Michael Joy (Partner)

Robert Jochen (Associate)

Lisa Means (Associate)

Jorge Rojas (Summer Associate)

On June 30, 2014, the New York Court of Appeals issued its decision to uphold local oil and gas development bans in the companion cases of Wallach v. Town of Dryden et al., No. 130 (slip copy) (N.Y. June 30, 2014), and Cooperstown Holstein Corporation v. Town of Middlefield, No. 131 (slip copy) (N.Y. June 30, 2014).  The decision is the most recent in the struggle between states and local governments for control over the regulation of oil and gas operations.  Although the decision will likely have a very limited impact on current oil and gas production in New York—where a moratorium on high-volume hydraulic fracturing has already stymied oil and gas operations—many are concerned that it may have the potential to play a role in determining the balance of power between states and local governments nationwide. While those opposed to oil and gas development certainly have their sights on other producing states, the decision has little practical impact outside of New York. This article comments on the New York Court of Appeals’ recent decision and the current state of regulations in Pennsylvania, Ohio, West Virginia, Michigan, Colorado, and California. The highly developed jurisprudence of states like Texas, Louisiana and Oklahoma deserve their own treatment and are outside the scope of these comments.

New York

To better understand the New York Court of Appeals’ recent decision, it is necessary to have a basic understanding of New York’s existing regulatory scheme.  In New York, oil and gas operations are subject to the Oil, Gas and Solution Mining Law (the “OGSML”), and are overseen by the Department of Environmental Conservation (“DEC”).  The OGSML is intended to regulate the development of oil and gas in ways that prevent waste and protect the correlative rights of both landowners and the general public, and includes sections related to permitting, well spacing, and compulsory integration.  The OGSML also contains a supersession clause stating that the law “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” (the “Supersession Clause”).  N.Y. Envtl. Conserv. Law § 23-0303(2).

The supersession clause and its impact on local laws was the focal point in the New York Court of Appeals’ decision in Wallach and Cooperstown Holstein Corporation.  The central issue in both cases was whether a town may enact local zoning ordinances and ban oil and gas production activities, including hydraulic fracturing, within its municipal boundaries.  In Wallach, Norse Energy Corp. USA (“Norse”), through its predecessors in interest, began acquiring oil and gas leases from landowners in Dryden as early as 2006.  However, in August 2011, Dryden’s Town Board amended its zoning ordinance to “specify that all oil and gas exploration, extraction and storage activities were not permitted in Dryden.”

In Cooperstown Holstein Corporation, Cooperstown Holstein Corporation (“CHC”) executed two oil and gas leases in 2007.  In 2011, Middlefield’s Town Board adopted a zoning provision that classified oil, gas and solution mining and drilling as prohibited uses.  In both cases, the plaintiff brought an action to set aside the local zoning law, claiming that they were preempted by the Supersession Clause of the OGSML.

On appeal, Norse and CHC claimed that New York’s energy policy, as exemplified by the OGSML, required a uniform, statewide approach and that the supersession clause expressly preempted local zoning laws that restricted or forbade oil and gas operations, including hydraulic fracturing, within the municipality.  Conversely, Dryden and Middlefield argued that municipalities must be able to restrict industrial uses that could affect the communities’ characteristics and that the supersession clause does not restrict the municipalities’ zoning powers.

The New York Court of Appeals began its analysis with the home rule provision of the state Constitution, which grants every local government the power to adopt and amend local laws – so long as doing so doesn’t make them inconsistent with state laws.  The court found that the local regulation of land use is among the “most significant powers and duties granted . . . to a town government.”  The court would therefore only invalidate a zoning ordinance if there was a “clear expression of legislative intent to preempt local control over land use,” as determined by the plain language of a supersession clause, the state’s statutory scheme, and any relevant legislative history.

The court’s analysis found that the supersession clause was “quite close” to the supersession clause at issue in a previous decision—Matter of Frew Run Gravel Products v. Town of Carroll, 518 N.E.2d 920 (N.Y. 1987)—and was therefore intended to preempt only those local laws that attempt to regulate actual oil and gas operations and activities, not zoning ordinances that restrict or prohibit certain land uses within a town’s boundaries.  According to the court, if the supersession clause was intended to preempt home rule zoning powers, it, like other provisions, would have explicitly included zoning laws in the preemptive language.

