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Added January 19, 2012.
REASONS THE COMPANIES’ FORCE MAJEURE CLAIMS
ARE NOT VALID:
February 9, 2011
Mr. Henry J. Hood
Chesapeake Energy Corporation
PO Box 18496
Oklahoma City, OK 73154-0496
RE: YOUR LETTER OF JANUARY 26, 2011
Dear Mr. Henry:
The purpose of this letter is to inform Chesapeake that we categorically reject the position taken in your January 26, 2011 letter that our lease has been extended due to the actions of New York State. You have misread the law and the Executive Orders # 41 and #2. There is no moratorium on drilling and fracking in New York State, therefore there is no justification for force majeure.
The Executive Orders only remove the "short cut" method of obtaining a drilling permit. The Generic Environmental Impact Statement, which commonly allows a shortened period for the consideration and granting of a drilling permit did not originally address environmental impacts associated with high-volume hydraulic fracturing combined with horizontal drilling. This has been known to the industry for many years. Well drilling permits can still be obtained by complying with the normal 'site specific' SEQRA requirements, which have never disappeared nor been rescinded.
The fact that the "old way" of having to comply with SEQRA by the performance of a site specific Environmental Impact Statement is still in existence belies your contention that an event of force majeure has occurred. You may obtain a drilling permit under the current Executive Order; it simply will take more time and money. Incidentally, a prominent environmental scientist in the oil and gas industry has repeatedly asserted that once one site specific EIS has been performed, it can serve as a template for all subsequent site specific EIS's at other sites. He also asserts that such an EIS would take about six months. Once one EIS has established the common environmental concerns in a "gas field" any future EIS need only insert the site-specific variations. Each subsequent EIS would take far less time. This is not rocket science and is commonly done under SEQRA.
Force majeure is an equitable concept which originated to allow someone who had an obligation under a contract to be relieved 'temporarily' from that obligation when an event, so tragic, so unexpected, so unforeseen, and uninsurable occurred. Chesapeake has asserted no obligation, which it cannot perform. Without identifying specifically the obligation required of Chesapeake of which Chesapeake seeks to avoid, there can be no obligation which force majeure can act upon. As Chesapeake has neglected or refused to identify the obligation from which it is to be relieved, your letter is of no effect.
The Executive Orders are only extensions of a preexisting order issued several years ago. Force majeure is an equitable defense under the laws of New York State. In order to claim force majeure as an equitable defense Chesapeake "must have given equity to receive equity." Your letter admits, in its first paragraph, that Chesapeake has been aware of the regulatory situation in New York, relative to gas drilling permits, since then Governor Paterson’s actions in July of 2008.
Chesapeake's claim of force majeure is not timely and at this late date constitutes laches. The Lessors in the community have relied on the fact that Chesapeake has done nothing to assert Force Majeure in the previous two and one half years of the existence of the original Executive Order. Moreover, if you at Chesapeake thought that the Executive Orders were invalid or a violation of law, Chesapeake had 120 days from the issuance of the Executive Orders to challenge it by way of an Article 78 proceeding under the New York CPLR. That time has long passed for the original Executive Order and is still running for the others.
If the recent Executive Orders #41 and 2, are considered new orders, then Chesapeake must first exhaust all its remedies and seek mandamus relief from the Order by commencing litigation against the State of New York and filing claims with the NY Court of Claims for damages for a 'taking". Chesapeake could prevail in those suits.
In addition well permits are currently being issued for all wells that do not require high-volume hydraulic fracturing combined with horizontal drilling. Chesapeake is not prevented from drilling and completing as there is still available fracking by use of propane gas, nitrogen, and carbon dioxide when combined with horizontal drilling. The law never has guaranteed the use of any specific technology.
Further, Chesapeake is not prevented from drilling vertical wells, or from high-volume, slick-water, horizontal hydraulic fracturing in any subterranean rock formations other than the Marcellus Shale, such as the Utica Shale, Trenton Black River and the Oriskany.
[There is no force majeure clause or language in our lease, although we have learned such a clause if very common in most gas leases signed by Chesapeake. The lack of this clause is a further reason why the company cannot invoke this equitable defense at this late hour in the lease term. This position is reinforced by the clause that provides: “The entire agreement between Lessor and lessee is embodied herein. No oral warranties, representations, or promises have been made or relied upon by either party as an inducement to or modification of this Lease.”] PLEASE NOTE: REMOVE THIS ¶ IF YOUR LEASE DOES CONTAIN A FORCE MAJEURE PROVISION.
Chesapeake is undoubtedly aware that when Fortuna Energy (now Talisman) attempted to invoke force majeure to extend some of their leases in New York, which also did not contain force majeure clauses, they were confronted by the New York State Attorney General’s office. This resulted in a settlement under the terms of which the company dropped its force majeure claims and paid a fine of $192,500.00. We are aware that Chesapeake was also approached by the Attorney General’s office, but you have apparently ignored their opinion.
Your letter of January 26, 2011 is a disingenuous attempt to transmute low natural gas prices and a natural gas supply glut and its consequent lack of economic profit into a force majeure event. Neither a gas glut nor low prices for natural gas constitute a tragic, unexpected, unforeseen and uninsurable event. In fact Chesapeake commonly buys 'hedges" (a form of unregulated insurance policy to guarantee a certain sale price of its natural gas) to guard against market fluctuation.
Based on the facts set forth above, there is no event of force majeure, as you have not been prevented from drilling .
Lastly, we are aware that Chesapeake had, in other instances, filed documents with various county clerk offices, claiming to extend leases under the same theory as incorrectly invoked in your January 26, 2011 letter. Please be aware that we would regard such improper and illegal filing to be a defamation of our title, among other legal wrongs. This letter is to advise you not to record any documents in the County Clerk’s office, and if you do, we will regard it as not only negligent but a possible intentional attempt to damage our title and our ability to market or mortgage our property. As a consequence, you could be subject to punitive damages.
We presume that you will act prudently and not damage our title in any way and that if you wish to drill a well you will follow the required procedures of the New York State DEC by submitting such site specific environmental impact statements as are required under the State Environmental Quality Review Act. None of these are beyond your control, but are required by statute for all drillers.
Very truly yours,