An intermediate appeals court in New York State has held that municipal zoning laws in New York State banning natural gas and petroleum exploration, storage or production – including production utilizing high volume hydraulic fracturing (commonly called fracking or HVHF) – were not preempted by the state’s Oil, Gas, and Solution Mining Law (OGSML).

The decision was handed down on May 2 by a four-judge panel of the Supreme Court Appellate Division for the Third Judicial Department in Norse Energy Corp. USA v. Town of Dryden and will likely be appealed to the Court of Appeals (New York’s highest court). The ruling is a setback to the state’s natural gas industry and proponents of HVHF. Industry had sought to use the case to stem a rising tide of local opposition to HVHF, with over 150 municipalities in New York having enacted either moratoria or outright bans on HVHF. Notably, fracking and its attendant economic benefits remain robust in neighboring Pennsylvania.

In August 2011, the Town of Dryden in Tompkins County, New York (which encompasses the Ithaca metropolitan area) amended its zoning ordinance to ban all activities related to exploration, production or storage of natural gas and petroleum. The amendment was largely the result of growing local opposition to the use of HVHF to recover natural gas from the Marcellus Shale, which lies partially beneath Dryden. Anschutz Exploration Corporation, a driller and developer of oil and natural gas wells that owned leases covering 22,200 acres in Dryden, brought suit, asserting that the town’s zoning law was preempted by the OGSML. The Norwegian company Norse Energy Corporation replaced Anschutz in the litigation when it acquired some of the Anschutz leases. Norse Energy’s US subsidiary filed for bankruptcy in 2012 after New York State’s five-year-old HVHF moratorium prevented the company from drilling on more than 100,000 acres of land it had purchased in New York State for over US$100 million.

The trial court eventually granted summary judgment in favor of Dryden, and Norse Energy appealed to the Third Department.

In a decision written by Presiding Justice Karen Peters, the Third Department upheld the lower court’s ruling that the OGSML did not preempt Dryden’s ban on oil and gas activities. The court first noted that under New York law “one of the most significant functions of a local government is to foster productive land use within its borders by enacting zoning ordinances.” The Third Department then reviewed the supersession clause of the OGSML (Section 23-0303(2) of the N.Y. Environmental Conservation Law), which provides that the statute preempts “all local laws or ordinances relating to the regulation of the oil, gas and solution mining industries.” The court held that because Dryden’s zoning law “does not seek to regulate the details or procedure of the oil, gas and solution mining industries” but “simply establishes permissible and prohibited uses of land within the Town for the purpose of regulating land generally,” Dryden’s law was “not the type of regulatory provision that the Legislature intended to be preempted by the OGSML.” The court found that the legislative intent of the OGSML was merely to eliminate any local regulation of “technical operational activities” in the oil and gas industries, not to usurp more general zoning and land use decisions.

The Third Department also rejected the argument that the OGSML established a policy in New York State to “maximize recovery” of oil and gas resources at the expense of municipal land use decision-making. The court held that the statute’s goal of avoiding waste in the manner in which “reservoir energy” is produced “does not equate to an intention to require oil and gas drilling operations to occur in each and every location where such resource is present, regardless of the land uses existing in that locale.”

Norse Energy has promised to move for leave to appeal to the Court of Appeals. The Town of Dryden was represented in the case by Deborah Goldberg of Earthjustice. (Earthjustice and Ms. Goldberg were opposing counsel in DLA Piper’s significant victory last year in the US Court of Appeals for the Second Circuit for Inergy, L.P. and its subsidiary Central New York Oil And Gas Company, LLC, in an important case that cleared the way for the development of a US$257 million Marcellus Shale gas pipeline project, the MARC I Hub Line, in Pennsylvania.)

In a separate ruling the same day of the Dryden decision and based on the same rationale, the Third Department in Cooperstown Holstein Corporation v. Town of Middlefield upheld a similar ban on all mining in the Town of Middlefield in Otsego County. A lower court has also upheld a ban enacted in the Town of Avon in Livingston County in Western New York.

The decisions by the Third Department could embolden more localities to enact bans on HVHF. As noted by Wes Gillingham, program director for Catskill Mountainkeeper, an anti-fracking group, “Fear of lawsuits has always been one of the impediments to local communities to pass these kinds of limitations on fracking.”

Heather Briccetti, president of the Business Council of New York State, issued a statement saying, “Regardless of the final court outcome of this case, we oppose statutory prohibitions on the state or local level, as contrary to sound economic, energy and environmental policy.”

Developments in the legislative and executive branches

The legislative and executive branches of the New York State government also continue to address potential natural gas production utilizing HVHF. The New York State Assembly passed a two-year moratorium on HVHF earlier this year by a 95 to 40 vote. While the Assembly passed similar moratoria on HVHF in 2010 and 2011, those bills went nowhere in the then-Republican-controlled Senate. However, the Senate is now controlled pursuant to a power-sharing arrangement between the 31-member Republican caucus and the four-member Independent Democratic Caucus (IDC), with the 27-member Democratic caucus comprising the minority. On the day before the Assembly passed its two-year moratorium on HVHF, the members of the IDC proposed their own two-year moratorium.

The regular Democratic senators have been supportive of a moratorium or even a ban on HVHF in New York, and there might be sufficient numerical support in the Senate to enact at least a two-year moratorium like the one passed in the Assembly. However, Senator Dean Skelos, the Senate co-leader along with Senator Jeff Klein of the IDC, has made it clear that he will not allow the moratorium legislation to be voted on, and the rules of the power-sharing agreement require that both men must agree to allow any legislation to come up for a vote.

Co-leader Skelos’s second-in-command, Republican Senator Tom Libous, who represents a district in and around Binghamton that sits atop the Marcellus Shale, is a strong HVHF proponent and has said in a statement that he believes the IDC’s “moratorium proposal is simply a media gimmick to placate activists against fracking.”

The review of fracking by the administration of Governor Andrew Cuomo remains stalled; the Department of Environmental Conservation is still waiting for the New York State Commissioner of Health, Dr. Nirav Shah, to complete a health impact study before NYSDEC takes final action on the proposed HVHF regulations. When pressed for a timetable for his decision during a May 1 cabinet meeting, Dr. Shah demurred and said that no timetable exists. “I will continue to work on this until I am comfortable,” Dr. Shah told reporters.

The prospects for HVHF in New York State

The prospect for HVHF occurring in New York State continues to involve a complex interplay of legal, technical and policy considerations and advocacy by various groups of stakeholders.

However, recent judicial and legislative developments clearly are not a positive sign for those planning to take part in shale gas production utilizing HVHF in New York State anytime soon.