Michael P. Joy, James M. Doerfler and Stefanie L. Burt ()
Editor’s note: The authors represented Lenape Resources as counsel of record at the trial court level in challenging Avon’s municipal ordinance. Burt was involved in trial court proceedings in Aukema.
On Dec. 19, 2013, the Pennsylvania Supreme Court issued its long-awaited decision in Robinson Township v. Commonwealth of Pennsylvania, No. 63 MAP 2012 (Pa. 2013), striking down a number of provisions in Pennsylvania’s Act 13, an overhaul of the Oil and Gas Act that had established statewide uniform zoning standards for oil and gas exploration and development purposes. Specifically, the court struck Sections 3303 and 3304 of the act, which had set forth provisions that implemented the uniform zoning standards. The court explained that those provisions, and thereby uniform zoning for oil and gas activities, are incompatible with the Environmental Rights Amendment of the Pennsylvania Constitution because local governments have “necessary and reasonable authority” to carry out the constitutional duties in the amendment, including providing clean air and pure water to the people. The court also struck down a number of other provisions in the act, including Section 3215(b), which had provided that municipalities were not able to appeal the Department of Environmental Protection’s decisions on well permits.
Failure to Provide Guidelines
Much of the initial commentary in the legal community on the Supreme Court’s decision in Robinson Township has focused on the legal reasoning behind the court’s split 4-2 decision, its lack of a majority decision on many key substantive issues and the court’s patchwork legal analysis.
While the Supreme Court’s analysis is still being deciphered and its ultimate impact remains to be seen, one possible practical impact of the decision may flow from what the decision failed to say. The Supreme Court made clear that municipalities are not preempted from issuing ordinances that regulate oil and gas activities. The Supreme Court invalidated Act 13′s clear division of authority between state and local governments to regulate oil and gas activities, but notably missing from the opinion is an explanation of the extent to which municipalities may regulate oil and gas activities by local ordinances. Instead, the Supreme Court’s prior framework in Huntley & Huntley v. Council of Oakmont, 964 A.2d 855 (Pa. 2009), and Range Resources-Appalachia v. Salem Township, 964 A.2d 869 (Pa. 2009), becomes the operative analysis. In the past, this framework has led to inconsistent results and uncertainty for oil and gas development firms and landowners. The question thus becomes: What will be the result of this absence of clear guidelines and this uncertainty over regulatory standards? One likely answer: land use litigation.
As the local townships and municipalities start to craft oil and natural gas ordinances—or revive dormant draft ordinances that were shelved during the pendency of the Robinson Township proceedings—it is foreseeable that in some areas of Pennsylvania where the influence of environmental groups is strong, those groups may promote more restrictive zoning ordinances banning or limiting drilling and exploration activities or issuing temporary moratoria on drilling or exploration activities while local officials profess a desire to study the issue further. While such a scenario is by no means certain, Robinson Township does not clearly foreclose local zoning ordinances that might be interpreted as effectively imposing local bans on hydraulic fracturing.
New York’s Lack of Statewide Regulations
The experience in New York indicates that one likely response in the absence of a uniform statewide regulatory scheme may be a push in areas where environmental groups have political clout for the enactment of local land use regulations that will temporarily restrict drilling activities or impose restrictions within certain geographical limits.
In July 2008, New York’s governor issued a directive to study, pursuant to the state Environmental Quality Review Act, the impact associated with high-volume hydraulic fracturing and to update the 1992 Generic Environmental Impact Statement on the oil and gas industry. In response, the New York Department of Environmental Conservation ceased issuing drilling permit applications. Seizing upon the lack of centralized standards, a number of municipalities in New York enacted zoning ordinances that either directly or effectively banned oil and gas exploration activities within municipal limits. For example, the town of Dryden, N.Y., passed a zoning ordinance amendment in 2011 that banned all activities related to the exploration, production and storage of natural gas and petroleum. Following its lead, Middlefield, N.Y., likewise zoned all oil and gas drilling as being prohibited land uses. Avon, N.Y., likewise banned nearly all oil and gas activities, including hydraulic fracturing and conventional drilling and production, under a similar model zoning ordinance proposed by local environmental groups.
