Walker Friedman and Jack Price 2016-02-26 15:17:07
The fight between local and state governments over fracking bans and oil and gas development. The past two years have seen major shots fired in a battle over how much regulatory influence a municipality may exert over oil and gas development in its own backyard. The case of Denton is representative of a nationwide struggle over the power to regulate—or, in some cases, prevent—oil and gas development. On one side, communities concerned with the environmental, safety, health, and aesthetic impacts of oil and gas activity have become bolder about asserting their autonomy. On the other side, industry players and private mineral owners seek to protect their investments and operate independently. The state has so far come to be on the industry’s side. Regulatory Scheme and Denton’s Fracking Ban The Texas Constitution provides that “home-rule” municipalities may pass local ordinances as long as they are not inconsistent with the general laws of the state.(1) The Texas Supreme Court has held that cities’ zoning ordinances may be permissible even if they affect private-property rights as long as they are not arbitrary and are substantially related to protecting their citizens’ health, safety, and general welfare.(2) But a state agency, the Texas Railroad Commission, governs the permitting, drilling, producing, and other oversight of oil and gas wells in Texas.(3) Put broadly, under this scheme the state regulates the minerals, and the local government regulates the surface and protects local health and safety. But what happens when municipal regulations that are ostensibly aimed at the surface estate or public safety actually impose on the Railroad Commission’s governance of the minerals? This is the question that many Texas cities have been asking—and in 2015 the Legislature answered loudly. To understand this state-city tension, consider the tumultuous past 18 months for Denton. Like most urban Texas cities, Denton had little concern over oil and gas development for most of its history. There was no reason to believe oil or gas could be produced there. But that changed after operators began using innovative stimulation techniques to maximize recovery from shale formations and employing horizontal drilling to access gas under previously inaccessible land. Over the past 20 years, hydraulic fracturing, or fracking, became the industry standard for producing natural gas from formations such as the Barnett Shale in North Texas. Without fracking, the Barnett Shale would have remained undeveloped. By the mid-2000s, many Barnett Shale communities began enacting ordinances to retain some control over this new industry activity. Denton was among these cities, and it adopted its first drilling ordinance to require local permitting and to provide for minimum required distances (“setbacks”) between drilling locations and protected-use areas like residences, schools, and hospitals.(4) These protections were adequate for the first Barnett wells, most of which were on the city’s outskirts. But by 2009, as drilling crept closer to city centers, opposition developed with questions arising about the health, safety, and environmental impacts of fracking. Local activist opposition groups negotiated with the city, and the ordinance was amended to increase the setbacks to 1,000 feet.(5) A 2013 amendment further extended setbacks to 1,200 feet and prohibited many operational practices based on concerns about negative environmental impact.(6) Still, many Denton citizens were unsatisfied and believed exceptions swallowed up the new rules. State law grandfathered old well sites, and primitive early permits allowed perpetual new drilling on existing sites as close as 200 feet from residences. (7) The city became divided more sharply between pro- and anti-drilling factions. Finally, in May 2014, the city council declared a moratorium on issuing any new drilling permits while it worked on rewriting the ordinance.(8) Meanwhile, a citizen alliance called the Denton Stakeholder Drilling Advisory Group had partnered with national environmental organizations and began efforts to ban fracking in Denton altogether.