NORWICH – Good news came last week to lease holders locked into older, low-paying contracts with natural gas companies when a federal judge invalidated natural-gas giant Chesapeake Energy and Denver-based Inflection Energy’s lease extension claims under a provision called force majeure.
The companies had contended that the clause was triggered because New York has not allowed high water-volume hydraulic fracturing since launching an environmental review in 2008. Force majeure, included in many standard contracts, generally allows an agreement to be extended in the event of an “act of God” or unforeseen circumstances that don’t allow its terms to be upheld.
“The leases terminated at the conclusion of their primary terms, and defendants cannot invoke the force majeure clause nor the doctrines of impossibility or frustration of purpose to extend the leases,” wrote U.S. District Court Judge David Hurd. In separate but similar decisions, the rulings will immediately end the gas leases for at least 65 landowners in Tioga and Broome counties when they file the decision with their county clerks. The companies have 30 days to appeal.
Chenango County’s most prominent natural gas developer, Norse Energy Inc., invoked the provision in January 2011 after then Gov. Paterson signed an executive order banning hydrofracking until the state Department of Environmental Conservation completed a comprehensive review. The process – also known as “fracking” – is under scrutiny because of its alleged harmful effects on underground drinking water and the environment, although industry leaders have insisted it’s safe.
“This notice is designed to preserve our substantial investment in the future shale potential of New York state,” said Norse CEO Mark Dice at the time. Norse began leasing land in Madison and Chenango counties the early 2000s and today has more than 180,000 acres of mineral rights throughout Central New York.
Ryan Holbrook, legal spokesperson for Norse Energy, said he had not read Judge Herd’s decision nor the leases in question, and would be contacting Chesapeake’s attorneys to determine the implications for Norse.
“We are going to review the case and see if it applies to our situation,” he said.
A Norwich lawyer said many of his clients had sought counsel about Norse’s force majeure claims on their lease extensions, and each time he recommended they not allow it. But none sued because of the high cost involved.
“The (lease extension) checks they bring in are for a substantial amount of money. These are struggling farmers, most of them dairy farmers, and they need the money,” said Edward B. Downey Esq. “What this case means locally is somewhat complicated. Norse is not named, but it’s probably precedent setting. Anyone who has a lease that was to expire, probably those leases will expire and those landowners will get another bite of the apple.”
Downey said he refuted Norse’s force majeure claim “from the beginning” because the state’s moratorium does not prevent companies from obtaining drilling permits for vertical wells that don’t require high volume hydraulic fracturing. Site specific State Environmental Quality Review procedures weren’t rescinded when the DEC created a Generic Environmental Impact Statement procedure that enables companies to submit the same form for multiple drilling sites.
“Besides, Norse’s stockholder reports have touted that they are not going after the Marcellus, or shale, but the Oneida and other sandstone formations,” Downey said.
Most of the leases in the case against Chesapeake were signed between five and 12 years ago, according to Scott Kurkoski, an attorney who represented the Southern Tier landowners in the case. Most were signed for just $3 an acre — well below current market value — and were set to expire before the suit was filed.
“This shows that when a group of people get together, there is something they can do, even against a company the size of Chesapeake,” said Kurkoski, of Broome County-based Levene Gouldin and Thompson LLP.
Bob Jones, an attorney for the landowners who sued Inflection Energy, said Thursday’s decision was a “game changer.”
“We now have a court ruling — where we didn’t have one before — on whether force majeure extended these leases or not,” said Jones, an attorney for Broome County-based Coughlin & Gerhart. “And the court said unequivocally they do not.”
Both Kurkoski and Jones said the case now sets a legal precedent for other landowners facing force majeure claims.
Chenango County Planning and Economic Development Planner Rena Doing said there have been several lease extensions for natural gas development over the past few weeks using the same amounts. “It makes one wonder if those people will contact an attorney,” she said.
The Associated Press contributed to this story.