Periconi, LLC

New York's Highest Court to Weigh in on Who Bears the Cost of Regulatory Inaction on Fracking

Fresh off its hotly anticipated August 2014 decision upholding the right of municipalities to zone oil and gas extraction operations out of their towns, the New York State Court of Appeals is set to weigh in on another oil and gas extraction issue. This latest matter arrived at the Court of Appeals through a somewhat unusual route, but promises to decide whether landowning lessors or industry lessees bear the cost of state level regulatory inaction on high volume hydraulic fracturing of shale with horizontal drilling (also known as fracking). 

The oil and gas leases at issue were generally entered into in the early to mid 2000s, and each had a "primary term" of five years with an indefinite "secondary term" if the lessee began producing oil or gas on the leased property. Each lease also contained a force majeure clause stating that drilling delays due to "order, rule, regulation . . . or necessity of government . . . shall not be counted against Lessee . . ."

The idea was that the lessee could only burden the leased land for a few years without starting production of oil or gas. Production would allow the lessee to retain its interest in the land indefinitely, but with a corresponding obligation to pay royalties to the landowner. The force majeure clause provided the lessee with a level of protection because it would "stop the clock" and prevent the lease from expiring if some event beyond the control of the lessee prevented the lessee from extracting oil or gas.

In 2008, then-Governor Paterson asked the Department of Environmental Conservation to update the Generic Environmental Impact Statement on the state's Oil, Gas and Solution Mining regulatory program to include an analysis of then-recent advances in drilling technology. Those advances mainly involved the "horizontal" and "high volume" aspects of fracking.

Just over a year after DEC issued its 2009 draft Supplemental GEIS for fracking, Governor Patterson decided the issued needed further study. He ordered the DEC to refrain from issuing any fracking permits until it completed the final Supplemental GEIS. To this day, the DEC has not issued a final Supplemental GEIS, creating a de facto ban that exists to this day.

Wanting to retain their valuable interest in the leased land, the industry lessees claimed that the moratorium on fracking constituted a force majeure event that extended the primary term of the leases. The lessors, wanting to regain unencumbered control over their properties, filed suit in the United States District Court for the Northern District of New York in 2012 seeking a declaration that the leases had expired. After losing in the district court, the lessees appealed to the United States Court of Appeals for the Second Circuit.

The Second Circuit concluded that New York State was "essentially a blank slate as to all significant oil and gas lease issues," and decided to defer to the interpretation of the New York State Court of Appeals. Under little used rules allowing the federal appeals court to submit for resolution questions to the State's highest court, the Court of Appeals, and regulations allowing the Court of Appeals to resolve certain unresolved questions of state law, the Court of Appeals has agreed to answer the following two questions:

  1. In the context of certain oil and gas leases, did New York State's moratorium on high volume horizontal hydraulic fracturing amount to a force majeure event; and if so,
  2. Did the force majeure clause in the oil and gas leases extend the primary terms of the leases?

The deadline for answers is unclear, but counsel for the lessors and lessees will brief the court on their positions by the end of 2014 and will likely participate in oral arguments before the court in early 2015.

Stay tuned to the Periconi, LLC Environmental Law Blog for updates, and follow the links below for copies of the opinions by the Second Circuit and Court of Appeals.

Beardslee v. Inflection Energy, LLC, 71 F.3d 221, 2014 U.S. App. LEXIS 14876 (2d Cir. N.Y., July 31, 2014)

Beardslee v. Inflection Energy, LLC, No. 213, (N.Y. Aug. 28, 2014)

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