing at the time (see Shale Daily, Dec. 14, 2010; July 28, 2008). "In some cases, Chesapeake had leases with landowners that went back to the mid-to-late 1990s."

At that time Chesapeake officials "informed landowners that their leases contained provisions that allowed the company to extend the terms under force majeure, purported force majeure and 'covenants' clauses and/or other common law rights based on the principles of force majeure."

The force majeure clause exempted the contracting parties from fulfilling their obligations for causes that could not be anticipated. Agreements that were made under Chesapeake's force majeure contract claims were released under the settlement.

"Beginning in approximately July 2009 Chesapeake modified the...force majeure letter to add a claim that it could extend leases by making delayed rental payments to landowners because no drilling had occurred [and] informing them that the leases were extended indefinitely until the DEC completed the SGEIS process and began issuing permits for high-volume hydraulic fracturing. This was known as making 'prescribed payments,'" said the attorney general.

Robert H. Wedlake, who represented many of the New York landowners, called the settlement a "significant benefit...and this resolution can help landowners out of a difficult problem facing hundreds of landowners throughout New York."

In a case against Chesapeake Appalachia last year, the U.S. District Court for the Northern District of New York found that even if producers were prevented from fracking wells in the state they could not declare a force majeure and were required to pay property owners to hold the leases (see Shale Daily, April 11, 2011).

Chesapeake was not the only operator in New York to declare a force majeure to extend lease operating agreements. Last July ExxonMobil Corp. subsidiary XTO Energy Inc. sent letters to New York landowners indicating that it would not meet its contractual obligations and would extend the leases (see Shale Daily, July 13, 2011).