“Free” Advice on Natural Gas Yields $50MM Lawsuit – Part I
The lawsuit filed by Lenape Resources against the Town of Avon and the DEC is a superb overview of New York State law regarding natural gas development and the reasons why the efforts of two former dollar store owners from Ithaca are unlikely to prevail in their cynical campaign to kill natural gas development in New York through local bans and moratoriums.
Last week’s press was full of stories from the Associated Press, Wall Street Journal and Washington Examiner, among others, regarding Lenape Resources’ lawsuit against the Town of Avon, Livingston County, New York. Lenape is challenging Avon for enacting a “moratorium and prohibition” relating to natural gas development. A similar suit is expected against the nearby Town of Caledonia.
The storyline has largely focused on this being the fourth test of the legal ability of New York communities to enact such laws. This misses the big point, though. This is not only the first case to directly take on the “free” legal advice of the Slottje duo as to both substance and process, but it also demands that New York doesn’t permit their continued undermining of its regulatory program. It puts a potential price-tag of more than $5o million on the cost of entertaining legislation funded by special interest natural gas opponents.
Most importantly, it’s an exceptionally strong case, built on a foundation of legislative history, industry specifics and common sense. The complaint provides real insights on how current state law came to be and why it is what it is, with new information and compelling points that didn’t make it into the arguments surrounding the first three cases. It’s well worth reading for everyone with a stake in the “home rule” debate over natural gas development.
It Isn’t Free If It Costs You $50 Million
The word “Lenape,” is an Algonquian term meaning “common person” or “people.” It’s hard to think of a more apt term for John Holko’s company as it fights for the rights of landowners and small businesses such as itself against a campaign by the Park Foundation funded Community Environmental Defense Council (CEDC) to deny them.
This anti-development arm of New York high-society has served as a vanguard for the vanity of those seeking to keep Upstate New York in a perpetual state of “pastoral poverty.” It is essentially a husband and wife legal team that has advanced a theory surface mining law offers a basis for interpreting oil and gas law, while simultaneously dismissing case law regarding the latter – a cynical strategy intended to buy time and strangle prosperity through delay.
The CEDC has also marketed their theory as “free” legal advice or education, while advancing the direct interests of their wealthy benefactors. It’s never been clear this Faustian Bargain of trading the enactment of very specific special interest legislation for free advice made any sense, but Lenape’s complaint lays out the risks to municipalities intent upon appeasing such interests and blind to the real costs. The Town of Avon, like many others, thought there couldn’t be any harm in going along and throwing a bone or two to constituents opposed to natural gas development, but these dog bones came with a potential $50 million surcharge not even mentioned in the CEDC fine print.
No Good Deed Goes Unpunished
John Holko is well known in natural gas industry circles as the very competent operator of Lenape Resources, a small company engaged in the exploration and development of oil and natural gas. Lenape’s operations are based in Western New York. It owns or operates, individually or through joint venture agreements, more than 400 wells across this region, including approximately 20 wells in the Town of Avon and approximately 60 wells in the adjacent Town of Caledonia.
The company has approximately 138,000 gross acres of land under lease. Approximately 78,000 acres of this is currently held by production, meaning it generates landowner royalties, free natural gas deliveries to numerous homeowners, low cost natural gas for large and small businesses and ad valorem tax revenues supporting local governments and schools. Importantly, Lenape has operated in the Town of Avon for some 30 years without major incident and all its wells have been hydraulically fractured. It has approximately $25 million of capital investment in Livingston County alone, meaning restrictions on its ability to operate have real consequences not just to the company itself, but also to all those benefiting from its activities. No permitting has ever been required by the Town of Avon for any of Lenape’s oil and gas production activities.
Notwithstanding Lenape’s sterling record, the benefits accruing to the community from its operations and the lack of any prospects for shale development in the foreseeable future, the town became a target of natural opposition opportunists seeking a ban in June of this year. The Town Board was approached by Robert Thompson, a representative of a group called FrackFreeGenesee, which draws on the resources of the CEDC. It’s a bit hard to believe, but this is how the subject was first introduced to the town by the group and the Town of Avon Supervisor (this is directly from the minutes of the December 8, 2011 meeting of the Avon Town Board):
Supervisor LeFeber welcomed Mr. Robert Thompson who requested time on the agenda to provide a presentation on natural gas drilling. Mr. Thompson introduced Nicholas Varrone and Robert Nilsson and they requested the Town Board consider a one year moratorium for the following reasons:
New York State will be issuing permits beginning in February 2012.
