NY Landowners Sue Chesapeake & Statoilhydro Over Force Majeure Lease Extension

A number of landowners in New York’s Southern Tier region (Broome and Tioga Counties) signed leases with gas companies in 2000 for peanuts, $3 per acre, long before shale gas drilling was discovered and used. The technologies of hydraulic fracturing and horizontal drilling have been around for decades, but it wasn’t until 2006 that the two were combined to tap shale gas.

The leases signed by those NY landowners were for a term of 10 years—set to expire in 2010. But there’s a clause in the contract called “force majeure” which means if an unforeseen event beyond the control of the energy company happens, the energy company can extend the contract beyond 10 years. The contracts originally signed with smaller drilling companies were eventually purchased by Chesapeake Energy, and Chesapeake in turn sold part of its interests to the Norwegian company Statoilhydro. So Chesapeake/Statoilhydro sent letters to the landowners informing them they have invoked the force majeure clause and are extending the leases because of the moratorium on drilling in New York that prohibits them from any shale gas drilling at present. Their argument is that the state has stopped their ability to tap the gas, and therefore the contract will need to be extended to allow them time to drill once the moratorium is lifted.

There’s just one problem with that argument: Shale gas drilling was not even conceived of when the leases were signed in 2000—and other non-shale forms of gas drilling have not been prohibited. The landowners say that Chesapeake is trying to change the rules of the game, and make up new rules, part of the way through. So they’ve sued Chesapeake to terminate the leases. The latest lawsuit was filed this past week.

The most recent lawsuit was filed Friday against Chesapeake Energy and Statoilhydro by 160 landowners, related to claims on more than 12,000 acres, mostly in Broome and Tioga counties.

"All of the landowners in this action completely disagree that the leases should be extended. They made a bargain, and they expect Chesapeake to hold up to the bargain," said Scott Kurkoski, a lawyer for Levine Gouldin & Thompson, which assembled the lawsuit.

The leases, many of which were signed for $3 an acre up to 10 years ago, were signed by smaller companies and sold to Chesapeake, which in 2008 sold 32 percent of its Southern Tier leasehold to Norway-based Statoilhydro.

"Chesapeake, 10 years ago, never dreamed that they would be drilling horizontally in the Marcellus Shale," he said. "So it’s just not fair for them to say, ‘Well, we’re held up drilling in the shale now’ when that’s not what they intended to do when they started."

The lawsuit claims Chesapeake "engaged in misleading and deceptive practices directed at hundreds, if not thousands, of persons owning real property in New York state" by sending letters to landowners notifying them that their leases have been extended.

Not all drilling … is prevented by the moratorium.

The mineral wealth of other shale formations, including the Trenton Black River and the Oriskany, can still be tapped. Energy companies can drill vertically and can fracture wells using less than 8,000 gallons of water.

"A force majeure is a doctrine of impossibility, but it is not impossible to drill in New York," Kurkoski said.*

*Binghamton Press & Sun-Bulletin (May 3, 2011) – Two new suits challenge gas drillers’ claims to Tier land