Similarly, the court determined that New York’s Environmental Conservation Law was concerned only with the safety, technical and operational aspects of oil and gas activities.  The court therefore held that interpreting the supersession clause to prohibit only local laws that attempted to regulate oil and gas operations and activities, and not local zoning laws, was consistent with the Environmental Conservation Law’s statutory framework.

Finally, the court also analyzed the supersession clause’s legislative history.  The court found that the clause was enacted in 1981, at a time when drilling activity had exceeded the DEC’s capabilities.  The court, however, found nothing to elaborate on the purpose behind the supersession clause and, more specifically, nothing to indicate that it was intended to preempt local zoning ordinances. The court therefore determined that Dryden and Middlefield acted within their home rule authority in adopting the challenged zoning laws.

Practically speaking, the New York Court of Appeals’ decision in Wallach and Cooperstown Holstein Corporation has made it impossible for the DEC to oversee and enforce a uniform, statewide administration of the OGSML.  Instead, local officials are free to enact zoning ordinances that prohibit some, or even all, oil and gas activities.  How a patchwork of prohibitive ordinances throughout the state will be able to exist in light of the OGSML’s express purpose of regulating the development of oil and gas in ways that prevent waste, remains to be determined.

Pennsylvania

The distinction between local laws that regulate the technical, operational aspects of oil and gas activities and prohibitive zoning ordinances that the New York Court of Appeals drew in Wallach and Cooperstown Holstein Corporation echoes earlier case law in Pennsylvania.  On February 19, 2009, the Supreme Court of Pennsylvania issued its decision in Huntley & Huntley, Inc. v. Borough of Oakmont, 964 A.2d 855 (Pa. 2009), in conjunction with its decision in Range Resources-Appalachia, LLC v. Salem Township, 96 A.2d 869 (Pa. 2009).  At the time of the decisions, Pennsylvania’s Oil and Gas Act provided that, with only limited exceptions, “all local ordinances and enactments purporting to regulate oil and gas well operations regulated by [the Oil and Gas Act were] superseded.”

In Huntley & Huntley, an oil and gas operator challenged a borough council’s refusal to allow oil and gas operations in a residential zoning district as a conditional use.  However, in Range Resources-Appalachia, an oil and gas operator challenged a local ordinance that regulated developments associated with drilling operations (e.g., the location of access roads, requiring a permit for all drilling-related operations, and establishing requirements for site access and restoration).  In its rulings, the court upheld the location limitations in Huntley & Huntley, but held that the ordinance in Range Resources-Appalachia regulated “features of oil and gas well operations,” and was therefore preempted by the Oil and Gas Act.

The Supreme Court of Pennsylvania’s rulings in Huntley & Huntley and Range Resources-Appalachia did not put an end to the struggle between Pennsylvania and its municipalities.  Act 13 was enacted in February 2012 as an update and expansion of Pennsylvania’s Oil and Gas Act.  One of the main provisions in Act 13 was Section 3303, which stated

Notwithstanding any other law to the contrary, environmental acts are of Statewide concern and, to the extent that they regulate oil and gas operations, occupy the entire field of regulation, to the exclusion of all local ordinances. The Commonwealth by this section, preempts and supersedes the local regulation of oil and gas operations regulated by the environmental acts, as provided in this chapter.  58 Pa.C.S. § 3303, invalidated by Robinson Twp. v. Commonwealth, 83 A.3d 901 (Pa. 2013).

Act 13 also included Section 3304 which required all local ordinances to “allow for the reasonable development of oil and gas resources,” and stipulated a list of requirements and restrictions that the local ordinances must meet.