A final study is expected in 2014.
Both New York City and Syracuse are exempt from granting permits for water.
A presentation was provided including a video of an area that is being drilled.
Supervisor LeFeber stated that he visited areas in Pennsylvania and personally witnessed the same type of action as shown on the video being shared.
Only 30% of workers are local.
Serious crime went up.
Organic status of companies will be lost, such as Nut Butter in Nunda.
Please visit their web site http://www.frackfreegenesee.blogspot.com/
Do not sign a gas lease prior to reviewing your mortgage as it may be forfeited
It would be difficult to find a better example of bias and inaccurate information on the part of town officials than these opening remarks and irresponsible statements. Needless to say, the promotion of the virulently anti-natural gas website of a private special interest group in the minutes of a town board meeting is highly unusual, not to mention prejudicial.
The rest of the discussion that evening was no less entertaining. The minutes indicate someone asked “What about hearing the other side of this issue?” and then note that “Supervisor LeFeber responded stating no decisions are being made at this time.” Shortly thereafter, he declared a 5 minute recess, immediately followed by a unanimous vote to “approve Attorney Campbell to prepare a local law regarding a one year moratorium for drilling gas wells.” LeFeber might argue otherwise, but it appears his commitments come with a 10 minute expiration date. Revealingly, Attorney Campbell had also just told the town board “The industry is regulated by New York State and takes the authority out of our hands.” Avon clearly goes to the beat of its own drummer.
A “Kick in the Butt Out of Town”
The saga continued over the next seven months. The Town Attorney brought back a draft law at the December 29 meeting, explaining “It is not an original work as many other towns are considering the same law.” Indeed, it was anything but original; it was a version of the CEDC template, which readers of this blog know is supported by the Park Foundation. Park provides CEDC funding so David Slottje can issue statements such like this:
“I wish that wasn’t the case, but if you look at the history of resource extraction in this country, whether you’re talking about mountaintop coal removal or any of these things, these guys don’t give up. There’s money to be made and they’re going to keep going until they’re kicked in the butt out of town. And that’s what we’re trying to do is try to kick them in the butt out of town,” says David. – WSKG
Nothing about this rash statement will surprise our readers, but it sure presents a distinct contrast with the Town Attorney’s description of the Avon’s objectives, given at the same meeting:
The law we are considering is simply to consider a moratorium to provide more time to become better educated. – Avon Town Attorney
So, which is it; a “kick in the butt out of town” or an “opportunity to become better educated?” The strange reference to a law to “consider a moratorium” gives the game away; it’s all about hiding true intentions unless you’re only interested in learning how to apply a “kick in the butt out of town.” That game became ever more apparent as debate over the moratorium continued for the next several months. The board decided, on January 12 “the draft local law might need to be changed to suit our community needs.” Well, no kidding. One might have thought this was obvious when the town already had extensive natural gas development, but it was obviously a revelation to Avon officials, illustrating why they are especially unqualified to regulate any aspect of oil and natural gas development.
“But, We Didn’t Know”
Later in January, the board reviewed a letter from John Holko (attached to meeting minutes) outlining numerous problems with the draft legislation and requesting the documentation of impacts on which the proposed moratorium was supposedly based. The board’s response was to offer the possibility of grandfathering Lenape’s existing operations, without regard to the overall impact this would have on his business as a whole. A fuller discussion of the issues was had at the February 9 meeting when the board went on record with this startling admission (emphasis added):
The idea was to put restrictions on high volume and horizontal drilling and we were unaware of other existing wells.
Bear in mind this appears in the minutes of a town with numerous Lenape wells, whose businesses and residents are receiving gas from the company, and which is getting ad valorem tax revenue from these operations that supports critical local services – you know, things like public schools and town government, for example.
The board also received detailed correspondence from Lenape’s legal counsel, Reed Smith LLP, (attached to the minutes) explaining, with great clarity, the applicable case law that would later become the foundation for its lawsuit against the Town of Avon. The town was explicitly warned its actions were plainly contrary to the state’s pre-emption law, as well as case law, and would have severe economic consequences on Lenape.
A public hearing on the proposed moratorium was held on May 24 and continued at the June 14 and July 28 meetings. The board then voted 3 to 2 at the latter meeting to enact a revised version that included some grandfathering language for existing wells. Titled as a “Moratorium on and Prohibition of Gas and Petroleum Exploration and Extraction Activities, Underground Storage of Natural Gas, and Disposal of Natural Gas or Petroleum Extraction. Exploration and Production Wastes,” this mouthful was just the beginning of the debate.
