Federal Judge Tosses "Force Majeure" Out the Window

Just because you can’t “frack” doesn’t mean you can't drill. That’s what U.S. District Court Judge David Hurd told Chesapeake Appalachia the other day. In a decision posted November 15, Hurd rejects force majeure as a reason to hold onto expired leases. Leases, he explain, terminate at the end of their primary terms. His reasoning:

“… The purpose of the leases is to explore, drill, produce, and otherwise operate for oil and gas and their constituents.” And the fact that New York State is still reviewing regulations for high volume horizontal hydraulic fracturing (HVHF) does not stop oil and gas companies from exploring, drilling, producing and otherwise operating, says Hurd.

Even though the state does not allow fracking, “… drilling permits for conventional drilling methods have, and continue to be, issued in the area of plaintiffs’ lands,” wrote Hurd. He clarified that the leases signed by landowners did not limit Chesapeake’s right to drill to a specific type of drilling or a particular formation.

The whole force majeure argument was based on the illusion that the state was preventing the gas companies from drilling. But, notes Hurd, “While defendants submit evidence demonstrating that horizontal drilling combined with HVHF is the only commercially viable method of production in the Marcellus Shale and drilling using conventional methods is impractical,"[m]ere impracticality . . . is not enough to excuse performance." The gas companies “…contracted for access, exploration, and the right to drill for a set period of time.” Not for a specific technique or formation.

This decision brings a sigh of relief to more than 50 landowners in Broome and Tioga counties who were trapped in leases that should have expired years ago.

You can read Judge Hurd's decision here. Read previous posts about the force majeure cases here.

Chesapeake's Force Majeure Letters Strike Again

At the Finger Lakes Institute conference a couple weeks ago a representative from NY's Department of Environmental Conservation (DEC) mentioned that Chesapeake had served the Agency with a "force majeure" letter. In case you don't know what force majeure is, it's a clause in a contract that allows a contractor extra time to complete work (without penalty) in the event an act of God, labor strike, or other unlikely event prevents him from meeting the contract deadline.

Chesapeake Energy has been using "force majeur" as a blunt weapon to extend gas leases on land they have not yet drilled. The company claims that for the past 3 years they have been prevented from drilling because NY doesn't allow high volume horizontal hydraulic fracturing. They're already engaged in two lawsuits with landowner groups. Now they've rattled the cage of the very agency that approves drilling permits.

Back in February, Chesapeake wrote a letter to DEC stating that the agency should extend the leases until "certain types" of drilling were allowed. They threatened to use "force majeure" to extend the leases they have on some 15, 470-plus acres of state-owned land. Those leases, signed in 2006, are set to expire in just three months.

But visit DEC's oil and gas searchable database and you learn that over the past five years DEC has issued 166 permits to Chesapeake and the company has been actively drilling in the state - particularly in Chemung County.

It leaves one wondering whether Chesapeake understands what force majeure is - or whether they just selectively invoke it when they think they can intimidate landowners into accepting illegal lease extensions.

It also leaves one wondering: did they just threaten to extend leases on the agency that will be reviewing their permit applications? Way to win friends and influence your regulatory agency, Chesapeake! You can read Jon Campbell's article here and archived blog posts by clicking on "force majeure" in the list of topics to the right.

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.