Chesapeake Energy’s Appalachia division has agreed to cover the cost of the state of New York’s investigation and will let more than 4,400 Marcellus Shale leases covering more than 250,000 net acres be renegotiated. That will be a significant price to pay for acreage that was initially leased for signing bonuses of just a few dollars per acre. Note to NY mineral owners – without hydraulic fracturing, those leases are worth less than $2-3 per acre. Make sure you vote.
Bonuses increased to more than $1,000 per acre in other areas of the Marcellus Shale and leases are generally more elaborate than they were just a few years ago (environmental clauses, restrictive terms, etc.). If the company truly plans to renegotiate, this is a costly decision. If each acre is re-leased at $1,500 per acre, this will cost the company almost $400 million in lease bonuses alone. Add higher royalties, costly lease provisions, etc, and this decision could have a half a billion dollar impact.
We explored the details of the planned arbitration last month in an article titled Chesapeake’s Force Majeure Gas Lease Case in NY. Chesapeake was attempting to extend leases by declaring the ban on hydraulic fracturing in New York a ‘Force Majeure’ or an act of God event. That event kept the company from meeting the terms of its leases and the company had hoped to extend its opportunity to develop the leases. With arbitration looming, the company has agreed to simply renegotiate with New York landowners.
With the inventory of wells Chesapeake has plans to develop across all of the major shale plays, it will be interesting to see if they actually attempt to re-lease this acreage. This could very well be a situation where the company doesn’t believe it was going to develop the acreage in a timely fashion even if the fracking ban was lifted.