Every Dog Has Its Day
Immediately following the enactment of the moratorium/prohibition, Lenape followed through on a promise to shut-in a number of its Avon wells and stop free gas deliveries and royalty payments to local residents, noting the operation of those wells could result in violations of the moratorium and prohibition, if production continued. The company also issued a letter to the New York State Department of Environmental Conservation (DEC) on July 26, asking the agency to exercise its responsibility under Section 71-1311(1) of the Environmental Conservation Law, which provides as follows:
Whenever it appears that any person is violating or threatening to violate any provision of article 23 of this chapter or is committing any offense described in section 71·1305 of this title. the department, acting by the Attorney General. may bring suit against such person in any court of competent jurisdiction to restrain such person from continuing such violation or from carrying out the threat of violation. In any such suit, the court shall have jurisdiction to grant to the department without bond or other undertaking, such prohibitory or mandatory injunctions as the facts may warrant, including temporary restraining orders and preliminary injunctions.
Lenape specifically requested DEC “take legal action to extinguish the law prohibiting natural gas provisions in conflict with the ECL or the complex oil and natural gas regulatory scheme administered by the Department.”
There is strong precedent for such action, a fact that has received little or no attention to date in the pre-emption debate. DEC, in March, 1984, sent a letter to the City of Olean noting the city had enacted an ordinance that “among other things…requires mining and well operators to obtain permission from the city to operate a mine or well.” DEC’s legal counsel informed the city as follows (emphasis added):
The New York State Mined Land Reclamation Law and its regulations, ECL Article 23, Title 27 and 6 NlCRR Parts 420-426, permit local governments to regulate the mining industry, provided the local requirements are at least as strict as the State requirements. With respect to regulation of the oil and gas industry, however, I respectfully draw your attention to subdivision 2 of §23-0303 of the Environmental Conservation Law which states:
The provisions of this article shall supersede all local laws or ordinances relating to the regulation of the oil, gas and solution mining industries. but shall not supersede local government jurisdiction over local roads or the rights of local governments under the real property tax law.
Hence, only the State, through the Department of Environmental Conservation, has the authority to regulate the oil and gas industry, except as to matters concerning local roads and real property taxation.
…In summary, then, while it has the power to regulate the mining industry at least as strictly as is those provided for in State law and regulations, the City of Olean is without statutory authority to regulate any of the matters set forth in the proposed ordinance pertaining to oil and gas wells.
This acknowledges a critical distinction between pre-emption law relating to mining, which the Slottje team has tried to pretend is the precedent, and that pertaining to oil and gas, which we and others have repeatedly said is a completely different matter. Oil and gas are different and, notwithstanding lower court decisions with respect to Dryden and Middlefield, mining precedents do not control.
Be Careful What You Ask When Taking Free Advice
Lenape filed its lawsuit against Avon and the DEC after the latter failed to act, doing so on November 13. Their complaint provides the factual background and arguments supporting pre-emption while a separate memorandum of law makes the legal arguments with a thorough analysis of both case and statutory law. We’ll address the latter in a follow-up post, but there are several aspects to this case that make it a particularly strong one. Lenape’s complaint lays out the practical case for pre-emption, which, in many ways, is even stronger than the strictly legal arguments, as good as they are. Consider the following examples:
Wanting to Make a Political Statement Is Not a Crisis
Lenape notes it “is not proposing any new or unusual activity inconsistent with existing activities in the Town of Avon that is creating a dire necessity, the “Prohibition on Natural Gas is not reasonably calculated to alleviate or prevent a crisis condition in the Town of Avon. and, the Town of Avon is not taking action to rectify any real or perceived threat to the health, safety and welfare of any Town of Avon resident.”
This takes the point the Broome County Supreme Court made, in throwing out a Slottje moratorium adopted by Binghamton, a step further. The record documented in the Lenape complaint makes it explicitly clear not only that there’s no crisis when no permits are being issued by DEC, but also there’s no evidence the town would even have authority to regulate that about which it says it needs time to educate itself. There is no basis for a moratorium to see if you can find some way to “kick them in the butt out of town” when they are already in town, there are no problems and the town has already had four years of a de facto state moratorium to study whatever it wanted. The cynical and shallow purpose in such instance is revealed for what it is; a political statement and that’s no crisis.
