On January 15, 2015, the United States District Court for the District of New Mexico became the first federal court to address questions related to the scope of local governments’ ability to regulate oil and gas development within those governments’ jurisdictional boundaries. In SWEPI, LP v. Mora County, New Mexico, the district court struck down a county ordinance prohibiting the extraction of oil and gas, a decision that has generally been hailed as a victory for industry. Yet a closer reading of the 199-page opinion that United States District Judge James O. Browning issued reveals that the real import of the SWEPI decision is not the result, but the framework the court articulated for analyzing two issues driving the public debate over the regulation of oil and gas development: whether state and federal laws permitting oil and gas extraction preempt local regulation of oil and gas operations, and whether, if local regulation is permissible, those regulations can represent a taking of private property.
In SWEPI, the federal district court concluded that, while there may be limitations on local communities’ ability to regulate oil and gas operations, at least in New Mexico those limitations are not likely to foreclose local governments from regulating entirely. And while not deciding the issue, Judge Browning became the first federal judge to meaningfully grapple with the question regarding whether local regulation of oil and gas, and specifically regulation of hydraulic fracturing, has the potential to result in an uncompensated taking of a mineral interest in violation of the Fifth Amendment to the United States Constitution. Given the court’s comprehensive treatment of the pertinent legal issues relevant to those questions, the opinion in SWEPI is likely to be influential in shaping the approach of both regulators and industry in the future.
Beginning in 2010, Royal Dutch Shell subsidiary, SWEPI, LP (“SWEPI”), acquired a series of oil and gas leases in Mora County, New Mexico. Mora Country is a sparsely populated rural county in northeastern New Mexico. There was no oil and gas production activity in Mora County at the time that SWEPI obtained its interest in the leases, and none has occurred in the county since.
Notwithstanding this lack of development activity, on April 29, 2013, the Mora County Board of County Commissioners enacted an ordinance entitled “Mora County Community Water Rights and Local Self-Government Ordinance.” The ordinance purports to make it “unlawful for any corporation to engage in the extraction of oil, natural gas, or other hydrocarbons within Mora County.” The ordinance also provides that other sources of law that could be interpreted to grant a right to develop oil and gas – including federal and state statutory and constitutional law – would not be effective in the county and would have no preemptive effect on the ordinance.
On January 10, 2014, SWEPI brought suit against the county raising a number of challenges to the ordinance’s validity under federal and state law. Echoing contentions raised in lawsuits opposing local restrictions on hydraulic fracturing pending presently in state courts across the country, SWEPI contended that federal and state laws regulating the development of oil and gas interests preempted the local ban. Because Mora County’s ordinance only precluded corporations, and not individuals, from developing oil and gas, SWEPI also argued that Mora County’s ordinance denied corporations equal protection under the law. And because the ordinance denied mineral owners the ability to develop and sell oil and gas, SWEPI argued that, even if Mora County’s ordinance was enforceable, the county’s action represented an uncompensated taking of a property interest.
II. SOME ANSWERS, MORE QUESTIONS
In an exhaustive opinion granting judgment in SWEPI’s favor, the federal district court had little trouble rejecting Mora County’s attempt to elevate the county ordinance above the limitations that the federal Supremacy Clause imposes on local lawmaking. Judge Browning explained that “Mora County lacks the authority to nullify constitutional rights” and observed that “[i]f a county could declare under what conditions federal law preempted its law, federal law would not be preemptive at all.” With reference to the county’s attempt to restrict the fundamental rights of corporations specifically, the court emphasized that Supreme Court precedent recognizing corporate rights was controlling and concluded that the “local law is contrary to over  years of Supreme Court precedent.” Judge Browning noted: “[Mora County’s] argument that corporations should not be granted constitutional rights, or that corporate rights should be subservient to people’s rights, are arguments that are best made before the Supreme Court – the only court that can overrule Supreme Court precedent – rather than a district court.”
