Back in 2000, men from Chesapeake Energy (CHK) started showing up on people’s doorsteps around Broome County, New York, a few miles north of the Pennsylvania border. Once a hub of manufacturing and technology jobs (IBM (IBM) was founded there), Broome had long since peaked by the year 2000 and was now on the same downward trajectory as other Rust Belt towns in Ohio and Pennsylvania. Strangers didn’t typically show up offering cash to lease the drilling rights for people’s land. Sure, Broome was right on top of the natural gas-rich Marcellus Shale, but only geologists really knew what that meant, and back then, no one had ever heard of fracking.
Over the next few years, Chesapeake was able to snap up the drilling rights to some 13,000 acres of land across Broome and neighboring Tioga County, often paying as little as $3 an acre. By the mid-2000s, just a few miles south across the Pennsylvania border, energy companies were paying as much as $5,000 an acre, and giving landowners 25 percent royalty rights to everything they produced out of the ground. The 200 or so people in Broome and Tioga who signed up with Chesapeake were lucky if they got 12 percent.
Extending south from New York State through Pennsylvania, and west into parts of Ohio, the Marcellus Shale (map) has proven to be the most lucrative natural gas play in the U.S. Not only is the quality of the gas underneath excellent, but, thanks to its proximity to the Northeast, the gas can be delivered quickly and cheaply to big markets in New York City, Boston, and Philadelphia.
Chesapeake was clearly ahead of the curve on this one, as it so often was in the fracking game. Yet 13 years after signing some of those first, supercheap leases, Chesapeake is packing up without having produced a single cubic foot of natural gas from those original 13,000 acres in southern New York. Rather than continue battling landowners who want to negotiate better terms on those now-expired leases, Chesapeake is simply walking away.
Most of those first leases expired around 2008 and 2009. But Chesapeake built force majeure clauses into them, giving it the right to extend the leases without renegotiating them should some event preclude it from developing the land. The way Chesapeake saw it, that event was a 2008 moratorium on fracking in all of New York State. That ban is now in its sixth year and doesn’t appear to be going away anytime soon. In March, the New York State Assembly voted to ban fracking until 2015. Only Governor Andrew Cuomo has the power to lift the ban.
In November a federal court ruled that Chesapeake couldn’t use the moratorium as an excuse to extend the leases beyond their original terms without renegotiating them for better rates. It had been appealing the decision. But this week, Chesapeake decided to just pull the plug. Why offer better rates if the ban on fracking is here to stay?
Chesapeake’s retreat is considered a win for some of those early landowners who got duped into signing for such low prices. But it’s not like there are a lot of energy companies coming to town offering better terms. “There is zero demand in New York right now,” says Scott Kurkosky, a lawyer who represents more than 200 landowners, many of whom signed deals with Chesapeake.
That’s not to say there isn’t oil and gas drilling in the state. According to the New York State Department of Environmental Conservation, there are about 14,000 conventional oil and gas wells active in New York State. The key word, though is “conventional,” not “fracked.” At any time, Chesapeake could have drilled a straight-up-and-down vertical well on any of those 13,000 acres, but why waste such a choice play when it wouldn’t be able to produce nearly the amount of gas that a fracked well would?
Chesapeake’s decision to abandon those leases is clearly a sign that it’s frustrated over trying to operate in New York; it’s also a bet that Governor Cuomo is still nowhere near approving fracking. In May, Cuomo said he’d make a decision before he faces reelection this November. With two months to go, he doesn’t appear any closer to approving or banning fracking. Last month, Cuomo avoided appearing with President Obama in upstate New York, where Obama spoke in favor of natural gas and its economic benefits.