However, on December 19, 2013, the Supreme Court of Pennsylvania issued its decision in Robinson Township v. Commonwealth, and struck down a number of provisions of Act 13, including Sections 3303 and 3304.  According to the court, Section 3303 required local municipalities to ignore their obligations under the Environmental Rights Amendment to the Pennsylvania Constitution and to undo existing environmental protections.  Moreover, the court found that the requirements contained in Section 3304 conflicted with the pre-existing zoning districts, structures, and communities, and may have had a disparate impact on some areas within the Commonwealth as it required uniformity and prohibited local governments from tailoring protections for environmentally sensitive areas.  For these reasons, the court held that Sections 3303 and 3304 were unconstitutional.

In light of this precedent, it seems very unlikely that the New York Court of Appeals’ decision will have any impact in Pennsylvania.  In fact, it appears that New York remains at least one step, or one attempted legislative update, behind Pennsylvania.  It is therefore likely that Pennsylvania will be more concerned with its own recent developments, and not those from its northern neighbor.

Ohio

The New York Court of Appeals’ recent decision appears unlikely to have any impact in Ohio either, where the state appears to have found the right balance in its ongoing conversations with local governments.  In Ohio, the Division of Oil and Gas Resources Management “has sole and exclusive authority to regulate the permitting, location and spacing of oil and gas wells within the state[.]”  O.R.C. 1509.02 (“Section 1509.02”).  Moreover, the regulation of oil and gas is a “matter of general statewide interest that requires uniform statewide regulation, and [state statutes] constitute a comprehensive plan with respect to all aspects of the locating, drilling, and operating of oil and gas wells within this state, including site restoration and disposal of wastes from those wells.”  Id.

The courts that have interpreted Section 1509.02 have held that a municipality’s ordinances that conflict with the statute are preempted.  In Morrison v. Beck Energy Corp., 989 N.E. 2d 85 (Ohio Ct. App. 2013), Beck Energy applied for and obtained a well permit from the Ohio Department of Natural Resources to drill a well on a parcel of land.  However, when Beck began drilling on the property, the city issued a Stop Work Order alleging the company had violated city ordinances.

The court engaged in a home rule analysis to determine whether Section 1509.02 precludes any local control or oversight of drilling within the municipality.  The court ultimately held that the city’s drilling ordinances (i.e., ordinances which required a permit, a public hearing, and a performance bond) were in direct conflict with, and preempted by, Section 1509.02, but that the city’s right-of-way ordinances (i.e., ordinances related to the care, supervision, and control of the streets) were not.  This decision is presently pending appeal before the state Supreme Court.

Based upon Section 1509.02 and the Court of Appeals of Ohio’s decision in Morrison, it is unlikely the New York Court of Appeals’ decision will have any impact on the preemption debate in Ohio.  Section 1509.02 is part of a statewide, comprehensive plan that preserves the power to regulate oil and gas operations at the state level and clearly preempts local interference.  Thus, whereas New York’s supersession clause fell short, Ohio’s statutes are much more developed and should be much more effective in answering these questions.

West Virginia

West Virginia also has a detailed and mature statewide regulatory scheme that should remain unaffected by the New York Court of Appeals’ decision.  In West Virginia, the Secretary of the Department of Environmental Protection (DEP) has primary oversight over oil and gas operations.  Also, with respect to horizontal wells, the Secretary has “sole and exclusive authority to regulate the permitting, location, spacing, drilling, fracturing, stimulation, well completion activities, operation, any and all other drilling and production processes, plugging and reclamation of oil and gas wells and production operations within the state.”  Thus, it appears that local municipalities are completely preempted from enacting zoning ordinances that may ban oil and gas drilling or hydraulic fracturing.

West Virginia’s regulatory scheme has already withstood one challenge by a local government.  In Northeast Natural Energy, LLC v. City of Morgantown, No. 11-C-411 (Cir. Ct. W.Va. Aug. 12, 2011), the Circuit Court of Monongalia County struck down an ordinance banning the use of hydraulic fracturing within the city of Morgantown or within one mile of the city’s limits.  At issue was an ordinance that prohibited drilling a well “for the purpose of extracting or storing oil or gas using horizontal drilling with fracturing or fracking methods[.]”  The court found that the comprehensive regulatory scheme enacted by the state indicated an intent to fully occupy the regulation of oil and gas activities, and held that the exclusive control of the development and production of oil and gas was granted to West Virginia DEP.  The ordinance was therefore preempted.

