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August 25, 2014 Articles

New York Municipal Bans on Oil and Gas Drilling: Authorized by Home Rule or Preempted by State Law?

Oil and gas development may be banned by municipalities, but all is not yet lost.

By Cindy M. Monaco – August 25, 2014

In a much-awaited decision, the New York Court of Appeals has determined that the New York Oil, Gas, and Solution Mining Law (OGSML) does not preempt municipal bans on oil and gas drilling.

The emergence of high-volume hydraulic fracturing (fracking) as a technology that can effectively recover previously unrecoverable natural-gas resources sparked a struggle for control between municipalities and mineral-rights owners in the state of New York. Although New York has a long-standing history of oil and gas drilling, including horizontal drilling, the potential use of fracking spawned significant community and political opposition. Many municipalities responded by enacting zoning controls that prohibit all oil and gas drilling and development within their borders. This, in turn, resulted in litigation by landowners and oil and gas lessees, asserting that the law (New York Environmental Conservation Law [ECL], art. 23, tit. 1-13) expressly or impliedly preempts municipal drilling bans. See Anschutz Exploration Corp. v. Town of Dryden, 35 Misc. 3d 450, aff’d sub nom. Norse Energy Corp. USA v. Town of Dryden, 108 A.D.3d 25 (3d Dep’t 2013) (Dryden); Cooperstown Holstein Corp. v. Town of Middlefield, 35 Misc. 3d 767, aff’d, 106 A.D. 3d 1170 (3d Dep’t 2013) (Middlefield). In June 2014, the New York Court of Appeals answered the question in the negative, finding no preemption. See Wallach v. Dryden, 2014 WL 2921399, 2014 N.Y. Slip Op. 04875.

Dryden and Middlefield:The Decisions of the Lower Courts
In both Dryden and Middlefield, the lower courts held that the OGSML does not preempt municipal drilling bans, be it expressly or under conflict preemption principles. In reaching the conclusion of no express preemption, the lower courts relied heavily on precedent decided under a different statute, the New York Mined Land Reclamation Law (ECL art. 23, tit. 27), which governs solid-minerals mining. See Dryden, 108 A.D.3d at 35–36 (relying onFrew Run Gravel Prods. v. Town of Carroll, 71 N.Y.2d 126 [1987], and subsequently decided Reclamation Law precedent); Middlefield, 106 A.D.3d at 1171 (adopting reasoning inDryden).

In Frew Run, the New York Court of Appeals held that the Reclamation Law does not expressly preempt zoning controls that establish districts disallowing mining as a permitted use. The supersession language there stated that “this title shall supersede all other state and local laws relating to the extractive mining industry” but “shall [not] be construed to prevent any local government from enacting local zoning ordinances or other local laws which impose stricter mined land reclamation standards or requirements than those found herein.” Frew Run, 71 N.Y.2d at 131, 133. Examining the Reclamation Law and its legislative history, the court found that the New York legislature intended to supersede local regulation only as to “the actual operation and process of mining” but not as to its permissible location.

The supersession language in the OGSML directs that “[t]he 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.” ECL § 23-0303(2). The lower courts in Dryden and Middlefield opined that this language was effectively identical to the Reclamation Law supersession language. Finding Frew Run and its progeny supporting or controlling, they held that the phrase “regulation of the . . . industries” in the OGSML refers only to how drilling occurs (i.e., technical, operational aspects), but not where it occurs (i.e., even if, due to local restrictions, “where” is nowhere). Dryden, 108 A.D.3d at 35–36;Middlefield, 106 A.D.3d at 1171; see also Dryden, 35 Misc. 3d at 459–68; Middlefield, 35 Misc. 3d at 778–80. Accordingly, the lower courts upheld the municipal drilling bans as being not expressly preempted by the OGSML.

The intermediate appellate court also held that the drilling bans were not conflict preempted under the OGSML. The court found that drilling bans could “harmoniously coexist” with what the court acknowledged were express location-based directives in the OGSML relative to, among other things, well spacing, unit size, and the delineation of pools. Dryden, 106 A.D.3d at 37. The court reasoned that these directives could be met in locations (if any) where local zoning allowed for development. The court also found no conflict with the policies of the OGSML but never explained how local drilling bans could be squared with the policies of preventing waste, providing for greater ultimate resource recovery, and protecting the correlative rights of mineral owners. Dryden, 106 A.D.3d at 37–38.

