The activity now focused on development of the Marcellus Shale formation may or may not rise to the level of a “gas rush,” but if not, it’s not far off. In many respects, the current interest in signing gas leases and permitting sites resembles the development of cell phone towers during the 1990s, when pressure was high among telecom companies to be the first to obtain rights to choice locations, and often in the face of local opposition.

As was the case then, one of the primary challenges relating to the development of natural gas is in determining the appropriate and permitted role of local authorities in regulating and approving such drilling activities. The extent of local authority over such activities is still being defined, and recent case law continues to flesh this out.

The most pressing question in this area concerns the extent to which the Pennsylvania Oil and Gas Act serves to pre-empt local zoning and development ordinances insofar as they impact drilling. The stated goals of the act are to promote and regulate oil and gas development within the commonwealth in a manner consistent with the protection of persons, property and the environment.

In furtherance of this, the act contains an express pre-emption clause which, however, contains a carveout for certain local interests. The act reads: “Except with respect to ordinances adopted pursuant to … the Municipalities Planning Code, … all local ordinances and enactments purporting to regulate oil and gas operations regulated by this act are hereby superseded. No ordinances or enactments adopted pursuant to the aforementioned acts shall contain provisions which impose conditions, requirements or limitations on the same features of oil and gas well operations regulated by this act or that accomplish the same purposes as set forth in this act. The commonwealth, by this enactment hereby pre-empts and supersedes the regulation of oil and gas wells as herein defined.”

It is clear then, that the legislature intended the act to rule the field with respect to the “features of oil and gas operations” regulated thereby, but also that it intended to reserve a place for local zoning and land development interests. It is not surprising that the courts, including the Pennsylvania Supreme Court, have been kept busy attempting to clarify where this line is to be drawn.

In 2009, the Pennsylvania Supreme Court heard two cases on this issue and clarified the role of local governmental regulation as a result of reviewing two different zoning ordinances.

The first case was Huntley & Huntley v. Borough Council of Borough of Oakmont . In that case, Huntley had obtained a drilling permit from the Pennsylvania Department of Environmental Protection, but was required by the borough to obtain a conditional use permit as the site was zoned R-1. Huntley argued that the borough was pre-empted by the Pennsylvania Oil and Gas Act from restricting the location of its well. The Borough Council and trial court ruled that the act did not pre-empt this borough authority, which decision was overturned by the Commonwealth Court.

The Supreme Court defined its task as determining whether, in enacting the act, the legislature “intended to leave room for localities to designate certain zoning districts (such as residential ones) where oil and gas wells may be prohibited as a general matter.”

The court noted that language of the act relating to pre-emption focuses on “the features of oil and gas operations regulated by this act” and concluded that these are intended to describe regulations pertaining to the technical aspects of well operations, such as registration, bonding and restoration, rather than site location. The court determined that while some purposes of the zoning ordinance were shared by the act (primarily the ensuring of public safety), the zoning ordinance goals being served by the restriction of drilling in residential areas were primarily to “preserve[e] the character of residential neighborhoods and encourage[e] beneficial and compatible land uses.” These goals were not the same as those intended to be fostered by the act. Thus, the restriction of drilling activities in residential zones was found not to be pre-empted by the act.

In a second Supreme Court case that was issued the same day, Range Resources v. Salem Township , the court again reviewed a zoning ordinance to determine whether it was pre-empted by the act. The ordinance in Range was a general ordinance aimed at regulating development in connection with oil and gas operations.

Upon review, the court found that the ordinance reflected an attempt by the township to enact a “comprehensive regulatory scheme relative to the oil and gas industry.” It found that there were many aspects of the zoning ordinance dealing with “features of well operations that substantively overlap with regulation set forth in the act, falling under the express pre-emptive language of [the act]. For example, the zoning ordinance dealt with — and often in a more restrictive manner — such issues as bonding, drilling permits, registration, site restoration and capping. The court concluded that these were the aspects of the act intended by the legislature to pre-empt local ordinances.

