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Aukema v. Chesapeake Appalachia, LLC

United States District Court, N.D. New York

November 15, 2012

AUKEMA; Patricia A. Aukema; Jesse Barnhart; Charity A. Barnhart; Scott H. Bodine; Connie M. Bodine; Anthony Burchell; Cynthia Burchell; Gary W. Burchell; Clifford Castline; Alice Castline; Bruce T. Cook; Amy M. Cook; Gail P. Fisher; Douglas Greene; Herbert A. Hibbard; Daniel L. Hibbard; Mary B. Hibbard; August Hiemstra; Leslie J. Hiemstra; John P. Hricik; Susie A. Hricik; Stella Hricik; Stefan Jakubowski; Jadwiga Jakubowski; James P. Keesler; Elizabeth F. Keesler; Joseph W. Kellicutt; Dorleen Kellicutt; Michael J. Kellicutt; Susan Kellicutt; Robert D. Kuzel; Cheryl A. Kuzel; Charles W. Lee; Susan F. Lee; Gary A., Lee; Mary S. Lee; Eddie W. Maslin; Carol M. Maslin; Pietro Mauceri; Guiseppina Mauceri; Jarrett D. Newby; Nancy J. Newby; Orrin G. Pendell; Edward Rutkowski; Donna Rutkowski; David W. Schaeffer; Joan P. Schaeffer; Gary L. Smith; Kim Smith; Dorothy Smith; Norman J. Sweeney; Ruth A. Sweeney; Daniel J. Williams; Charity J. Williams, Plaintiffs,
v.
CHESAPEAKE APPALACHIA, LLC and Statoilhydro USA Onshore Properties, Inc., Defendants.

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[Copyrighted Material Omitted]

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Cynthia Ann Manchester, Esq., Levene Gouldin & Thompson, LLP, Binghamton, NY, for Plaintiffs.

Maria E. Lisi-Murray, Esq., Scott R. Kurkoski, Esq., Vestal, NY, Thomas S. West, Esq., The West Firm, LLP, Albany, NY, for Defendant, Chesapeake Appalachia, LLC.

David L. Barrack, Esq., Jeremy A. Mercer, Esq., Mark A. Robertson, Esq., L. Poe Leggette, Esq., Fulbright & Jaworski L.L.P., Canonsburg, PA, for Defendant, Statoilhydro USA Onshore Properties, Inc.

MEMORANDUM-DECISION and ORDER

DAVID N. HURD, District Judge.

I. INTRODUCTION

Plaintiffs Douglas and Patricia A. Aukema and other landowners [1] (collectively " plaintiffs" ) brought this declaratory judgment action against Chesapeake Appalachia, LLC (" Chesapeake" ) and Statoilhydro USA Onshore Properties, Inc. (" Statoil" ) (collectively " defendants" ) seeking a declaration that certain oil and gas leases entered into between the parties expired at the conclusion of the primary terms of those leases and that the terms have not been extended by payment or force majeure.[2] See Am. Compl. Plaintiffs also charge defendants with violating New York General Business Law section 349. Id. Defendants assert counterclaims seeking a declaration that the leases were extended due to force majeure events and the tender of payments.

Plaintiffs moved for partial summary judgment declaring that the leases have expired and directing defendants to file a release of the leases in accordance with New York General Obligations Law section 15-304. Defendants opposed plaintiffs' motion and cross-moved for summary judgment declaring that the leases were extended and are in full force and effect, and dismissing plaintiffs' amended complaint. Plaintiffs opposed defendants' motion and replied in support of their motion. Defendants replied in support of their motion.

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Defendants also moved to strike the reply affidavit of plaintiffs' expert David W. Keefe, dated August 16, 2012. Plaintiffs opposed.

Oral argument was heard on August 30, 2012, in Utica, New York. Decision was reserved.

II. BACKGROUND

A. Oil and Gas Industry in New York State

Gas drilling in New York State is governed by the Environmental Conservation Law. Under the authority of that statute, the State Environmental Quality Review Act (" SEQRA" ), N.Y. Envtl. Conserv. Law section 8-0101, was passed " to inject environmental considerations directly into governmental decision making." City Council of Watervliet v. Town Bd. of Colonie, 3 N.Y.3d 508, 515, 789 N.Y.S.2d 88, 822 N.E.2d 339, 341 (2004) (internal quotations omitted).

SEQRA requires all New York State agencies, including the New York State Department of Environmental Conservation (" DEC" ), to prepare or cause to be prepared an Environmental Impact Statement (" EIS" ) for " any action ... which may have a significant effect on the environment." N.Y. Envtl. Conserv. Law § 8-0109(2).[3] Where the impacts from separate actions are common and predictable, a generic EIS (" GEIS" ) may be prepared to analyze the impact of all such actions generally and cumulatively instead of preparing an individual (or site-specific) EIS for each action. See N.Y. Comp.Codes R. & Regs tit. 6, § 617.10(a). The purpose of a GEIS is to provide a comprehensive review of the potential environmental impacts of an activity and how those impacts could be mitigated. Subsequent proposed actions which may significantly affect the environment, but which are not adequately addressed by a GEIS, require either a supplemental GEIS (" SGEIS" ) or a site-specific EIS. See id. § 617.10(d)(4); N.Y. Envtl. Conserv. Law § 8-0109(2).

In 1992, the DEC issued a GEIS addressing the environmental impacts associated with oil and gas exploration. N.Y.S. Dep't of Envtl. Conservation, Generic Envtl. Impact Statement on Oil, Gas, and Solution Mining Regulatory Program (1992), available at http:// www. dec. ny. gov/ energy/ 45912. html. The 1992 GEIS contemplated conventional well fracturing using 20,000 to 80,000 gallons of fluid.