The district court also determined that the ordinance likewise “strays from the historical territory of county lawmaking,” stating that “[r]egulating oil-and-gas production is not within the purview of traditional county powers” and acknowledging that, “[i]n New Mexico, oil-and-gas regulations have traditionally been left to the state and to the Oil and Gas Commission.” Observing that the New Mexico Oil & Gas Act provides “the Oil Conservation Division with a number of powers concerning the regulation of drilling for, and producing oil and gas,” Judge Browning concluded that “the Oil and Gas Act impliedly preempts [Mora County] from completely banning oil-and-gas production.”
In the weeks since the decision, this has been the holding that industry commentators have cheered. What has been overlooked, however, is that the court’s decision went no further. Judge Browning did not hold that local governments have no place in the regulation of oil and gas development. To the contrary, he was express in adopting the opposite view. Noting that the Oil and Gas Act omitted regulation of pertinent aspects attendant to development such as the “traffic that oil-and-gas production creates,” “noise limitations for production near residential areas,” “potential nuisance issues from sound, dust, or chemical run-off,” and “the impact of oil-and-gas production on neighboring properties” the court reasoned that New Mexico law “does not preempt the entire oil-and-gas field.” Rather than eliminate Mora County’s ability to regulate oil and gas activity, Judge Browning’s opinion affords “room for concurrent regulation.”
This “room” all but assures that local governments embracing Mora County’s opposition to oil and gas development will attempt more nuanced efforts to restrict operations through use of regulations focused on the aspects of development that Judge Browning referenced in the SWEPI opinion, as well as other activity attendant to development, but not expressly addressed in the New Mexico Oil & Gas Act. Whether these nuances will manifest in a form that will permit local enforcement, or whether future efforts will represent the functional equivalent of bans on extraction (and therefore be equally unenforceable) will depend on the letter and the application of subsequent regulatory efforts. Suffice to say, the result in SWEPI does little to settle the debate on the scope of local control over oil and gas development in New Mexico or elsewhere.
And even if local governments are successful in exerting regulatory power that restricts or eliminates the ability to develop oil and gas within the local government’s jurisdictional boundary, there still remains the question of whether mineral owners may have constitutional recourse for the frustration of these property rights. Although the court in SWEPI did not decide whether Mora County’s ordinance constituted an uncompensated taking – because SWEPI’s failure to seek just compensation under state processes rendered SWEPI’s takings claim unripe – the district court did conclude that because the ordinance “effectively destroys all economic value that SWEPI, LP has in its leases,” SWEPI had alleged an injury-in-fact, endowing SWEPI with standing to bring a takings claim. Judge Browning explained that because the value in SWEPI’s oil and gas leases derived from the right to drill for oil, without the right to drill, “an oil and gas lease is worthless.”
Given Judge Browning’s acknowledgment that the Mora County ban on hydrocarbon extraction represents “a particularized, concrete interest in property that state law protects,” it is not a substantial leap to conclude that the court would be open to declaring broad extraction bans like the one Mora County enacted uncompensated takings of mineral interests. But similar to the court’s holding on preemption, the court’s takings analysis suggests that more nuanced regulatory efforts might be able to withstand constitutional scrutiny. The court’s opinion does not address whether a ban on oil and gas development would represent a taking when the mineral owner is also the fee owner of the surface estate. And in response to the court’s probing at oral argument, SWEPI’s counsel conceded that, if Mora County had banned only hydraulic fracturing, as opposed to a total ban on extraction, the takings implications would be less certain.
Although Judge Browning’s thoughtful opinion in SWEPI v. Mora County certainly advances the legal thinking on questions of local control and constitutional protection of mineral rights, it does not provide any conclusive answers to the two questions that continue to dominate the policy debate over how best to regulate domestic oil and gas production. Nor is it likely that a universal answer will present itself soon. States like New Mexico and Colorado – where court decisions have favored state preemption – are presently treading a path on these questions distinct from jurisdictions like New York and Pennsylvania – where court decisions have empowered local governments. How these questions affect the business approach of operators and the political strategy of regulators may drive the fate of the domestic oil and gas industry in 2015 and beyond.