It’s Not Just the Operations, Stupid
The Slottje mantra is that a community can decide where it wishes to allow or even completely outlaw natural gas development as a matter of land use control without getting into the operational matters pre-empted by the state. Lenape’s complaint speaks to this directly by explaining the state law encompasses a “detailed and comprehensive system for siting oil and natural gas wells.” It sets forth the requirements for the distance between wells based on the depth of the wells, the type of geologic formation being drained by the wells, whether the wells are drilled vertically, diagonally or horizontally and whether the well targets the production of oil or natural gas.
Gaps between well units, Lenape notes, create the possibility of orphaned acreage. “Orphaned acreage is a term of art used to describe the situation where undeveloped acreage exists between producing well units that is of insufficient size or configuration to allow for future oil and natural gas development. Orphaned acreage reduces the likelihood that potentially productive land will be developed for oil and natural gas production, it deprives the owners of the orphaned acreage of their right to receive revenue from the development of their property and it adversely affects the orderly development of New York’s indigenous sources of oil and natural gas in contravention of the specific policy objectives and statutory requirements” of state law. Therefore, it’s not just the operations that are pre-empted by the state, but also the locations and, by necessity, the land use.
No Natural Gas Well Is An Island
Lenape’s complaint also serves to explain another of the key differences between natural gas development and other mining and land uses. It serves as a primer on the industry. “Lenape derives its enterprise value from producing oil and natural gas from existing wells on its leasehold properties and drilling new wells. Once oil and natural gas has been discovered and wells are placed into commercial production the finite resource declines as production continues such that wells must be replaced from time to time to maintain or increase production volume.”
The business, in other words, is more than a single well or a collection of wells; it is the continuous development of resources to maintain the ability to deliver product to meet contractual obligations. Each well begins dying the minute it’s born and without new wells there is no life, but, rather,only a business losing sales each year. This is why Avon’s grandfathering clause means nothing and only reflects a profound misunderstanding of the industry. Old wells die and new ones are born, just like communities of people. No single well or group of wells is an island that can be set apart and dealt with separately. A natural gas enterprise needs new life to survive and that’s why it invests in the future by exploring, testing, developing and reworking wells on a continuous basis and builds infrastructure to serve this activity which, in turn, requires new activity to cover costs. It is one business and land use, not a collection of them.
There’s Nothing New About Hydraulic Fracturing
One of the most interesting features of Lenape’s complaint is the history it lays out:
Initial exploration programs targeting natural gas production from shale formations such as the Marcellus Shale and the Utica Shale began in the 1970’s in New York.
During the 1970’s energy crisis natural gas was in short supply and New York was eager to exploit its own natural resources to reduce energy costs and provide greater energy stability.
The federal government created tight sand pricing to promote development of oil and gas from tight sand reservoirs and other marginal reservoirs including shale formations to increase domestic natural gas supplies.
The DOE created the Eastern Shale Gas Project to promote the review and development of shale gas production from the large natural gas bearing shale formations in the eastern United States including the Marcellus Shale and the Utica Shale.
A collaborative effort of the DOE and the New York State Energy Research Development Authority (NYSERDA) resulted in the creation of the Northeast Shale Gas Project.
The Northeast Shale Gas Project funded drilling of several Marcellus Shale wells by several private companies including a Marcellus well on the grounds of Houghton College and a Marcellus well on the grounds of Saint Bonaventure University among other locations.
The public-private partnership created between the DOE, NYSERDA and several oil and natural gas companies that drilled the first Marcellus wells started the practice of HVHP, then known as massive hydraulic fracturing (“MHP”), by using between 300,000 to 500,000 gallons of hydraulic fracture stimulation treatment fluid per fracture stage to complete wells in shale formations.
Today’s HVHF practices are virtually the same as the MHP technology developed in New York in the late 1970’s and early 1980’s except that lateral wellbores now extend more than a mile in the subsurface, more than 10 stages of HVHP fracturing are normally done on a single lateral wellbore and production efficiency is higher than any time in history.
Lenape’s history documents the fact hydraulic fracturing using high volumes of water is nothing new. The industry has simply perfected the means of adding additional stages to the process, each one of which is performed in the same manner, with the same pressures, the same water use and the same sorts of fluids. There’s nothing new except the efficiency, which reduces environmental impact by involving less earth disturbance.
There’s much more to tell (stay tuned) but this overview serves to illustrate what a powerful case Lenape has assembled. Will the courts agree? That remains to be seen, but the Lenape complaint is a masterful explanation of the industry case.