Student Post: Legal and Social Ramifications of the Chesapeake Lease Agreements

One of the issues being discussed in class is legality of the actions of the Chesapeake Company in relation to its drilling for oil. The company had engaged in leases with land-holders whereby the company would have the right to explore for oil below the surface of the land. If oil was to be discovered than the company could take the oil and use it for its own purposes and the lessor would obtain royalties. Moreover, the available information suggests that there were bonuses to be paid regardless of any future royalties. In Michigan these leases were set up through a subsidiary and in the case of North Dakota the leases were directly entered into by the parent company.

The problems arose when the parent company (in North Dakota) and the subsidiary (in Michigan) refused to honor the terms of the lease agreement. Many property owners thus allowed a company to use their land pursuant to a contract whose provisions have not been fulfilled.

There are two main legal ramifications involved: 1) The particular areas of law involved if the company is to be held liable and 2) The impact this could have on oil exploration.

As to the first matter, the most obvious claim that the property owners could bring is one of breach of contract. If the lease stated that the land holders were entitled to a bonus irrespective of the possibility for future royalties than they are entitled to such whether or not the Company has actually discovered oil. Furthermore, if the Company signed the agreements with the intent not to honor them than the issue of fraud is raised. Finally, a company engaging in such practices is open to a shareholder derivative suit.

The second matter pertains to the impact this may have on future oil exploration. When there is fierce competition for the rights to oil, companies want an advantage over their competitors. Nothing is inherently wrong in entering into leases and exploring for oil even though oil may not be found. It is another matter to not carry through on those agreements with the lessor. That resembles dishonest speculation. It may cast a negative light on the entire industry which may make individuals less likely to enter into future lease agreements with not only the previous company in question but others as well. The net effect would be disastrous for oil exploration. In addition it may lead to more regulations and restrictions on the industry which may make it more costly to drill for oil.

An interesting aspect of this issue is the possibility of state-owned oil companies in the U.S. The advantages in regard to the issue at hand would be bargaining power. An individual company no matter how rich or powerful would not be able to treat a state the same way it can an individual land-holder. Moreover, a state-owned oil company could enter the market itself and explore for oil itself at a subsidized cost if other companies were unwilling to do business. In this way it could undercut privately owned oil companies while remaining democratically accountable. This would change the power dynamics greatly. Of course, this latter course has not been pursued.