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Exclusive: Chesapeake drops energy leases in fracking-shy New York

Chesapeake Energy Corporation's 50 acre campus is seen in Oklahoma City, Oklahoma, on April 17, 2012. REUTERS/Steve Sisney
Chesapeake Energy Corporation's 50 acre campus is seen in Oklahoma City, Oklahoma, on April 17, 2012. REUTERS/Steve Sisney

By Edward McAllister

NEW YORK (Reuters) - Chesapeake Energy has given up a two-year legal fight to retain thousands of acres of natural gas drilling leases in New York state, landowner and legal sources told Reuters.

Landowners in Broome and Tioga counties, who had leased acreage to Chesapeake over the past decade, had battled the pioneering oil driller in court to prevent it from extending the leases under their original terms, many of which were agreed to long before a boom in hydraulic fracturing swept the United States.

But Chesapeake is now ready to walk away from the leases, according to a letter some landowners received two weeks ago from their attorney at Levene Gouldin & Thompson, potentially allowing the landowners to renegotiate new deals with other drillers at a higher rate, if New York state eventually ends a five-year fracking ban.

The decision, expected to be finalized next week, is a sign of energy firms' growing frustration over operating in the Empire State, where most drilling is on hold, and also an indication of how Chesapeake is reining in spending after years of aggressive acreage buying left it with towering debt.

"Chesapeake contacted us and offered to withdraw Chesapeake's appeal and provide complete release of the leases," attorneys from Levene Gouldin & Thompson said in a letter to one of their clients, a landowner. The letter dated July 26 was read over the phone to Reuters.

"Obviously, this is excellent news as it constitutes an end to the litigation," the lawyers wrote to their client.

Chesapeake had sought to extend the leases, many of which were signed in 2000, on existing terms, arguing that the fracking ban had allowed it to do so. Extending the leases meant it would avoid renegotiations, which would likely have raised the cost of the acreage.

Scott Kurkoski, a partner at Levene Gouldin & Thompson, who represents a group of landowners against Chesapeake, confirmed that he was in talks with the company, though he declined to comment further. Chesapeake Energy declined to comment for this story.

MORATORIUM MOANS

A moratorium on hydraulic fracturing imposed in 2008 continues to halt development in New York's portion of the Marcellus shale, one of the United States' biggest gas deposits, while neighboring states like Pennsylvania, Ohio and West Virginia experience an energy drilling renaissance.

The Oklahoma City-based company had been appealing a decision by a federal court in New York state which ruled in November that Chesapeake could not use a state ban on hydraulic fracturing, known as fracking, as a reason to declare force majeure and hold on to leases beyond their expiry without offering landowners better terms.

It is unclear how much land is involved in the decision, but one source said it would involve more than 10,000 acres. That is a small portion of the 2.5 million acres the company holds in natural gas shale plays across the United States, according to company filings, but is a meaningful sum for New York where Chesapeake is one of the biggest leaseholders.

"We have not yet been released of the leases, but it is pending," said John Hricik, who owns 200 acres in Broome County in southern New York and who recently received a note from Levene Gouldin & Thompson saying that the lease could be terminated as early as this week.

FINALLY CAPITULATED

Chesapeake was one of the first energy companies to enter New York on a major scale, securing leases from hundreds of landowners, some for as little as $3 an acre, since 2000. It generally offered a 12.5 percent royalty payment from oil or gas produced on the land, a number of landowners said.

The company, like many other firms attracted to the Marcellus shale, looked set to commence fracking in New York until a 2008 moratorium was imposed while an environmental study was conducted to determine the impacts of the controversial gas extraction technique.

That ban remains in place while Governor Andrew Cuomo considers the health impacts of fracking, which involves pumping millions of gallons of water and chemicals deep underground to release trapped gas and oil. It looks increasingly likely that fracking will not take place in New York until at least 2014.

Meanwhile, Chesapeake declared force majeure because it was unable to use fracking, and wanted to extend its old leases. But the existing leases paid far less than the thousands of dollars per acre that some landowners were receiving over the border in Pennsylvania where energy drilling has boomed since 2007.

Chesapeake's force majeure argument was denied by the U.S. District Court for the Northern District of New York, a New York District Court, a decision that Chesapeake had appealed, until now.

"I can renegotiate with other companies now," said Frank Laskowski, who owns land in Broome County just north of Binghamton. "Before that we were tied up with Chesapeake at $3 an acre and 12.5 percent. Most people are getting much more than that."

In a frenzied land grab that accompanied the U.S. energy boom since 2007, some landowners have received thousands of dollars an acre across the country. One landowner in Broome County said he now hoped to secure up to $3,000 an acre.

Gail Fisher, another landowner in Tioga County in southern New York, expressed relief at the prospect of being free of Chesapeake's lease. "Chesapeake finally capitulated after about a year and a half," she said. "I will not sign up to have my land leased again."

With litigation continuing, it is unclear when, if ever, fracking will be allowed in New York. It has been a graveyard for energy company hopes in recent years.

Still, some remain optimistic, despite the moratorium.

"There are a lot of big players still here who are still looking to develop shale gas resources in this state if and when the administration lifts the ban on drilling," said Jim Pardo, a partner at the New York law firm McDermott Will & Emery which represents energy companies.

"Given the size of the resources, it is still a very attractive market for most."

(Reporting by Edward McAllister; Editing by Leslie Gevirtz)

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