Oil and Gas Leases Killed Amid Fracking Fears

     MANHATTAN (CN) – The Second Circuit declined Wednesday to resurrect oil and gas leases that expired during New York’s years-long moratorium on fracking.
     Relying on an interpretation of state law from New York’s high court, the appeals court affirmed the 2012 decision of a federal judge in Binghamton that the moratorium did not constitute an event that triggered a clause extending the leases.
     “Because we perceive no factual disputes material to the legal question presented, we conclude that the district court correctly granted summary judgment in favor of the landowners,” the unsigned opinion from the three-judge panel states.
     In the early 2000s, energy companies became interested in exploring areas of New York for natural gas trapped deep in the Marcellus Shale, a geologic formation stretching east from Ohio.
     Using a combination of high-volume hydraulic fracturing – fracking – and horizontal well drilling, the companies hoped to release the gas held in sedimentary rock.
     In Tioga County, located between Elmira and Binghamton close to the Pennsylvania border, energy companies signed leases in 2001 with nearly three dozen landowners to extract gas from their property via fracking.
     The technique uses pressurized water, sand and chemicals to free the gas.
     The leases with Inflection Energy, Victory Energy and Megaenergy contained identical habendum clauses – typical in standard oil and gas leases that outline a primary lease term of five years and a secondary term lasting as long as product is taken from the ground.
     But when the state halted new fracking permits in 2010 until a comprehensive environmental assessment of the technique could be completed, Inflection informed the landowners that the leases’ force majeure clause had been invoked – an unexpected event or government action – which extended the primary term of the habendum clause.
     The landowners disagreed and sued in Federal Court, contending the leases had expired on their own. The energy companies counterclaimed that the state’s moratorium was a force majeure event.
     After U.S. District Court Judge David Hurd found for the landowners, the energy companies appealed to the Second Circuit.
     But because the appeal “turns on significant and novel issues of New York law concerning the interpretation of oil and gas leases, a legal field that is both relatively undeveloped in the state and of potential great commercial and environmental significance to state residents and businesses,” the Second Circuit panel asked for guidance from New York’s high court, the Court of Appeals.
     The panel certified two questions to the court last summer: whether the state’s moratorium amounted to a force majeure event and, if so, whether that changed the primary term of the leases’ habendum clause.
     In March, the Court of Appeals offered a technical reading of leases, “with reference to both the intention of the parties and the known practices within the industry,” and concluded that the force majeure clause “does not modify the primary term of the habendum clause and, therefore, does not extend the leases.”
     Using that “definitive statement of New York law,” the Second Circuit panel on Thursday affirmed Hurd’s ruling.
     A footnote in the 10-page opinion indicated the energy companies asked the panel not to follow the Court of Appeals’ reasoning, arguing that the high court “misquoted the leases’ language and misapplied New York law.”
     “Here, we note that the Court of Appeals did not misquote the leases,” the footnote said. “Moreover, we will not second-guess the court’s interpretation and application of New York law.”
     Another footnote indicated that in June New York finished its exhaustive health and environmental review of fracking – first suggested in 2008 by then-Gov. David Paterson – and concluded the technique would be prohibited in the state.
     The panel included Circuit Judges Ralph Winter, Richard Wesley and Susan Carney.

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