Chesapeake Settles Over Royalty Dispute

Yesterday Chesapeake settled a class action lawsuit challenging the company for improperly deducting post-production and transport fees from gas royalties. According to the Daily Review, Chesapeake has agreed to fork over $7.5 million.

The lawsuit, filed electronically earlier in the day, named 14 plaintiffs from Pennsylvania and New York as representatives of the “class”. The plaintiffs claim that post-production fees were deducted from their royalty payments despite terms in their leases that precluded Chesapeake from deducting those costs, and that the fees were in excess of the actual costs. They also claim

that Chesapeake "breached its duty" by basing royalties on the market value of the gas prior to refining – at “below market” price.

However, the leaseholders won’t end up with all the royalties they’d hoped for. They’re still going to have to pay about 72 percent of post-production costs, and cover 100 percent of the costs related to transporting gas through the pipelines.

The settlement proposal still has to be reviewed by a federal judge before final approval.

Read more about this here and here. 

Extending leases ... still

Chesapeake is still trying to extend leases in NY by any means possible, and that means invoking “force majeure”. Force Majeure was originally intended to protect contractors from being held responsible when they couldn’t complete work due to events beyond their control – things like floods, hurricanes, tornadoes.

Now they are using the force majeure clause in leases to shift their economic risk onto the landowner, says attorney Chris Denton. Companies claim that they cannot drill because NY does not allow hydro-fracking.  If they can successfully extend the leases, that transfers economic risk to the landowner by trapping him in a lease at a market price that made sense five years ago.

The truth is that there is nothing preventing companies from drilling. But that isn’t stopping Chesapeake from filing lease extensions.

“They bring them in batches of 30 to 40,” says Cortland County clerk Elizabeth Larkin. But she’s not accepting lease extensions because they are not signed by the landowners – and she may be the only county clerk to refuse filing the documents.

“They say that they need to extend the leases because of force majeure, or they claim that the original lease gives them an option to renew,” Larkin said in a phone conversation a couple weeks ago. But an option to renew is a lot different than an automatic renewal or extension, she says, and so far Larkin has refused to file the extensions. The county attorney is backing her up.

When landmen began filing the leases years ago Larkin felt optimistic about the gas rush. She hoped the companies would strike it rich and the county would see some economic benefit. But now … “I’m not against drilling,” she clarifies, “but I am very disheartened by how dishonest they [gas companies] are. How can we trust them to protect our water when they don’t even care about the landowners? These extensions just aren’t right.”

Larkin hopes that other county clerks will take a similar stand, but acknowledges that it’s hard to refuse recording a document when each one brings in much needed cash to the county. Every lease extension she refuses costs Cortland County $20 – “and I’ve refused hundreds,” Larkin said.

Force majeure isn’t the only Ace companies have up their sleeves. According to attorney Joe Heath, energy companies are now crafting leases that contain a non-termination clause. The law, he said, protects gas companies, not landowners.

NY Attorney General Comes to Defense of Landowners Caught in Lease Extensions

Just one month ago the NY Office of the Attorney General announced that some landowners would be able to renegotiate the terms of their gas lease - or get out of their lease altogether. In an agreement between Fortuna and the OAG, the gas drilling company promised to stop using misleading tactics to unilaterally extend leases on properties. They also agreed to pay $192,500 to the state to help settle the matter.

“Drilling companies will not be permitted to use misleading letters and dubious legal claims to bully landowners,” Attorney General Andrew Cuomo said. “Many of these companies use their size and extensive resources to manipulate individual property owners who often cannot afford to hire a private attorney,” he said, adding that this type of land-grabbing practice must stop.

Back in April, Fortuna sent letters to hundreds of landowners whose natural gas leases with the company were about to expire. These letters falsely stated that Fortuna had the right to extend these leases without the permission of the landowners.

Fortuna claimed (falsely) that the leases contained a provision that allowed them to put the lease on hold until the New York State Department of Environmental Conservation (DEC) got around to issuing permits for horizontal drilling in the Marcellus. But, says the OAG, most landowners’ leases contained no such provisions.

In these letters Fortuna offered landowners 30 days to extend their leases for an additional three years, with a small increase in the royalty. Landowners choosing to not extend their leases would be sent a “Notice of Force Majeure”, and Fortuna would file the notices with county clerks as well. That would prevent landowners from freely negotiating drilling rights with other companies. 

Not only did landowners feel that these letters were corporate bullying, but they also felt that the gas companies who were threatening Force Majeure were giving new meaning to the concept of "we can't drill." You see, no one was preventing gas companies from drilling vertical wells, and there are plenty of other gas-bearing strata in the area. Not only that, other companies were actively drilling.

The letters motivated enough landowners in one county to seek assistance from the OAG. They wrote to the Attorney General, sending along copies of what they felt were misleading leases. Some wrote multiple letters, but eventually the OAG paid attention. 

Give Fortuna credit for sitting down at the table with the OAG, because they certainly aren't the only player in this game. Chesapeake also sent out similar letters this summer, and so far they haven't come to the table with the Attorney General. Not only that, Chesapeake decided to try extending the old 10-year leases they bought up a few years back. Some of these leases were so old that when they were signed the going rental rate was $3 - $5/acre.

So, when the landmen filled out these leases, they left blanks instead of penning in an extension of the lease term. Back in 2008, Chesapeake decided they would not extend the leases beyond the primary term, and sent letters to landowners saying so.

But what a lot of difference a year makes! This July Chesapeake changed their mind and told landowners that they would extend the leases - keeping to the original terms, of course. So while their neighbors were negotiating deals close to $3,000/acre, Chesapeake was threatening to extend leases up to an additional decade at three bucks an acre! 

