In two precedent setting cases argued and decided the same day, the Honorable David N. Hurd, a federal district court judge sitting in the Northern District of New York, held that oil and gas leases terminated at the expiration of their primary term and had not been extended upon grounds of force majeure in the face of New York's more than four-year moratorium on high-volume hydraulic fracturing.
In Aukema v. Chesapeake Appalachia, LLC (NDNY, No. 11-cv-489), a number of landowners residing in Broome and Tioga Counties alleged that their oil and gas leases terminated at the conclusion of their primary term since no operations had occurred during the leases' five or ten year terms. Similar claims were asserted by the plaintiffs in Beardslee v. Inflection Energy, LLC (NDNY, No. 12-cv-242), a group of landowners in Tioga County. In total, five different lease forms were at issue between the two cases, with varying force majeure clauses. In similar fashion, the plaintiffs in both cases maintained that New York's moratorium did not prohibit all drilling (e.g., the defendants could have drilled wells targeting non-shale formations or drilled shale wells without high-volume hydraulic fracturing), just high-volume hydraulic fracturing, and that the defendants could have, but elected not to, pursue site-specific environmental review during the Department of Environmental Conservation's process to supplement its 1992 generic environmental impact statement for oil and gas drilling ("SGEIS").
The defendants in both cases countered that each of the oil and gas leases had been extended due to force majeure, commencing on July 23, 2008 when New York's moratorium on high-volume hydraulic fracturing began, as well as on grounds of impossibility and frustration of purpose. In doing so, the defendants in both cases offered expert testimony that the only viable formations underlying the plaintiffs' land were the shale formations and that viable development required the use of high-volume hydraulic fracturing and horizontal drilling. This expert testimony included evidence concerning failed attempts to drill vertical shale wells in New York, even using significantly greater than 80,000 gallons of water, as well as the unproductive nature of the wells targeting non-shale formations in the vicinity of the plaintiffs' leaseholds. The defendants also filed expert affidavits explaining why site-specific environmental review was not an option.
On the parties' competing motions for summary judgment in both cases, the Court held that the plaintiffs' oil and gas leases terminated at the conclusion of their primary terms and that the defendants could not invoke any of the lease's force majeure clauses nor the doctrines of impossibility or frustration of purpose to extend the leases. Underlying the Court's holding was its determination that the defendants were not prevented from performing under the terms of each oil and gas lease. According to the Court, "[d]efendants were leased the right to drill, produce, and otherwise operate for oil and gas, but they were not required to do so. The leases merely provided the option to do so. As defendants did not have an obligation to drill, the invocation of a force majeure clause to relieve them from their contractual duties is unnecessary." The Court further rejected the relevance of defendants' expert geological testimony based on its finding that the "[d]efendants did not contract for guaranteed production of oil and gas; they contracted for access, exploration, and the right to drill for a set period of time."
The Court, however, did not stop there. In addition to its lease interpretation ruling, the Court arguably held that the ongoing moratorium in New York is not a force majeure event. First, the Court's ruling notes that irrespective of the moratorium, drilling permits have been and continue to be issued for conventional wells. Second, the Court found that the moratorium was foreseeable by adopting plaintiffs' argument that the 1992 GEIS failed to adequately consider the environmental impacts of high-volume hydraulic fracturing and also found, without cited authority, that "[t]he 1992 GEIS is clear that drilling utilizing more than 80,000 gallons of liquid would not be permitted without conducting an SGEIS or performing a site-specific EIS."
The take away from Aukema and Beardslee is that lease extension premised on force majeure in New York is tenuous and must be carefully considered and, if necessary, reevaluated. Although these decisions reflect the analysis of one federal judge concerning a limited number of leases, lessees of New York oil and gas leases cannot take comfort in this technical point or in the likelihood that these decisions will be appealed. Lessors across New York State who have had their leases extended on grounds of force majeure will look to these two decisions as a basis to invalidate their own leases.
Hiscock & Barclay has first-hand experience dealing with force majeure issues in New York and has carefully analyzed the Aukema and Beardslee decisions to assist operators who hold leases that may be impacted by the Court's rulings.
If you require further information regarding the information presented in this Legal Alert and its impact on your organization, please contact Richard Capozza, Chair of the Energy Practice Area at 315-425-2710 or rcapozza@hblaw.com or Yvonne E. Hennessey at 518-429-4293 or yhennessey@hblaw.com.