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Monday, April 22, 2024 | Back issues
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NY Ban on Fracking Didn’t Extend Gas Leases

ALBANY, N.Y. (CN) - A 2008 state moratorium on fracking did not constitute an unexpected event that triggered clauses extending oil and gas drillers' land leases, New York's high court found.

The decision came in response to two certified questions sent by a federal appeals court to clarify state law on the "relatively undeveloped" legal field around high-volume hydraulic fracturing and horizontal well drilling, commonly known as fracking.

Parts of New York sit atop the Marcellus Shale, a rich deposit of natural gas deep underground that stretches east from Ohio. The gas is freed when pressurized water, sand and chemicals are injected into the earth, shattering the sedimentary rock.

Starting in the mid-2000s, energy companies interested in exploring for natural gas in New York began securing land leases with property owners. The leases typically lasted five years.

At the same time, though, safety and environmental concerns about fracking arose, leading then-Gov. David Paterson to direct the state Department of Environmental Conservation, which oversees conventional oil and gas drilling, to conduct a formal review of the technique.

The order prompted Inflection Energy, a driller with leases in Tioga County near Binghamton and the Pennsylvania border, to notify landowners that a "force majeure" event had occurred which extended the term of its contracts.

Oil and gas land leases typically let energy companies conduct geophysical, seismic and other exploratory tests, with landowners receiving a nominal annual fee in return. If a well goes into production, the landowner receives a royalty on the energy company's gross proceeds.

Inflection Energy's leases, like most oil and gas contracts, contained term clauses known as habendum clauses that established the set period for granted development rights - in this case a primary term of five years.

Habendum clauses usually contain language referring to a secondary, open-ended term during which the driller is producing oil or gas from the well.

Inflection's leases also had a force majeure clause, signifying "an event beyond the control of the parties that prevents performance under a contract and may excuse nonperformance."

That clause kicked in when Paterson ordered the fracking review, Inflection contended.

In 2012, after the primary term of Inflection's leases had expired, the landowners sued in federal court seeking a declaration that the leases indeed had ended. Inflection filed a counterclaim that the leases were still in effect, citing the force majeure clause.

A district court found for the landowners, saying all of the leases had expired according to their primary terms. The court declined to rule on whether a force majeure event had occurred.

Inflection appealed to the 2nd Circuit, which last summer turned to the New York Court of Appeals to clarify state law on oil and gas leases.

On Tuesday, the high court ruled that the force majeure clause did not affect the habendum clause "and, therefore, the leases terminated at the conclusion of their primary terms."

Writing for the unanimous court, Judge Eugene Pigott noted that a general rule of New York contract law is that "the intent of the parties controls" and if an agreement is clear on its face it "must be enforced according to the plain meaning of its terms."

Oil and gas leases tend to be more complex, he acknowledged, and so "must be construed with reference to both the intention of the parties and the known practices within the industry."

Inflection had argued that the force majeure clause contained language that specifically cited an act of government as potentially having an effect beyond the lessee's control, and therefore not counted against the lease term.

But Pigott wrote that because the force majeure clause refers to a delay or interruption in drilling or production, "it follows that the clause only conflicts with and therefore modifies the secondary term of the habendum clause, in which the lessee has the obligation to operate in the production of oil or gas, or the lease terminates."

Reading the force majeure clause as applying to the exploratory phase rather than the production phase "would be to interpret the leases in a manner contrary to the plain intent of the parties," Pigott said.

Chief Judge Jonathan Lippman concurred, along with Judges Susan Read, Jenny Rivera, Sheila Abdus-Salaam, Leslie Stein and Eugene Fahey.

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