Then, this fall, Chesapeake began sending out checks to landowners to “continue and extend for another year” their leases. Even if the landowners don’t cash the checks, they were led to believe that their lease would be extended.  

Now with the possibility that DEC will begin permitting wells in a couple months, the land grab has begun in earnest. Landmen are once again going door to door with their notepads full of company leases. And, according to folks they've visited, they're using the same pressure tactics.

Read more about force majeure here.

Fragmenting the Agricultural Landscape one Well at a Time

For most of the farmers in our area - upstate NY perched atop the Marcellus - oil and gas leases have been part of the business since their grandfathers pounded in the first fenceposts. But with a huge reservoir of natural gas beneath their hayfields and forests, and bonus payments heading north of $5500/acre, leasing has become the number one rural land-use issue says Brett Chedzoy, a regional forester with Cornell Cooperative Extension.

Chedzoy, who is also a farmer, speaks from experience. His  livestock operations have been interrupted not once, but twice for  gas pipeline construction projects. Without proper lease protections, farm and forest owners face potential losses in terms of timber, wildlife habitat and other property uses, he says.

If a gas company wants to use your land for a drilling pad or as a right-of-way for a pipeline, they ought to pay fair value for all timber removed from your land, Chedzoy says. Even young successional forests have value. An 8-inch tree may have current value only as firewood, but if left for another 50 years it would have significant value as a saw log.

The problem, Chedzoy says, is that too often energy companies use bulldozers to clear land. That leaves downed trees mixed with stones and debris - unacceptable to a mill or to someone using a chainsaw. Instead, trees should be cut by an experienced logging crew and stacked in an accessible location

As with fields, forest owners need to protect their topsoil, restore drainages, and control erosion. Once construction is completed, the soil needs to be de-compacted. Then the topsoil should be replaced and – especially if the area will be maintained by brush-hogging – make sure that the rocks and stones are picked out. Unfortunately, some farmers say that even when these items are outlined in their leases, the gas companies are not following their directives.

Pipeline Right-of-Ways

Access roads and well-pads are not the only threat to agriculture. According to Chedzoy pipeline right-of-ways (ROWs) are the number-one entry point for invasive species. Once you take out the trees, you create an “edge” – an opening preferred by such invasive species as European buckthorn, multifloral rose, privet, several Asian species of honeysuckle, burning bush, Japanese barberry, autumn olive, swallowwort, Oriental bittersweet, and garlic mustard.

The problem with invasive species is that they interfere with native plants and degrade the wildlife habitat. Take buckthorn, for example. It displaces other berry-producing shrubs such as Viburnums and blackberries. and the buckthorn fruit isn't very nutritious for the animals; it causes them to vomit the fruit without digesting any nutrients. This is great for buckthorn dispersal, but not very beneficial for the wildlife.

Invasive plants also affect the quality of the forest. The more competitive invasive plants may shade or crowd out the existing seedlings and saplings, changing the character of the woods. Or, like garlic mustard, they may produce chemicals that inhibit seed germination.

Pipeline right-of-ways also create other problems for forest owners. Landowners needing access to their forests for timber harvest will want to make sure there are permanent crossings for skidders and other heavy equipment. Otherwise forest owners wanting to sell a few trees may find themselves required to provide a “timber bridge”.

Trespass liability has become an issue as well. Many forest owners have complained that pipeline ROWs become conduits for ATV and snowmobile traffic.

Cumulative impacts

David Behm, NY Ag and Markets Farmland Protection Program Manager, is concerned about preserving agricultural land for future generations. He wonders whether conservation easements will be strong enough to protect farmland in the face of the anticipated natural gas rush.

A conservation easement is a legal document that is written in the form of a deed. It permanently restricts the future development of a piece of property for the purpose of preserving or maintaining the scenic, open, historic, agricultural, or natural condition, character or significance of that property. And, Behm explains, it can be modified to allow a well.

Thing is, while a single well on a farm doesn’t seem like a huge impact, Behm is concerned about the cumulative impacts of gas development on a given agricultural landscape over time. He believes that access roads to well sites will fragment the agricultural land. 

"Anytime there’s a road dividing a field, agricultural land is at risk," Behm says. He is particularly concerned about access roads that cut off a couple acres from a larger field – those smaller pieces are at risk for development, Behm says. You can read more about forest and ag-land issues here.

Gas Leases & Real Estate

My neighbor down the road is a farmer. Like most of the farmers I know she is down-to-earth, can fix just about anything, and practical. During a discussion the other day about landowner's rights to lease, she raised two good points: that a landowner could be held liable for damages that might occur to a neighbor's water should contamination from drilling occur, and the difficulty of selling leased property.

Last spring I interviewed a few realtors in gas-drilling areas, asking them if they'd experienced any trouble selling properties. Dave Knudsen, a Sullivan County realtor with the Catskill Buyer Agency, said that during the summer of 2008 he fielded two calls a week from investors looking for "100 to 200 leaseable acres".

"They were asking for land near the pipeline," Dave said. But his other clients, downstaters looking for a quiet country home, had other priorities. Their first question was: are the neighbors leased? If so, they didn't want to look at the land.

Dave isn't the only one. A Finger Lakes area realtor said she had more than the usual trouble matching prospective home-buyers with their country dream house. One 32-acre parcel near Ithaca was rejected twice because of the lease. The second buyer even had a house package worked up for the land, but the bank denied him a loan because of an existing gas lease on the property. The ultimate buyer figured he could build a house before the gas company moved in to drill a well.

To read the complete article go to http://www.tiogagaslease.org/images/BVW_03_20_09.pdf