During 2008 there was an increased interest in the issuance of permits for horizontal drilling [4] and high volume hydraulic fracturing (" HVHF" or " hydro fracking" ) [5]

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to develop the Marcellus Shale and other low-permeability gas reservoirs.[6] According to the DEC, the Marcellus Shale is a shale formation extending deep underground from Ohio and West Virginia northeast into Pennsylvania and southern New York. It is as deep as 7,000 feet or more below ground in some areas. See N.Y.S. Dep't of Envtl. Conservation, Marcellus Shale (2012), available at http:// www. dec. ny. gov/ energy/ 46288. html. Geologists estimate that it may contain up to 489 trillion cubic feet of natural gas.[7] Id. Although the gas potential in the Marcellus Shale is not a new discovery, drilling companies abstained from exploration and extraction because of the difficulty and expense associated with drilling such a deep formation. However, recent advancements in technology and the use of HVHF prompted drilling companies to reconsider opportunities in the Marcellus Shale.

As a result of the interest in horizontal drilling combined with HVHF, and the unknown environmental impact caused by it, on July 23, 2008, Governor David Paterson directed the DEC to update its 1992 GEIS covering oil and gas drilling. See N.Y. Envtl. Conserv. Law— Oil and Gas Wells, L. 2008 ch. 376, 2008 N.Y. Sess. Laws 1658-59 (McKinney) (" Directive" ). He directed the DEC's update " to address potential new environmental impacts from drilling, including horizontal drilling in Marcellus shale formations." Id. Important concerns included " potential impacts on groundwater resources, procedures for the treatment and transport of process water contaminated during drilling operations, potential impacts on local infrastructure from increased heavy truck traffic, the safety of fluids used in the hydraulic fracturing of geologic formations and potential cumulative impacts of wide-scale drilling." Id.

Accordingly, the DEC commenced the development of a SGEIS. That process is still ongoing. The most recent revised draft SGEIS was released on September 7, 2011, with the period for public comment ending on January 11, 2012. According to the DEC, no permit applications to drill horizontal wells utilizing HVHF in the Marcellus Shale are being processed pending completion of the SGEIS or preparation of a site-specific EIS. Any site-specific review must take into account the same issues being considered in the SGEIS and must be consistent with the requirements of SEQRA and the Environmental Conservation Law.

According to defendants, the Directive constitutes a moratorium which has effectively brought natural gas development in New York State to a screeching halt. According to plaintiffs, defendants may, and have acquired permits to drill utilizing the conventional drilling methods contemplated by the 1992 GEIS. For example, in 2009 there were sixteen vertical Marcellus wells producing in New York State. See 2009 DEC Annual Report at 5.

B. The Instant Leases

Plaintiffs are a group of landowners who reside in New York State throughout

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Broome and Tioga counties. Between 2000 and 2006, the plaintiffs each [8] entered into separate oil and gas leases with either Central Appalachian Petroleum (" CAP" ); Phillips Production Company (" Phillips" ); Fortuna Energy, Inc. (" Fortuna" ); or Fairman Drilling Company (" Fairman" ) (collectively the " leases" ). Plaintiffs each leased to CAP, Phillips, Fortuna, or Fairman all oil, gas, and constituents underlying their property, and the rights necessary to develop, produce, measure, and market them.

The leases were eventually acquired by defendant Chesapeake. Chesapeake later assigned 32.5% of its interests to defendant Statoil.

1. CAP Lease

The one CAP lease at issue was executed by plaintiffs Robert and Cheryl Kuzel on June 5, 2000, for a ten year primary term. See Am. Compl., Ex. B. The Leasing Clause describes what the Kuzels leased to defendants. It reads:

Lessor hereby leases exclusively to Lessee all the oil and gas and their constituents, whether hydrocarbon or non-hydrocarbon, underlying the land herein leased together with such exclusive rights as may be necessary or convenient for Lessee, at its election, to explore for, develop, produce and market production from the Leasehold, and from adjoining lands, using methods and techniques which are not restricted to current technology, including the right to conduct geophysical and other exploratory tests...."

The Lease Term, also known as the habendum clause, provides:

This lease shall remain in force for a primary term of ten years from June 5, 2000 and for so long thereafter as prescribed payments are made, or for as long thereafter as operations are conducted on the Leasehold in search of or production of oil, gas or their constituents or for as long as a well capable of production is located on the Leasehold, or for as long as extended by provision herein, or for as long as the Leasehold is used for the underground storage of gas, or for the protection of stored gas.

This provision, like many modern habendum clauses, provides that the interest conveyed by the lease exists for a prescribed term of years (here, ten), " and for so long thereafter" as a specified product such as oil or gas is obtained from the land in paying quantities, or some other specified activity continues. See Wiser v. Enervest Operating, LLC, 803 F.Supp.2d 109, 118 (N.D.N.Y.2011) (Peebles, M.J.). Habendum clauses " establish a definite (or primary) term in which the lessee [is] permitted to develop the property, with an option for an indefinite secondary term permitting the lessee to reap the long-term value and return on the money spent developing the property during the primary term." Id. (internal quotations omitted).

The CAP lease also contains the following Covenants clause:

This lease and its expressed or implied covenants shall not be subject to termination, forfeiture of rights, or damages due to failure to comply with obligations if compliance is prevented by federal, state, or local law, regulation or decree.

The parties agree the Covenants clause is equivalent to a force majeure provision. A force majeure event is an event beyond the control of the parties which prevents ...


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