Chesapeake Threatens NY with Lawsuit on State Land Leases

force majeureThe New York Department of Environmental Conservation (DEC) leased 19,000 acres of state forestland to Chesapeake Energy and Fortuna Energy (now Talisman Energy) in 2006 to allow gas drilling. The deal provided state coffers with $9 million and the promise of 12.5 percent royalties on any gas produced. Those leases are due to expire Nov. 15 of this year, but Chesapeake has let the DEC know it believes the leases for its share (15,472 acres) should be extended, a legal phrase called force majeure, because of the moratorium that has been in place since 2008 on hydraulically fractured gas drilling. In a letter to the DEC, Chesapeake implied they will sue the state to extend the lease agreements if the state does not willingly agree to an extension.

The issues in this case are many and complex, but essentially boil down to two key points:

(1) When Chesapeake and Fortuna signed the leases in 2006, using horizontal fracking technology was in its infancy and likely not on the radar screen. So “intent” will be a big factor in a lawsuit. Did Chesapeake intend to use a particular method of drilling to get the gas and was that method subsequently disallowed? The state will argue that Chesapeake did not intend to use horizontal fracking and could have used conventional gas drilling but elected not to. Chesapeake will counter that technology changes and that the moratorium has resulted in an artificial delay of drilling using the best available technology to get the gas—that the original agreement did not specify (or limit) the types of drilling technology they could use to get the gas, and the type they wanted to use was disallowed without warning. The entire mess is a lawyer’s delight.

(2) The new state drilling regulations (called the SGEIS), if adopted in their currently proposed form, will ban drill pads on state-owned land. So the only way Chesapeake would be able to get at the state-owned gas now will be from a neighboring piece of privately owned land—building a drill pad there and drilling underneath state land. Even though such a scenario is legal under the new drilling regs, the DEC is making noises they aren’t in any mood to allow it. And they have the power to prevent it:

But the DEC holds a significant trump card.

Since the department decides whether or not to grant permits, it could simply decide to reject any applications from Chesapeake that includes any drilling on the forestland in question.*

This will be an interesting case to watch.

Here is a list of the state-owned properties for which Chesapeake is trying to extend their lease:

  • Tracy Creek State Forest in Vestal, Broome County, and Owego, Tioga County
  • Maple Hill State Forest in Chemung, Chemung County
  • Hewitt State Forest in Scott, Cortland County
  • James D. Kennedy State Forest in Harford, Lapeer and Virgil, Cortland County
  • Tuller Hill State Forest in Virgil, Cortland County
  • Coon Hollow State Forest in Orange and Dix, Schuyler County
  • West Hill State Forest in Hornby, Steuben County
  • Oakley Corners State Forest in Newark Valley and Owego, Tioga County
  • Robinson Hollow State Forest in Richford, Caroline and Harford, Tioga County
  • Ketchumville State Forest in Newark Valley, Tioga County
  • Small sections of State Routes 326, 34 and 20*

*Binghamton Press & Sun-Bulletin (Aug 7, 2011) – DEC, gas firm build turf battle