Upon timely application, the New York Court of Appeals granted leave to appeal, which many thought was a signal that the high court might reverse the lower-court decisions.

Respondents’ Arguments Before the New York Court of Appeals 
The respondents relied on Reclamation Law precedent—namely, that under Frew Run, the phrase “regulation of the . . . industries” is necessarily limited to the manner and method of conducting the activity but can never encompass where the regulated activity takes place. In the statutory analysis, the respondents adopted the reasoning of the lower courts, contending that the supersession language of the Reclamation Law and the OGSML are effectively identical. Thus, they argued that under Frew Run, “regulation of the . . . industry” is a wholly different subject matter from land-use determinations and that, therefore, the OGSML does not expressly supersede drilling bans.

The respondents also maintained that the OGSML’s legislative history failed to show intent to preempt local zoning. Here, they pointed to the absence of any zoning discussion in the bill jacket to the 1981 amendments that enacted the supersession language. The respondents argued that the 1981 amendments were meant solely to fund the OGSML regulatory program adequately and to confirm municipal control over local roads. Relative to the local-roads and real-property-tax exceptions to supersession in ECL section 23-0303(2), the respondents characterized both as being operational aspects of well drilling; thus, they argued that these exceptions have meaning if “regulation of the . . . industry” is limited to the “how” of drilling. They further asserted that because other statutes contain more express articulations to preempt “zoning,” the absence of the word “zoning” in ECL section 23-0303(2) means that there is no express preemption.

Adopting the rationale of the intermediate appellate court, the respondents also argued that there is no conflict preemption, be it with the OGSML’s express location-based provisions or its policy objectives. The respondents maintained that the location-based directives of the OGSML and its policies can be met where, if anywhere, development is authorized to proceed under municipal zoning controls.

Appellants’ Arguments Before the New York Court of Appeals 
The appellants argued that the decisions below are fundamentally flawed because they evaluate the scope of supersession under the OGSML by reference to the Reclamation Law, which differs from the OGSML in all relevant respects—language, design, subject matter of regulation, history, circumstances of enactment, and policy objectives.

In terms of supersession language, the appellants noted that the OGSML states unqualifiedly that “all local laws or ordinances” are superseded, thus including zoning ordinances, and then narrowly limits local “jurisdiction” solely to two discrete areas—local roads and ad valorem taxes. They observed that the Reclamation Law lacks any similar “ordinance” or “jurisdiction” limiting language in its supersession clause. They also argued that the local-roads and property-tax exceptions in ECL section 23-0303(2) have no meaning if supersession is limited, as the lower courts held, to the “how” of drilling, and that this is so because neither local-road usage nor real-property taxes have anything to do with the technical, operational aspects of well drilling. The appellants further highlighted the other substantive provisions of the Reclamation Law that speak to the retention of local jurisdiction over the mine site, as well as notice to and approval by localities at the permitting phase, observing that there are no comparable provisions in the OGSML.

As to the substantive provisions of each statute, the appellants identified the many provisions of the OGSML that dictate, and thus “regulate,” where drilling may occur (e.g., well location, unit size and orientation, spacing between units, setbacks), noting the lack of any comparable provisions in the Reclamation Law regarding the location or spacing of mine shafts. Thus, they argued that, because the OGSML “regulates” where drilling may occur, “regulation of the . . . industries” in ECL section 23-0303(2) encompasses the “where” of drilling, rendering that subject matter off-limits to municipalities.

In terms of legislative history, the appellants pointed to the circumstances of enactment of the OGSML’s supersession language in 1981, as well as legislative articulations regarding its intent—namely, that (1) the supersession language was enacted in response to the energy crisis and was meant to remedy problems caused by decades of parochial regulation and (2) this was to be accomplished by vesting exclusive control in the state to ensure the efficient development of indigenous oil and gas resources that, for decades, had eluded the state due to local interference. Again, the appellants noted the absence of anything comparable in the history of the Reclamation Law.

Relative to agency implementation of each statute, the appellants observed that, since enactment of the OGSML’s supersession provision in 1981, the Department of Environmental Conservation (DEC) consistently has applied the OGSML as superseding local zoning, in marked contrast to its application of the Reclamation Law. All of this, the appellants argued, rendered Reclamation Law precedent decidedly inapt to the OGSML express preemption analysis.

