Energy, Petrochemical and Natural Resources

Action Item: Oil and gas operators should be aware that courts recently have been paring back on the power of local municipalities to regulate their operations. Oil and gas operators encountering local regulations or constraints that are adversely impacting operations should contact an attorney.

Have we seen the Midway or El Alamein-style turning point in the courts on the wave of local regulation of oil-and-gas-related activities? In 2014 and the end of 2013, a pair of court decisions signaled judicial momentum allowing local regulation of oil and gas development. In the well-publicized December 2013 case, Robinson Township v. Commonwealth of Pennsylvania, 83 A.3d 901 (Pa. 2013), a three-justice plurality of the court struck down certain provisions of Act 13. Act 13 was the legislative and executive effort to, in part, promote statewide uniformity, and it prohibited local governments from imposing limitations on the construction of oil and gas operations that are more stringent than those imposed on other industrial uses. The well-publicized plurality opinion striking down parts of Act 13 was based on the Environmental Rights Amendment (“ERA”), which confers upon Pennsylvania citizens the right to clean air and water. The plurality opinion was sweeping in scope and arguably contained discussion and reliance on facts that were never part of the record. Three other justices issued an opinion also striking limited provisions of Act 13, but premised their decision upon due process. Meanwhile, in New York, the state’s highest court ruled that towns can ban oil and gas production within their boundaries through the adoption of zoning laws. (See Norse Energy v. Town of Dryden, 16 N.E.3d 1188 (N.Y. 2014).) The court reasoned that the statewide Oil, Gas and Solution Mining Law does not pre-empt the home rule authority vested in municipalities to regulate land use.

But this is 2015 and times are changing quickly. Remarkably, the Robinson Township decision has been denuded, literally and judicially, just 13 months after the decision was issued. First, two of the three justices of the plurality are now gone from the bench. State Supreme Court Chief Justice Ronald D. Castille retired after a distinguished career from the court at the end of 2014, having reached the mandatory retirement age of 70. Justice Seamus McCaffery also retired from the court in 2014, under different circumstances. So there is only one justice remaining who subscribed to the ERA theory articulated in the plurality decision. Second, the Commonwealth Court, in an important decision in January, flatly rejected the Robinson Township plurality opinion, saying it was not bound by it and declined to adhere to it. (See Pennsylvania Environmental Defense Foundation v. Commonwealth, No. 228 M.D. 2012 (Pa. Commw. Ct., Jan 7, 2015).) In that case, a unanimous en banc panel rejected the Environmental Defense Foundation’s (“EDF”) ERA challenge of certain budget decisions regarding the leasing of state lands for oil and gas development. In so doing, the Commonwealth Court found that the conclusions in the Robinson Township plurality opinion are “not binding precedent” and instead revived the long-standing three-part test set forth in the 1973 case of Payne v. Kassab, 11 Pa. Commonwealth Ct. 14 (1973), which will govern when reviewing challenges to state action brought pursuant to the ERA. The court’s message was clear: Until a majority opinion from the Supreme Court states otherwise, the Payne test is controlling. The EDF’s petition for reargument has subsequently been denied. If the EDF appeals the decision, and the court agrees to hear the case, the court deciding that case will look considerably different from the court that decided Robinson Township.

Meanwhile, two other courts concluded that local regulation of or bans on oil and gas operations are unlawful. In January, the U.S. District Court for the District of New Mexico became the first federal court to grapple with the issue of a local government’s ability to regulate oil and gas operations. In SWEPI LP v. Mora County, 2015 U.S. Dist. LEXIS 13496 (D.N.M. Jan. 19, 2015), the court reviewed a county ordinance that completely banned oil and gas development in the county by making it “unlawful for any corporation to engage in the extraction of oil, natural gas or other hydrocarbons within Mora County.” The ordinance further declared that federal and state statutory law that might grant a right to develop oil and gas would have no pre-emptive effect on the ordinance. SWEPI brought suit, contending that the ordinance was pre-empted by state and federal laws regulating oil and gas development. The court agreed and began by summarily rejecting the county’s attempt to elevate the ordinance over federal law as a violation of the supremacy clause, noting that “if a county could declare under what conditions federal law pre-empted its law, federal law would not be pre-emptive at all.” The court went on to conclude that the ordinance strayed from the historical territory of local lawmaking and entered into an area traditionally left to the state Oil and Gas Commission. In invalidating the ordinance, the court concluded that the establishment of a state-controlled regulatory scheme was implicitly tantamount to approval of oil and gas operations within the state, and that any ban on oil and gas extraction was “antagonistic” to state law.

Then, last month, the Ohio Supreme Court became the first state high court to consider and reject the proposition that local zoning regulations impacting drilling operations can trump a state law permitting oil and gas exploration and production. In State ex rel. Morrison v. Beck Energy, No. 25953, Slip Opinion No. 2015-Ohio-485 (Feb. 17, 2015), the Ohio Supreme Court invalidated five local zoning ordinances, finding that the Ohio Constitution “does not allow a municipality to discriminate against, unfairly impede, or obstruct oil and gas activities and production operations” permitted by state law. First, some context: Beck Energy Corp. received a permit from the Ohio Department of Natural Resources to drill for oil and gas within the city of Munroe Falls. The city sought, and was granted, a preliminary injunction due to Beck’s failure to comply with local ordinances by failing to obtain a zoning certificate and pay a local fee. Note that unlike the ordinance at issue in SWEPI, the ordinances at issue here were not outright bans on oil and gas activities, but rather attempts to regulate oil and gas activities through licensing and fees. On appeal, the court of appeals reversed the trial court, and the Ohio Supreme Court affirmed in a split 4-3 decision, concluding that the local ordinances were invalid. The court reasoned that the Ohio Home Rule Amendment to the Ohio Constitution, which allows municipalities to have the authority to exercise all powers of local self-government and to adopt police, sanitary and other regulations that do not conflict with general laws, did not allow the city to impose its own permitting requirements on oil and gas drilling operations. Because the ordinances prohibit oil and gas development without a local license, the court found that the ordinances were an unlawful exercise of “police power” and were beyond the powers of local self-government permitted by the Home Rule Amendment. The court reasoned that the ordinances prohibit an activity that state statute allows, namely, state-licensed oil and gas production within Munroe Falls. In short, the court found that the municipal-licensing ordinance conflicted with the state-licensing scheme, thus warranting invalidation.

While some may quibble about the nuances of those cases, a fair reading of the decisions is that local government attempts to ban or otherwise regulate oil and gas activities are pre-empted by state regulatory schemes. That is the status quo ante, really. In Pennsylvania, for example, the Oil and Gas Act has always pre-empted local regulation of the “how” of oil and gas operations. Similarly, the Pennsylvania Solid Waste Management Act has always pre-empted the local regulation of the “how” of the solid waste management business. The role of local zoning-type regulations has always been permitted on the “where,” not the “how,” of oil and gas development, or the “how” of solid waste management.

In short, 2015 may represent a watershed moment in walking-back the municipal overreach into the regulation or prohibition of oil and gas activities that was embraced by courts in 2014. This is good news for the constitutional property rights of mineral rights owners—a class of citizens that are often forgotten and run roughshod over by local overreach. But what Winston Churchill famously reminded the English people just after the battle of El Alamein in November 1942 holds true here in 2015 in this context: “Now this is not the end. It is not even the beginning of the end. But, it is perhaps, the end of the beginning.