Similar to Section 1509.02 and the decision in Morrison, West Virginia’s regulatory scheme and the decision in Northeast Natural Energy, LLC seem to indicate that the New York Court of Appeals’ decision will have very limited impact in or on West Virginia.  Moreover, West Virginia’s Horizontal Well Act seems to have bolstered the pre-existing regulatory structure.  West Virginia therefore appears to be on par with Ohio and unlikely to be affected by the recent decision.

Michigan

Michigan’s statutory scheme appears to be more robust than some, granting the state broad powers while stipulating the exact limitations of local governments’ authority.  In Michigan, a county or township is prohibited from regulating the drilling, completion, or operation of oil or gas wells and lacks jurisdiction to issue permits for the location, drilling, completion, or operation of the wells.  Further, local ordinances are prohibited from preventing the production of “valuable natural resources” from any property unless “very serious consequences” would result.

Court precedent has established that the Supervisor of Wells has exclusive control of the regulation of oil and gas wells—see Addison Township v. Gout, 460 N.W.2d 215 (Mich. 1990); Dart Energy Corporation v. Iosco Township, 520 N.W.2d 652 (Mich. Ct. App. 1994).  Municipalities may, however, enact ordinances that regulate “hours of operation, blasting hours, noise levels, dust control measures, and traffic” that are not preempted by other law and so long as the regulation reasonably accommodates “customary mining operations.”  Michigan law therefore specifically states that a county and township cannot regulate the location of an oil and gas well, and stipulates the limited authority of counties and townships.  The New York Court of Appeals’ decision seemingly has no impact in Michigan.

Colorado

Colorado’s statutory scheme is also well-developed, and a recent decision at the district court level appears to bolster the state’s broad authority to regulate oil and natural gas development.  In Colorado, the oil and gas industry is regulated by the Colorado Oil and Gas Conservation Commission (the “Commission”), and all oil and gas activity—including the drilling, producing, spacing, and plugging of wells—is governed by the Oil and Gas Conservation Act.  In December 2011, the Commission adopted rules regarding hydraulic fracturing, and various Commission rules specific to hydraulic fracturing include the disclosure of hydraulic fracturing chemicals, potential testing requirements, and notice requirements.

A recent decision out of a district court in Colorado, Colorado Oil and Gas Association v. City of Longmont, Case No. 13CV63, 2014 WL 3690665 (Trial Order) (Colo. Dist. Ct. July 24, 2014), affirmed the state’s authority to regulate the oil and gas industry, and illustrates the limited reach of the New York Court of Appeals’ decision.  In City of Longmont, Longmont had passed an amendment to its charter that banned hydraulic fracturing and the storage and disposal of hydraulic fracturing waste within the city.  The Colorado Oil and Gas Association (“COGA”) challenged the amendment and claimed that it was preempted by state law.

The district court’s opinion in City of Longmont contains an in-depth explanation of Colorado’s jurisprudence related to the preemption of local statutes and regulations.  See id. at *2-*5 (citing Cnty. Comm’rs, La Plata Cnty. v. Bowen/Edwards Assocs., Inc., 830 P.2d 1045, 1060 (Colo. 1992); Voss v. Lundvall Bros., 830 P.2d 1061, 1069 (Colo. 1992)).  Its own analysis began by acknowledging that the Commission regulates the oil and gas industry and hydraulic fracturing is a common technique used therein.  The court then applied a four factor test for operational conflict preemption and found that the city’s ban on hydraulic fracturing prevents the efficient development and production of oil and gas resources.  The court found that the ban did not prevent waste, but caused it by requiring deposits that could have been produced by existing wells to be left unproduced.  Moreover, the ban impairs the correlative rights of owners:  landowners in Longmont that are included in drilling units—but whose lands are not producing because they cannot be hydraulically fractured—are receiving a higher percentage of the proceeds than their acreage actually contributes to production.  The court held that “Longmont’s ban on hydraulic fracturing creates a patchwork of oil and gas extraction methods that inhibits what the General Assembly has recognized as a necessary activity in the Oil and Gas Conservation Act and it impedes the orderly development of Colorado’s mineral resources,” and that the city’s ban was preempted by state law.