Finally, the appellants argued that, even if not expressly preempted under ECL section 23-0303(2), municipal drilling bans conflict with the location-based directives in the OGSML, as well as the policies of preventing waste, protecting correlative rights, and providing for greater ultimate resource recovery. The appellants contended that these policies are unique to oil and gas drilling and have no analogue in the arena of solid-minerals mining governed by the Reclamation Law. They argued that due to the unique geophysical properties of oil and gas, production is intimately tied to proper well location; and, in turn, proper well location is essential to preventing waste and allowing mineral owners to realize their correlative rights. The appellants noted that the Colorado Supreme Court held a local drilling ban to be conflict-preempted based on these very same policy considerations. See Voss v. Lundvall Bros., Inc., 830 P.2d 1061, 1067 (Colo. 1992).

Decision of the New York Court of Appeals
In a 5–2 decision, the New York Court of Appeals affirmed the intermediate appellate court’s finding of no express preemption. The court adopted the rationale of the lower courts, holding that Frew Run and its progeny applied and led to the same result.

Specifically, the court applied a three-factor analysis, evaluating (1) the plain language of the supersession clause, (2) the statutory scheme as a whole, and (3) legislative history. First, the court found the OGSML’s supersession language “quite close” to that in Frew Run. The court rejected the appellants’ argument that the local-roads and ad valorem tax exceptions would be rendered meaningless if “regulation of the . . . industries” were limited to the “how” of drilling. The court opined that both could be characterized an operational features of drilling because vehicle traffic would be associated with drilling and ad valorem taxes were based on production. Then the court compared the OGSML supersession language to that in more explicit statutes adopted after Frew Run was decided, finding that the absence of explicit “zoning” language in ECL section 23-0303(2) meant there was no clear intent to preempt.

Again applying Reclamation Law precedent, the court found that its reading was consistent with the OGSML’s overarching statutory scheme. The court acknowledged that the OGSML’s spacing provisions were designed to allow the DEC to space wells to promote efficient drilling and to prevent waste, but the court concluded that these were “operational” features limited solely to preventing inefficient drilling operations if drilling were allowed. Nowhere did the court address the argument that the OGSML regulates drilling location, whereas the Reclamation Law does not—and this is a key distinction as to what “regulation” means under each statute.

Beyond truncating the concepts of preventing waste and providing for greater ultimate recovery, the court effectively ignored the policy of protecting correlative rights. The court’s only mention of correlative rights appears in a footnote, where the court asserts that correlative rights do not equate with the right to drill. The court so found notwithstanding contrary regulatory language and treatise authority that a component of correlative rights includes the opportunity to extract the resource (or be compensated in kind).

Evaluating only a part of legislative history and ignoring others, the court concluded that the 1981 amendments adding the supersession language were meant solely as a funding mechanism for the DEC. The court made no mention of additional legislative history explaining that the supersession language was being enacted to remedy the problems caused by decades of parochial control that had thwarted resource development.

Finally, the court summarily rejected arguments that drilling bans were the most stringent type of “regulation” that could not be squared with the policies of the OGSML. In reaching this result, the court found Gernatt Asphalt controlling, notwithstanding that by the time this case was decided, the Reclamation Law had been amended with language expressly reaffirming full local zoning authority.

Finally, the court never addressed conflict preemption, finding that analysis foreclosed underFrew Run. The court so found, notwithstanding its own precedent (and federal preemption precedent) that an express preemption clause does not foreclose an implied preemption analysis. Notably, the court did not address the Voss case, wherein the Colorado Supreme Court found a municipal drilling ban to be conflict preempted under a statutory scheme akin to the OGSML and premised on the same policy underpinnings.

In the end, given the many matters seemingly ignored or not fully evaluated, the decision leaves many analytical issues unresolved. However, the decision stands as the final law of the land in New York, meaning that oil and gas development may be banned by municipalities.

After New York’s ongoing 6-plus-year moratorium on natural-gas development through fracking, the court’s holding authorizing bans on oil and gas development will have a chilling effect on oil and gas development in New York. However, all is not lost, as a number of municipalities have adopted resolutions supporting natural-gas development. Not surprisingly, these municipalities are located in areas of New York where the shale resources are presumed to be the most prolific and there is strong landowner support for development of mineral rights. Ultimately, this means that there will be opportunities to develop the shale resources in New York, but operators will need to proceed cautiously to take steps to protect their investments from after-the-fact municipal bans and restrictions.

Keywords: energy litigation, oil, gas, OGSML, Reclamation Law, zoning, regulation, land use, preemption, supersession

Cindy M. Monaco is with the West Firm in Albany, New York.

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