(9) DAG crafted a proposed ordinance making fracking within city limits a misdemeanor, punishable by fines of up to $2,000 for each day in violation. The proposal cited concerns over the city’s environment and infrastructure, public health and safety, noise, road use, hazardous materials management, insurance, gas venting, air pollution, groundwater contamination, and property devaluation. (10) DAG collected nearly 2,000 signatures supporting the ordinance. In July, the group presented its proposal to the city council as a voter-initiative petition. The council rejected the petition, opting to put it on the November ballot for the city’s voters to decide.(11) In November 2014, after an expensive campaign, the measure passed with 59 percent of voters in favor, and Denton became the first Texas city to explicitly ban fracking.(12) Legal Challenges and HB 40 The Denton victory was short-lived. The next day, the Texas Oil and Gas Association and Texas General Land Office separately sued the city. Their petitions alleged that the ordinance was preempted by state law and they sought an injunction prohibiting its enforcement.(13) Other litigation against the city raised questions about Denton’s potential liability to mineral owners: Even if the city had the power to regulate drilling, did Denton’s regulations preventing development amount to a compensable taking of property? Mineral owners said they did, because the regulations effectively prevented development altogether, which “destroyed their property’s value” or “denied them all its economically viable use.”(14) Whether a city with an effective drilling ban would owe damages to mineral owners for devaluing their property would likely turn on (1) whether the minerals were severed from the surface (thus eliminating any potential value from the surface estate) and (2) assessing the economic, regulatory, and political climate at the time the property was acquired.(15) If the property retained any practical value at all or if the owner had no reasonable expectation of economic development when he or she acquired it (for example, if the regulation at issue was already in place or had been proposed), then a compensable taking claim would fail. But before these issues could be litigated, Texas legislators quickly introduced bills to overturn the Denton fracking ban and prevent similar bans elsewhere. In March 2015, Rep. Drew Darby introduced House Bill 40, which easily passed both houses. Gov. Greg Abbott signed the bill into law on May 18.(16) HB 40 was codified as Texas Natural Resources Code section 81.0523 and provides that oil and gas “operations” (which expressly include fracking) are subject to the exclusive jurisdiction of the state; municipalities may not enact ordinances that ban, limit, or otherwise regulate them. Local regulation is expressly preempted except for measures satisfying a four-part test, which allows a regulation if it: (1) is “limited to aboveground activity”; (2) is “commercially reasonable”; (3) does not “effectively prohibit an oil and gas operation conducted by a reasonably prudent operator”; and (4) is not otherwise preempted. The law’s safe harbor provision considers ordinances that have been in effect for at least five years and that have allowed operations to take place during that time to be prima facie commercially reasonable.(17) The Legislature’s swift and strong action invalidated the Denton fracking ban specifically and also made clear to other state municipalities that attempts to substantially restrict oil and gas development would be preempted by state law and met with great scrutiny. Aftermath and National Trends Back in Denton, once HB 40 became effective, the Texas Oil and Gas Association and Texas General Land Office promptly amended their petitions to focus on the facial illegality of the fracking ban and the moratorium’s de facto prohibition against development.(18) The city council eventually repealed the fracking ban on June 1719 and allowed the drilling moratorium to expire in August.(20) In September, the lawsuits were dismissed.