Tuesday, April 3, 2012

Chesapeake Foists Bad Leases (again) on NY Landowners

photo by Tim Ruggiero

Chesapeake Energy is at it again. They recently mailed hundreds of letters to landowners in the Tioga County Landowners Group, letters that contained a “Notice of Force Majeure” and an “Offer of New Lease”.

The force majeure letters should really be called “farce majeure”. There is nothing stopping Chesapeake from drilling in NY. The company could exploit Oriskany and Medina and any number of hydrocarbon-bearing layers. But they don’t want to; they have decided that the only thing worth drilling is Marcellus shale, and maybe Utica, and the only technology they can possibly use is high-volume horizontal hydraulic fracturing.

Then there’s their new lease terms: $500 per mineral acre with a 12.5% royalty – the basement bargain rate. Furthermore, these punitive terms make it possible for Chesapeake to extend the lease indefinitely.

“Chesapeake has been playing the game of holding by production or using delay rental payments to hold the leases in PA,” Nick Schoonover wrote to members of the Tioga County Landowners today. “This is a terrible lease with no serious money for years.”

Oil and gas attorney Chris Denton weighed in on the matter. The new lease is much worse than their old lease he said. Why?
  • The new lease has an Arbitration Clause which, in their old leases, they are using to try hold our members into expired leases.   This clause is one of the more egregious provisions in the lease.
  • The new lease specifically declares that Chesapeake does not have to drill, prevent drainage, develop or even market the gas during the lease term.  In other words they are effectively "warehousing the landowner".  If they don't drill, then there are no royalties.
  • The lease gives Chesapeake the right of first refusal on any top-leasing or renewals.  How many offers is a landowner likely to receive if the offeror knows that someone can outbid him?  This provision takes away the landowner's right to better economic opportunities.
  • The Chesapeake lease has an incredibly broad Force Majeure Clause, effectively allowing Chesapeake to extend the lease for a host of bumps in the road for them.  They even require the landowner to waive any damage claims against Chesapeake.  Chesapeake is currently trying to tie up your lease with a weaker Force Majeure claim.  The new clause is worse for the landowner.
  • The lease allows gas storage, which likely will effectively bar the landowner from developing and recovering any gas or oil if gas is stored.
  • There are no surface rights protections of any substance.  There is no base line water testing.  There are no restrictions on open pits or on site waste disposal.  There are no drainage protections and no pipeline specifications.  There is no audit provision and the royalty is paid after deductions.
  • The lease allows Chesapeake to construct compressor stations on the property and to place as many pipelines as it deems convenient.  Also this lease gives Chesapeake exclusive rights to your property, preventing you from measuring or testing your own gas and oil.
  • Worst of all, Chesapeake's lease can never be forfeited by them for violating any terms in the lease.  You can never evict them for violating any terms of the lease.  In other words, they can stay there no matter how many times and no matter how large the violation occurs.
“This is a lease that no one should sign,” says Denton. “There is not one good element in this lease for the landowner. It shifts the economic risks and burdens to the landowner when they should instead be borne by Chesapeake.”


  1. It seems that Chesapeake Energy is trying to do to NY landowners what it did to PA a few years ago. $500 an acre? Really? What a joke. Hopefully enough information is out now to counteract this kind of highway robbery/environmental destruction.


    1. There's tons of info out, especially with the landowner groups presenting meetings all over the place these past couple years. Maybe Chesapeake thinks people are desperate enough to snap at anything with the price of gas going down, down, down. Hopefully, landowners who want to lease will wait until the price of gas goes up and the companies have solved their worst environmental problems.... like how to keep gas and chemicals out of the water.

    2. Cabot recently paid 6500 an acre and 21% royalty to the Dimock township....

  2. You make a deal with the devil, you get a helluva deal. I hope the landowners who signed in my neighborhood get nothing less than this.

  3. I think you may be missing something in your estimation of CHK. While your argument that CHK could target a different formation is accurate, I doubt any of the mineral owners subject to a CHK lease would want them to drill another low-producing formation (Medina, Queenston, etc.). Doing so would hold the lease indefinitely anyway and royalty payments would be a pittance compared to shale gas. If CHK drilled shallow low-producing wells thereby holding the acreage by production, the mineral owner would not be in a position to lease their acreage to another company for an increase in upfront bonus. I'd think mineral owners would want CHK to drill the shale in the hopes that royalties would be much, much higher than if one of the other formations had been targeted.

    1. The point is that you can't cry "force majeure" if you can drill another strata.

  4. Here's some info on Chesapeake you may find eye-opening

    Chesapeake Energy – Peeking Behind the Curtain
    Connecting the Dots: The Marcellus Natural Gas Play Players – Part 2
    By Dory Hippauf

    Aubrey McClendon: Chesapeake Energy’s Little Problem
    By Dory Hippauf
    Connecting the Dots: The Marcellus Natural Gas Play Players–Part 6

    FRACKorporation: Aubrey and Ralph - BFF

    FRACKorporation: Chesapeake Energy: "THE DOTS"