Anti-Fracking Win in N.Y. Court May Deal Blow to Industry

Jun 30, 2014 6:12 pm ET

(Updates with lawyer’s comment in fifth paragraph.)

June 30 (Bloomberg) -- New York’s cities and towns can block hydraulic fracturing within their borders, the state’s highest court ruled, dealing a blow to an industry awaiting Governor Andrew Cuomo’s decision on whether to lift a six-year- old statewide moratorium.

The case, closely watched by the energy industry, may invigorate local challenges to fracking in other states and convince the industry to stay out of New York even if Cuomo allows drilling. Pennsylvania’s highest court issued a similar ruling last year, striking down portions of a state law limiting localities’ ability to regulate drillers.

“This sends a really strong and clear message to the gas companies who have tried to buy their way into the state that these community concerns have to be addressed,” Katherine Nadeau, policy director for Environmental Advocates of New York, an anti-fracking group, said in a phone interview. “This will empower more communities nationwide.”

The ruling may lead the oil and gas companies to further abandon efforts to extract gas in New York, said Thomas West, an attorney for Norse Energy, one of the companies in the case.

“It’s going to have a real chilling effect on the investment in New York,” he said in a phone interview. “Most of the major companies are not going to see New York as open for business if they have to develop the resource around municipalities with bans.”

Town’s Character

By a 5-2 vote, the Court of Appeals upheld the dismissal of lawsuits challenging bans in the upstate towns of Dryden and Middlefield. The towns engaged in a “reasonable exercise” of zoning authority when they banned oil and gas extraction and production, Judge Victoria Graffeo wrote.

The towns were within their rights to find that drilling “would permanently alter and adversely affect the deliberately cultivated small-town character of their communities,” she said.

The ruling is “one more nail in the coffin” for fracking in the state, Brad Gill, executive director of the Independent Oil and Gas Association of New York, said in a phone interview. Chesapeake Energy Corp. and other firms that divested New York assets “could see the writing on the wall.”

Fracking, as hydraulic fracturing is known, is the creation of fractures in rocks and rock formations by injecting fluid into cracks. The larger fissures allow more oil and gas to flow out of the formation to be carried to the surface.

Marcellus Shale

The process, used in states from North Dakota to Pennsylvania, has helped push U.S. natural gas production to new highs in each of the past seven years, according to the U.S. Energy Information Administration. It has also come under attack from environmental advocates, who fear it may contaminate water supplies and destroy farmland.

Parts of New York sit above the Marcellus Shale, a rock formation that the Energy Information Administration estimates may hold enough natural gas to meet the demands of the U.S. market for almost six years. The state barred fracking in 2008 while studying the environmental effects of the drilling method, which is allowed in more than 30 states.

Since then, more than 75 New York towns have banned fracking while more than 40 have passed resolutions stating they support it or are open to it, according to Karen Edelstein, an Ithaca consultant affiliated with FracTracker Alliance, which analyzes the effects of oil and gas drilling.

Seismic Monitors

With the U.S. poised to surge past Saudi Arabia as the world’s largest supplier of oil in 2015, states are now regulating the drilling process.

In Ohio, new permitting rules require placement of seismic monitors and a shutdown of drilling in the event of an earthquake. In Colorado, where at least five communities voted to restrict fracking, rules to limit the release of methane have been put in place, and the state may give local governments the right to ban or restrict oil and gas drilling.

California and Illinois have moved to require companies to identify the chemicals that are forced below ground to bust up the shale. 

“Practically speaking, municipal-fracking bans in New York may have little more than symbolic value given that state fracking policy has been on hold since 2008,” Christine Tezak, managing director at ClearView Energy Partners LLC, a Washington-based energy consultant, said in a research note.

Dryden, Middlefield

“On the other hand, today’s finding has potential to be a powerful symbol, as it represents a second court ruling upholding municipal primacy in a state overlying the Marcellus Shale,” she wrote, citing the Pennsylvania decision.

Dryden, a town of about 14,000 residents about an hour’s drive south of Syracuse, and Middlefield, a town of about 2,000 about 75 miles further east, passed bans on oil and gas exploration in 2011.

Later that year, Anschutz Exploration Corp., an affiliate of billionaire Philip Anschutz’s closely held company that had bought about 22,000 acres worth of gas leases, challenged Dryden’s ban. Norse Energy Corp. ASA, a Lysaker, Norway-based explorer whose U.S. unit filed for bankruptcy in December 2012, later replaced Anschutz Exploration as plaintiff.

A dairy farm that had signed leases to explore and develop resources under its property sued Middlefield.

Beyond Zoning

Attorneys for the towns said they have the right to enact zoning laws as long as they don’t interfere with state oil-and- gas regulations. Industry lawyers said New York’s Oil, Gas and Solution Mining Law superseded the local bans.

Separate judges in 2012 dismissed the lawsuits challenging the local bans. Those rulings were upheld by an intermediate appeals court last year and again today by the Albany-based Court of Appeals.

Two judges dissented. The zoning ordinances “go above and beyond zoning and, instead, regulate those industries, which is exclusively within the purview of the Department of Environmental Conservation,” Judge Eugene Pigott wrote.

“We’re just going to have to do the best we can with those towns and municipalities that want us,” Gill, of the Hamburg- based Independent Oil and Gas Association, said. “It creates a patchwork of green lights.”

New Claim

Anschutz is “in the process of selling assets, surrendering leased lands and exiting New York,” Brent Temmer, a spokesman for the closely-held company, said in an e-mail. Lindsay McIntyre, a Chesapeake spokeswoman, didn’t immediately respond to requests for comment on its New York holdings.

Exxon Mobil Corp., the largest U.S. gas producer, controls drilling rights across 43,000 acres in two New York counties, said Suann Lundsberg, a spokeswoman for the company’s XTO Energy subsidiary. Exxon paid about $8 million in New York state taxes last year and has no employees in the state, according to the company.

West, the lawyer for Norse Energy, said property owners may challenge the bans as an illegal “taking.”

“The government is not supposed to take your private property without just compensation,” he said. “If they ban gas development, the landowners are entitled to be compensated for the mineral rights they have lost.”

Scott Kurkoski, the lawyer for the Middlefield farm, urged Cuomo to issue a final ruling on the statewide moratorium and to allow development to proceed in towns where it’s favored.

Cuomo is seeking to balance the prospect of economic development as seen in Ohio and Pennsylvania against claims by environmental groups that drilling is harmful. His spokesman, Rich Azzopardi, didn’t respond to a request for comment.

Joe Martens, head of New York’s Environmental Conservation Department, has said he won’t issue fracking regulations until at least April 2015, signaling that Cuomo, a Democrat, probably won’t make a decision before he faces re-election in November.

The cases are Cooperstown Holstein Corp. v. Town of Middlefield, 1700930/2011, New York Supreme Court, Otsego County (Cooperstown); and Anschutz Exploration Corp. v. Dryden, 902/2011, New York Supreme Court, Tompkins County (Ithaca).