(21) To comply with the new law’s commercial-reasonableness requirement, the city council amended its ordinance to restore setbacks to their pre-2013 distance of 1,000 feet and went back to the drawing board, fashioning new ordinances that use a zoning framework to discourage drilling near residential areas and impose new “co-location” rules requiring operators to consolidate operations onto fewer pad sites.(22) Outside Texas, versions of the Denton drama have played out similarly. In 2015, courts in Ohio, New Mexico, and Colorado invalidated local regulations designed to inhibit oil and gas development.(23) Oklahoma recently enacted preemption legislation, and Florida’s Legislature is debating similar measures.(24) Pennsylvania and New York are the notable outliers at the moment; courts there have routinely upheld local drilling prohibitions.(25) As for Texas after HB 40, questions remain about how the law will be applied. Approximately 30 municipalities have standing bans on drilling, but most of them are in places where there is no real expectation of commercial production, so the regulations are unlikely to be challenged. (26) In other places with ordinances enacted before HB 40, it is possible that previously uncontroversial provisions could suddenly be ripe for challenges due to the new law. Eventually, test cases are likely to emerge and define the boundaries of the “commercially reasonable,” “effectively prohibit,” and “reasonably prudent operator” language. But as long as oil and gas prices remain severely depressed, it is unlikely that the state will see the flurry of litigation that some predicted in the bill’s immediate aftermath. Notes 1) Tex. Const. art. XI, § 5. City of Coll. Station v. Turtle Rock Corp., 680 S.W.2d 802, 805 (Tex. 1984). 2) See TEX. NAT. RES. CODE §§ 81.051, 81.052. 4) See Denton, Tex., Dev. Code Code subch. 22 (2014) (prior versions of subchapter governing gas well drilling and production date back to 2004); Frack Free Denton, Denton Fracking Facts, http://www.frackfreedenton.com/fracking-facts (last visited Dec. 15, 2015) (“In 2001, Denton passed the first drilling and production ordinance on the Barnett Shale.”). 5) See Jim Malewitz, Dissecting Denton: How a Texas City Banned Fracking, THE TEXAS TRIBUNE (Dec. 15, 2014), available at http://www.texastribune.org/2014/12/15/dissecting-dentonhow-texas-city-baned-fracking (last visited Dec. 8, 2015). 6) See id. 7) See id.(explaining that early city well permits were issued in perpetuity, so that an operator with an early permit could drill additional wells on the same site without new permit applications). See also TEX. GOV’T CODE §§ 245.002(a)-(b) (applications for permits shall be considered solely on the basis of rules and regulations in effect at the time of application, including the original permit application if a series of permits is required). 8) See Peggy Heinkel-Wolfe, Residents Present Petition to City, DENTON RECORD-CHRONICLE (May 7, 2014), available at http://www.dentonrc.com/local-news/local-news-headlines/20140507-residents-present-petition-to-city.ece (last visited Dec. 15, 2015). 9) See Peggy Heinkel-Wolfe, Gap Over Gas Rule Rewrite Widens, DENTON RECORD-CHRONICLE (Jan. 12, 2013), available at http://www.dentonrc.com/local-news/local-news-headlines/20130112-gap-over-gas-rule-rewrite-widens.ece (last visited Dec. 15, 2015). 10) See City of Denton Fracking Ban Initiative (November 2014), Ballotpedia, https://ballotpedia.org/City_of_Denton_Fracking_BanInitiative(November_2014) (last visited Dec. 8, 2015). 11) Peggy Heinkel-Wolfe, Voters to Decide Ban Issue, DENTON RECORD-CHRONICLE (July 15, 2014), available at http://www.dentonrc.com/local-news/local-news-headlines/20140715-voters-to-decide-ban-issue.ece (last visited Dec. 15, 2015). 12) Peggy Heinkel-Wolfe, Fracking Banned, DENTON RECORD-CHRONICLE (Nov. 5, 2014), available at http://www.dentonrc.com/local-news/local-news-headlines/20141105-frackingbanned.ece (last visited Dec. 15, 2015). 13) Peggy Heinkel-Wolfe, Lawsuits Follow Fracking Outcome, DENTON RECORD-CHRONICLE (Nov. 5, 2014), available at http://www.dentonrc.com/local-news/local-news-headlines/20141105-lawsuits-follow-fracking-outcome.ece (last visited Dec. 15, 2015). 