In two separate but related cases in U.S. District Court for the Northern District of New York, a judge has ruled that energy companies can’t use the state’s de facto moratorium against high-volume hydraulic fracturing (HVHF) as an excuse to invoke force majeure to extend expiring oil and natural gas leases.
U.S. District Judge David Hurd said the defendants, which included a subsidiary of Chesapeake Energy Corp., “cannot rely on impossibility nor frustration of purpose to extend the leases.”
“The leases terminated at the conclusion of their primary terms, and defendants cannot invoke force majeure, the doctrine of frustration of purpose, nor the prescribed payments clause to extend the leases,” Hurd wrote in one of the rulings Thursday. A similarly worded statement accompanied the second ruling.
The rulings effectively release the 90 plaintiffs involved in the two cases from the oil and natural gas leases they had signed, beginning in 2000. Chesapeake and the other defendants have 30 days to appeal.
“We’re pleased that Judge Hurd agreed with our position,” Scott Kurkoski, plaintiffs’ attorney with the Binghamton, NY, law offices of Levene Gouldin & Thompson LLP, told NGI’s Shale Daily on Tuesday. “Most people used common sense and thought these leases expired.
“You can drill in New York. We have wells that are being drilled here on a regular basis. So the concept that Chesapeake would try to say that it’s impossible to drill just didn’t sit very well with most people and clearly didn’t sit well with Judge Hurd, either.”
Thomas West, an attorney for The West Firm PLLC in Albany, NY, who represented the oil and gas companies in both cases, said he was confident they would appeal to the U.S. Second Circuit Court of Appeals. “It’s just another setback for operators in New York State,” West told NGI’s Shale Daily on Tuesday. “They’re caught between a rock and hard place, being told by the state that they can’t develop one of the richest natural gas deposits on record in this country.
“[Hurd] said force majeure can’t apply under any circumstances in New York to extend a lease. That’s not what the lease language contemplates, particularly in the lease that was at issue in the Beardslee case, which very clearly states that delays in permitting extend the lease. The judge has essentially written that language out of the lease. That’s unfortunate, but we’ll let the Second Circuit decide that issue.”
In the first case, Beardslee et al v. Inflection Energy LLC et al (No. 3:12-cv-242-DNH-DEP), 35 plaintiffs, who collectively own about 1,200 acres in Tioga County, had filed a lawsuit against Inflection, Victory Energy Corp. and Mega Energy Inc. The second case, Aukema et al. v. Chesapeake Appalachia LLC et al (No. 3:11-CV-489-DNH-ATB), saw 55 plaintiffs with 2,785 acres in Broome and Tioga counties challenging Chesapeake Appalachia LLC and Statoil USA Onshore Properties Inc.
According to court documents in the Beardslee case, most of the oil and natural gas leases were signed in 2001, but others were signed between 2002 and 2006. Most were for a five-year term with some extended for an additional five years.
In the Aukema case, court documents showed the plaintiffs had signed five- and 10-year leases with Central Appalachian Petroleum Corp., Phillips Production Co., Fortuna Energy Inc. and Fairman Drilling Co. from 2000 to 2006, many at $3/acre. Chesapeake eventually acquired the leases and later assigned a 32.5% interest to Statoil.
Inflection declared a force majeure in 2010. Chesapeake did the same in May of that year, telling its leaseholders that “this ill-conceived moratorium has prevented Chesapeake from fulfilling its obligation for natural gas production,” (see Shale Daily, March 3, 2011).
But Hurd disagreed. “As the drafters of the leases, [the] defendants were in the best position to impose drilling specifications as to the methods used or [the] formations explored,” he said. “Had [the] defendants changed their minds during the primary term — for example, had they determined that the leaseholds were no longer commercially viable and accordingly chose not to drill — they would have been free to continue making delay rental payments and let the leases expire by their primary terms.”
In June, Chesapeake settled with New York Attorney General Eric T. Schneiderman to allow more than 4,400 landowners the opportunity to renegotiate their natural gas leases (see Shale Daily, June 15). Under the terms of that agreement, 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.
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