The result of this patchwork regulatory approach and the imposition of local drilling moratoria in New York over the last few years has led to: (1) litigation challenging overly restrictive zoning ordinances as de facto bans on oil and gas activities; (2) force majeure disputes as oil and gas lessees seek to extend leases by force majeure due to local bans on oil and gas activities; and (3) challenges to local ordinances by landowners who are unable to develop the oil and gas underlying their properties and who view such regulations as being governmental takings.
Challenges to Local Ordinances as De Facto Bans
All three of the local laws enacted by the towns of Dryden, Middlefield and Avon were challenged in the courts under New York’s Oil, Gas and Solution Mining Law. Those cases were Matter of Norse Energy Corp. USA v. Town of Dryden, 964 N.Y.S.2d 714 (N.Y. App. Div. 3d Dep’t 2013); Cooperstown Holstein v. Town of Middlefield, 106 A.D.3d 1170 (N.Y. App. Div. 3d Dep’t 2013); and Lenape Resources v. Town of Avon, No. 1060-2012 (Sup. Ct. Livingston Co. Mar. 15, 2013). The Dryden and Middlefield ordinances are currently on appeal before the New York State Court of Appeals, which will determine the legality of the zoning regimes enacted by local ordinances.
Force Majeure Lawsuits
Given the legal uncertainty created by adverse governmental ordinances, another response by several oil and gas exploration companies has been efforts to seek to extend oil and gas leases by seeking a force majeure declaration under the terms of those leases, as in Aukema v. Chesapeake Appalachia, 904 F. Supp. 2d 199, 204 (N.D.N.Y 2012), and Beardslee v. Inflection Energy, 904 F. Supp. 2d 213, 217 (N.D.N.Y. 2012). The legal issues associated with such force majeure declarations are currently pending before the U.S. Court of Appeals for the Second Circuit in Beardslee. If Pennsylvania municipalities likewise enact restrictive zoning ordinances that are restrictive to the point of causing de facto bans on oil and gas activities, then lessees in those jurisdictions may likewise rely on the force majeure provisions that are often included in oil and gas leases. There is no direct Pennsylvania precedent to predict how Pennsylvania courts might react to such legal challenges.
In Dryden, Middlefield and Avon, each of the property owners adversely affected by the newly enacted regulations asserted regulatory and constitutional takings claims.
The Possible Impact
The development of the oil and gas industry in Pennsylvania in recent years has been increased, at least in part, because of the burdens imposed on oil and natural gas development in New York both at the statewide and local levels. As a result, out-of-state investment in natural gas drilling and pipeline infrastructure has been a source of economic development and jobs in an otherwise uncertain economic environment, because the legal environment in Pennsylvania was viewed as being conducive to development activities.
The decision in Robinson Township potentially negatively impacts this nascent economic development in the oil and gas industry in two ways. First, by providing a legal basis for lawsuits by citizens, municipalities or groups that claim to be adversely impacted by drilling activities based upon environmental, natural, scenic, historic or aesthetic impact under the Environmental Rights Amendment to the Pennsylvania Constitution.
Second, by creating an environment conducive to the enactment of a patchwork of inconsistent local regulations, the decision may ultimately impair or discourage out-of-state, energy-related investments.
These ordinances, while enacted with noble goals in mind, often end up hurting the very landowners they are designed to protect. Overly restrictive oil and gas zoning ordinances and local moratoria harm landowners who own oil and gas rights by denying them the benefit of the bargain under an oil and gas lease—a contract entered into by a landowner for his own interest. Given the economic stagnation in New York in the oil and gas industry, it would be unfortunate if the result of the Supreme Court’s decision were to put a shadow over one of the bright spots of economic development in recent years.
Michael P. Joy is a partner in the energy and natural resources group of Reed Smith in Pittsburgh. James M. Doerfler is counsel in the firm’s Pittsburgh office. Stefanie L. Burt is an associate in the firm’s energy and natural resources group.