Further, the court noted, the ordinance required the driller to obtain an additional approval, which could be withheld at the discretion of the township. In the opinion of the court, this contrasted “starkly” with the more permissive approach contained in the act, which was intended to foster responsible drilling. Taken in this light, the court held that “the ordinance is qualitatively different from the zoning enactment in Huntley that sought only to control the location of wells consistent with established zoning principles.” The ordinance, found to focus not on zoning but solely upon regulating drilling activities, was therefore held to be pre-empted by the act.

In July, in Penneco Oil Co., et al. v. The County of Fayette, Pa., et al. , the Commonwealth Court has provided the latest guidance in this area, relying heavily on Huntley and Range . In this case, Penneco , the driller, alleged that the county’s zoning ordinance violated the act in several respects: (i) that it permitted oil and gas drilling by special exception only in areas where other mining activities were permitted as of right; (ii) that it permitted the zoning board to attach conditions to oil and gas operations to “protect the public’s health safety and welfare”; and (iii) that the grant of a special exception might be conditioned upon other conditions imposed by the zoning board, thereby vesting “unlimited discretion” in the board.

Penneco argued that the purposes of the ordinance overlapped impermissibly with those of the act and the discretion afforded the board might allow it to arbitrarily deny permits, or to impose requirements in areas clearly governed by the act.

The court first assessed whether the ordinance bore the hallmarks of a comprehensive regulatory scheme (as in Range ) or was more akin to a traditional zoning regulation (like Huntley ). The court determined that oil and gas drilling was permitted as of right in certain zones (agricultural, conservation), that it required a special exception in other areas (residential, industrial, airport overlay), and that the special exception provisions contained four criteria pertaining to oil and gas wells only: that the well not be in a flight path, setback restrictions, screening requirements, and that “the Zoning Hearing Board may attach additional conditions pursuant to this section, in order to protect the public’s health, safety and welfare.”

The court held that the first three conditions “do not pertain to technical aspects of well functioning,” but rather the well’s location, the preservation of neighborhood character and the encouragement of “beneficial and compatible land uses,” language drawn from Huntley . Further, although the ordinance did allow the board to attach additional conditions, such discretion, it held, was not unfettered and would not permit the board to deny a well at its discretion if the driller complies with all reasonable requirements.

The court rejected Penneco’s argument that any overlap between the goals of the act and the purposes of the ordinance was impermissible: “While there may be some overlap, … the most salient objectives underlying restrictions on oil and gas drilling in certain districts appears in Fayette County to be those pertaining to preserving the character of residential neighborhoods, as well as each zoning district, and encouraging beneficial and compatible land uses. As such, the limited provisions of the zoning ordinance governing oil and gas wells in Fayette County do not accomplish the same purposes as set forth in … the act.” Finding the ordinance to be a “zoning ordinance of general applicability,” the court upheld its enforcement.

The Penneco court appears to have ruled consistently with principles of zoning law. As interpreted by the Supreme Court in Huntley and Range , the act is intended to govern technical oil and gas drilling operations. It does not appear that the Pennsylvania legislature, in crafting the pre-emption language of the act, intended to foreclose municipalities from extending application of general zoning considerations to oil and gas uses. There is no “super-immunity” enjoyed by this industry.

On the other hand, it is likely that many zoning ordinances contain language, such as in Penneco , intended to permit the local board to add reasonable conditions to special exception permits. As long as these are generally applicable and reasonably crafted, such conditions should pass muster.

It is foreseeable, however, that in some cases a board under pressure from opposing forces might be tempted to use this provision to forestall drilling entirely. Such a result would certainly be subject to challenge and would illustrate that, while the statute might withstand scrutiny, as above, its application must also be reasonable — as in any zoning case. In light of the public debate facing many drilling proposals, it is very possible that the courts may soon be hearing more such cases. •

Martin J. Doyle is a partner and Bruce P. Bowen is special counsel in Saul Ewing’s real estate department in the Philadelphia office. Both are experienced in all aspects of real estate financing, sales and leasing. Doyle received his J.D., cum laude, from the University of Pennsylvania Law School. Bowen received his J.D., magna cum laude, from Temple University’s Beasley School of Law.