It should be noted that the decision in City of Longmont does not cite or even mention the New York Court of Appeals’ decision.  Although the decision may be appealed, and initiatives may be added to the state ballot (e.g., Initiative 88 which would increase setbacks to at least 2,000 feet; Initiative 90 which would give local governments the authority to restrict or even prohibit oil and gas development, including hydraulic fracturing, within their jurisdiction), it appears that the New York Court of Appeals’ decision has had no impact on, and will have no impact on, oil and gas development in Colorado.

California

The application of local versus state law concerning oil and gas drilling and hydraulic fracturing in California is uncertain, as recent, relevant state legislation lacks an express provision preempting local law, contributing to the ambiguity. California statutes provide that the State Oil and Gas Supervisor is responsible for monitoring the drilling, operation, maintenance, and abandonment of wells in order to encourage the wise development of oil and gas resources.

In addition, California’s recently enacted law, Senate Bill 4 (“SB4”), is intended to provide transparency and accountability regarding well stimulation treatments, including hydraulic fracturing, associated emissions to the environment, and the handling, processing and disposal of well stimulation and related wastes, including from hydraulic fracturing.  SB4, however, has no specific provision superseding related laws passed by local governments.  It is therefore unclear whether courts will interpret local laws to preempt state laws concerning the oil and gas industry.

The California Supreme Court has assessed whether local law is preempted by state law in the absence of statutory clarity. “Under article XI, section 7 of the California Constitution, ‘[a] county or city may make and enforce within its limits all local, police, sanitary, and other ordinances and regulations not in conflict with general laws.’” Great W. Shows, Inc. v. Cnty. of Los Angeles, 44 P.3d 120, 124 (Cal. 2002). The court elaborated: “If otherwise valid local legislation conflicts with state law, it is preempted by such law and is void. A conflict exists if the local legislation duplicates, contradicts, or enters an area fully occupied by general law, either expressly or by legislative implication.”  The court therefore upheld a Los Angeles County ordinance prohibiting gun and ammunition sales on County property despite a State law regulating the sale of firearms at gun shows.

California decisions assessing the application of local versus state law in the context of oil and gas drilling is limited, but some decisions shed light on the matter. In Marblehead Land Co. v. City of Los Angeles, 47 F.2d 528 (9th Cir. 1931), the court sustained the validity of a municipal zoning ordinance forbidding well drilling operations on approximately 291 acres of land.   Conversely, in No Oil, Inc. v. Occidental Petroleum Corp., 50 Cal. App. 3d 8, 123 Cal. Rptr. 589 (2d Dist. 1975), the court held that local ordinances prohibiting drilling could not be applied retroactively where it was once valid and approved.

Based on the above, it is difficult to predict exactly where the line between state and local regulations will be drawn in California.  California’s regulatory scheme appears to be more developed than New York’s was at the time of the New York Court of Appeals’ decision and is more similar to those states in which local regulations have been preempted.  Time and further guidance from California’s courts, however, is still needed.

Conclusion

New York once held the distinction of being a “battleground state” in the hyperbolic war over hydraulic fracturing.  New York was also poised at the leading edge of advanced regulation of unconventional drilling; the supplemental Generic Environmental Impact Statement process was once promoted as the most comprehensive regulatory analysis of hydraulic fracturing ever undertaken.  The recommendations of the sGEIS were expected to launch a new wave of effective regulation across the US and potentially around the globe.

After six years of dithering over the sGEIS (with no end in sight), court cases decided by political ideology rather than fact and law, and an industry that has mostly moved on to other opportunities, New York – for now – appears to be no longer relevant to the discussion of unconventional oil and gas development.

No doubt those that oppose oil and gas activities will use the recent decision in New York to energize their faithful followers. The temptation to sound alarms over the decision from New York will be strong, but like the regulatory and judicial processes of New York, don’t expect much to actually happen as a result.