14) Nicholas Sakelaris, Mineral Owners Call Denton’s Drilling Moratorium a Ban, Sue for $1M, DALLAS BUSINESS JOURNAL (Sept. 30, 2014), available at http://www.bizjournals.com/dallas/news/2014/09/30/mineral-owners-call-dentons-drilling-moratorium-a.html (last visited Dec. 15, 2015). See also Mayhew v. Town of Sunnyvale, 964 S.W.2d 922, 933 (Tex. 1998) (setting out standard for finding that a regulation constitutes a regulatory taking). 15) See Mayhew, 964 S.W.2d at 935-36 (reciting two factors in determining whether a government unreasonably interfered with property rights: the regulation’s economic impact and “the extent to which the regulation interferes with distinct investment-backed expectations”). 16) Peggy Heinkel-Wolfe, HB 40 Signed into Law, DENTON RECORD-CHRONICLE (May 18, 2015), available at http://www.dentonrc.com/local-news/local-news-headlines/20150518-hb-40-signed-into-law.ece (last visited Dec. 15, 2015). 17) TEX. NAT. RES. CODE § 81.0523. 18) Peggy Heinkel-Wolfe, Ban on Hydraulic Fracturing Repealed, DENTON RECORD-CHRONICLE (June 17, 2015), available at http://www.dentonrc.com/local-news/local-news-headlines/20150617-ban-on-hydraulic-fracturing-repealed.ece (last visited Dec. 9, 2015). 19) Id. 20) Peggy Heinkel-Wolfe, Council Turns to Zoning Powers After Reducing Well Setbacks to 1,000 feet, DENTON RECORD-CHRONICLE (Aug. 4, 2015), available at http://www.dentonrc.com/local-news/local-news-headlines/20150804-council-turns-to-zoning-powers-after-reducingwell-setbacks-to-1000-feet.ece (last visited Dec. 9, 2015). 21) Peggy Heinkel-Wolfe, Suits Against City Being Dismissed, DENTON RECORD-CHRONICLE (Sept. 11, 2015), available at http://www.dentonrc.com/local-news/local-news-headlines/20150911-suits-against-city-being-dismissed.ece (last visited Dec. 9, 2015). 22) Heinkel-Wolfe, supra note 20. 23) See State ex rel. Morrison v. Beck Energy Corp., 37 N.E.3d 128 (Ohio 2015) (Ohio Supreme Court defining limits of Ohio home-rule law and invalidating regulation that conflicted with state oil and gas permitting schemes); Swepi, LP v. Mora County, 81 F. Supp. 3d 1075 (D.N.M. Jan. 19, 2015) (holding that New Mexico state law governing oil and gas drilling preempted a local fracking ban); Bruce Finley, Colorado High Court Hears Cases on City Oil and Gas Fracking Bans, THE DENVER POST (Dec. 9, 2015), available at http://www.denverpost.com/news/ci_29223451/state-high-court-hears-cases-cityoil- and (last visited Dec. 15, 2015) (The Colorado Supreme Court recently heard arguments in cases challenging trial court decisions that overturned fracking bans). 24) See 52 Okl. St. § 137.1 (2015); Jeff Burlew, Counties Oppose Bills to Pre-empt Fracking Bans, TALLAHASSEE DEMOCRAT (Nov. 27, 2015), available at http://www.tallahassee.com/story/news/2015/11/27/counties-oppose-bills-pre-empt-fracking-bans/76379914/ (last visited Dec. 9, 2015). 25) See Robinson Township v. Commonwealth of Pennsylvania, 83 A.3d 901 (Pa. 2013) (Supreme Court of Pennsylvania holding that state Legislature is “not the sole trustee of the public natural resource” and local municipalities have constitutional authority to regulate local drilling activity); Kate Taylor and Thomas Kaplan, New York Towns Can Prohibit Fracking, State’s Top Court Rules, N.Y. TIMES (June 30, 2014), available at http://www.nytimes.com/2014/07/01/nyregion/towns-may-ban-fracking-new-york-statehigh-court-rules.html (last visited Dec. 15, 2015). 26) See Mose Buchele, After HB 40, What’s Next for Local Drilling Rules in Texas?, State Impact Texas (July 2, 2015), available at https://stateimpact.npr.org/texas/2015/07/02/afterhb-40-whats-next-for-local-drilling-bans-in-texas (last visited Dec. 9, 2015). WALKER C. FRIEDMAN is a shareholder in Friedman, Suder & Cooke in Fort Worth. His practice is limited to business litigation, including oil and gas litigation. JACK PRICE is a commercial litigator with a focus on business and oil and gas disputes. He is a shareholder in Friedman, Suder & Cooke in Fort Worth.
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