DEC, major gas company locked in land battle | The Ithaca Journal |

DEC, major gas company locked in land battle | The Ithaca Journal |

DEC, major gas company locked in land battle

8:17 PM, Aug. 5, 2011  |
Jon Campbell

ALBANY — One of the country’s largest natural gas producers and the state of New York appear headed for a battle over a soon-to-be-expiring contract for the natural gas rights on state forestland.

Chesapeake Energy is contending that the company’s gas leases on 15,472 acres of state-owned land in central New York and the Southern Tier should be extended as the state decides how to regulate hydraulic fracturing to extract natural gas.

The leases, which were signed in 2006, are set to expire Nov. 15.

In a letter obtained by Gannett’s Albany Bureau, Chesapeake wrote to the state Department of Environmental Conservation in February that the leases should be extended until the state starts issuing certain drilling permits.

Because the state has yet to allow high-volume hydraulic fracturing — a newer technique used with natural gas drilling — the company believes it has legal ground to prolong the lease, wrote Henry Hood, the company’s senior vice president.

“Chesapeake regrets these circumstances, including the need for this communication,” Hood wrote. “Chesapeake looks forward to the time when it can move forward with the safe and responsible development of the shale resources in New York State.”

The company made the claim under “force majeure,” a legal clause inserted in many contracts that allows either party to extend the length of the deal if unforeseen circumstances prevent it from being carried out. For the state’s leases with Chesapeake, the clause includes “acts of God, work stoppages due to labor disputes or strikes, fires, explosions, epidemics, riots, war rebellion, sabotage or the like.”

In a statement, the DEC didn’t rule out legal action to end the leases in November.

“We are in the process of determining our next steps,” spokeswoman Emily DeSantis said.

Similar attempts to extend gas leases have ended up in the courtroom.

Chesapeake is battling two lawsuits in federal court by Southern Tier landowners who received force majeure letters about their leases in recent years. The original expiration dates on those leases, which date back a decade, have already passed. The landowners want to end them permanently — in large part because the land would be more valuable under a new deal.

The company’s force majeure claims are significant because the acreage sits above the massive, gas-rich Marcellus and Utica shale formations. The state leases are on gas rights below state forests in Broome, Tioga, Chemung, Cortland, Schuyler and Steuben counties.

In 2006, the DEC took bids on about 19,000 acres of gas rights below state-owned forestland. Chesapeake and Fortuna Energy (now Talisman Energy) were the winning bidders, paying a combined $9 million up front to the state with a promise of 12.5 percent royalties on any gas produced.

Since then, technological advancements to the hydrofracking process — which injects water, sand and chemicals deep underground to break up shale formations — have made the Marcellus accessible to gas companies.

The value of the gas rights on the land above the formation, such as the state forestland in dispute, has skyrocketed.

In July 2008, then-Gov. David Paterson announced that the state couldn’t issue permits for high-volume hydrofracking until the DEC completed an environmental review and set up permitting guidelines. Last year, he called for the DEC to put out a second draft of its review for public comment, which is set to kick off later this summer.

The DEC is expected to complete its review at some point next year, but put out a preliminary report last month. Chesapeake says the length of the lease has essentially been on pause since July 2008 and will restart when permits are issued.

A Chesapeake official said the company is trying to protect its investment, and the state’s decision to hold off on hydrofracking prevents the company from “fulfilling its obligation for natural-gas production on these properties.”

“Chesapeake has taken reasonable and legal measures to extend the terms of many of our leases in New York State,” Paul Hartman, the company’s director of state government relations in New York, said in a statement. “These measures are based upon the original lease agreements, which can allow for extensions of the original lease term for various reasons.”

Talisman has not filed an extension claim on any of the 3,754 acres of state gas rights it has leased until November. A spokeswoman for the company did not return a call for comment.

Talisman has faced criticism for trying to enforce its expired leases. In 2009, the company agreed to a $192,500 settlement after then-Attorney General Andrew Cuomo found it was misleading customers with its force majeure claims.

Attorneys for private landowners have argued in lawsuits that the state’s permitting freeze doesn’t prohibit Chesapeake from upholding their end of the contract. They have contended that other gas-producing formations — such as the Trenton Black River and the Herkimer sandstone formation — are still accessible and can be drilled without high-volume hydrofracking.

Because the leases date back a decade, the gas-rich Marcellus and Utica formations weren’t on the company’s radar screen at the time, the lawsuits argue.

But while the private landowners’ lawsuits against Chesapeake seek to have the force majeure claims thrown out and allow their below-market-value leases to expire, the situation with the state-owned land could be more complicated.

A draft of the DEC’s proposed regulations for high-volume hydrofracking proposes a ban of surface drilling on state land, despite the existing Talisman and Chesapeake leases. About 32,500 acres of other state-owned gas rights — mostly in the southwest corner of the state — are also under lease to energy companies so long as existing wells on those properties continue to produce natural gas.

The new technology, however, allows companies to drill on a private piece of land before turning the drill bit horizontal and burrowing under neighboring properties. So if the company holds the rights to a private parcel near the state land, it could obtain gas from that state land by drilling horizontally — despite the surface-drilling ban.

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.

Chesapeake declined to discuss specifics, but Hartman said the company would prefer drilling for gas rather than debating over contract language.

“Chesapeake would much rather be drilling wells and creating value for New Yorkers, especially in the Southern Tier where economic development is much needed and for the whole state where clean energy is much needed,” Hartman said.

Once the Chesapeake and Talisman leases do expire, the DEC could choose to put them out for bid again to generate revenue for the state, with a provision banning drilling on the surface of the state’s properties.

The department spokeswoman, however, said it’s not currently in the cards.

“While this would be possible under the revised draft (regulations), we have no plans to do so at this time,” DeSantis said.

Campbell is a staff writer for the Gannett Albany Bureau.

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