NY Appellate Court upholds Home Rule fracking ban Landmark case critically linked to Marcellus development

New York’s anti-fracking movement scored a critical victory today in a landmark case testing the right of local governments to ban fracking.

In a much-anticipated decision, the state’s Third Appellate Division upheld a ruling  giving local governments authority to ban the controversial practice of unconventional drilling and well-stimulation techniques – including high volume hydraulic fracturing -- to extract petroleum from bedrock.

Today’s ruling comes after the shale gas industry appeal of a February, 2012 decision by a lower court favoring the right of local governments to ban drilling. The appeal was based on an argument that legislation amending the Oil Gas and Solutions Minding Law gave the state, not local governments, exclusive jurisdiction over wells.

In today’s appellate court ruling, the three-judge panel unanimously agreed that the oil and gas law did not reflect legislative intent to “pre-empt a municipality’s power to enact a local zoning ordinance banning all activities related to the exploration for, and the production or storage of, natural gas and petroleum within its borders.”

This theme was reiterated emphatically throughout the 15-page ruling:

We find nothing in the language, statutory scheme or legislative history of the (Mining Law) statute indicating an intention to usurp the authority traditionally delegated to municipalities to establish permissible and prohibited uses of land within their jurisdictions. In the absence of a clear expression of legislative intent to preempt local control over land use, we decline to give the statute such a construction.

Industry attorney Tom West said his legal team will file for an appeal, but it is up to the discretion of the state’s high court whether to hear the case.

Home Rule bans are supported by activists who fear shale gas development, including the use of high volumes of undisclosed chemical solutions injected into the ground to fracture shale and release gas – poses unacceptable threats to environment and public health. Activists praised the court’s decision to uphold local bans, while using the victory to encourage broader opposition.

“The real solution to this problem is for the state to ban fracking, but until that happens, local governments have a responsibility to protect their citizens from the oil and gas industry,” Kelly Branigan said in a statement. Branigan is a founding member of Middlefield Neighbors and a member of New Yorkers Against Fracking. Residents of the towns of Middlefield and Dryden supported the bans, which were legally challenged by Anschutz Exploration and Norse Energy.

The Marcellus and Utica shalea, some of the largest gas reserves in the world, extend throughout Pennsylvania, New York, and Ohio. Today’s ruling could have a profound impact on the future of shale gas development in the Empire State. Unlike conventional gas development, which tends to be geographically limited, the footprints of shale gas resources cover large regions. Uncertainty over jurisdiction from one town to the next can be a critical disincentive for drillers. Absent a successful appeal, according to West, the prospects of large scale shale gas development in New York are dim.  “This sends a signal to the industry that New York is not stable,” he said. “You can invest millions of dollars to lease in New York and be at the mercy of a 3-2 town hall vote.”

Which is exactly why grass roots activist like it. Local control of the gas industry is a “David and Goliath battle,” said Branigan. “This decision shows that our democracy in New York State still works.”

Permitting for gas wells in New York has been on hold for five years, pending the outcome of a policy review by the state Department of Environmental Conservation accounting for environmental and health impacts. That review, called the Supplemental Generic Environmental Impact Statement (SGEIS) has no timetable for completion, Department of Health Commissioner Nirav Shah said yesterday.

The battle continues, and shale gas development is still a real possibility in certain parts of the state despite today’s ruling. There are municipalities that support gas development, including many in Southern Tier counties that are adjacent to productive gas fields in Pennsylvania. If shale gas development were to begin in New York, it would be here, according to a plan floated by Governor Mario Cuomo last year.  The incentive to develop these areas in Broome, Tioga and Delaware counties are strong, because the geology is promising, they are close to major pipelines, and there is relatively little opposition from local town boards.

What does Total’s purchase of the Utica tell us? Three points to consider

This morning’s announcement by France’s largest energy company to increase its stakes in U.S. shale by $2.32 billion is impressive at face value. Specifically, as reported by Bloomberg’s Brian Swint, Total will take a 25 percent stake in 619,000 acres of Utica in eastern Ohio. As followers of the U.S. shale gas boom know, the Utica is the largely unexplored formation that sits well below the Marcellus and covers an even bigger footprint, extending north to the Great Lakes in New York, east to the New York’s Alleghany mountain range, west into Ohio, and south to Tennessee. Some have suggested that the Utica holds more energy than the Marcellus, although a working knowledge of its potential is yet to be developed.

Chesapeake Energy has been exploring the western part of the Utica, extending into Ohio, and has found natural gas liquids (NGLs). These include ethane, propane, and butane, which are valuable both as fuels and petrochemical feedstock for an array of manufacturing processes and products, including packaging, textiles, fertilizer, coatings, and adhesives. The westernmost part of the formation also holds oil reserves that, like natural gas and NGL, could be produced only by high-volume fracking.

Keep these points in mind when looking for relevance of how the Total investment will impact the shale gas boom that has accelerated with aggressive Marcellus development in Pennsylvania and West Virginia, and stalled in New York due to concerns over the environmental impact of fracking.

1 -- Total is reportedly interested in the liquid part of the Utica, which is in Ohio. The carbon reserves in the Utica, under New York and Pennsylvania, are thought to be primarily dry natural gas, for which the demand has lagged as production from shale reserves in other parts of the country has created a market glut. That could change with market conditions, which are driven by demand. Demand, in turn, is driven largely by policy and politics that reflect public opinion that natural gas development is indeed a bridge to cleaner alternatives, or simply an enabler of a greater dependency on antiquated fossil fuels.

2- Total became limited with its options for shale gas exploration in its own country in July when France outlawed hydraulic fracturing.

3- The U.S., with the second largest shale gas reserves in the world behind China, has continued to attract foreign investors looking to develop and refine their hydraulic fracturing technology on U.S. shale reserves. China National Offshore Oil Corporation (Cnooc), one of the three big Chinese state-run oil companies, owns one-third interest in Chesapeake’s shale projects in Colorado and Wyoming. Royal Dutch Shell, based in Britain, and Reliance Industries, based in India, have also invested in various U.S. shale gas plays. Chesapeake has been looking for an investor to raise capital to develop the western part of the Utica. Total, with available capital but limited by policies in its own country, was a fit.

Overall, Total’s purchase of the Utica fits a trend of foreign investment in U.S. shale production. The western portion of the Utica brings added value due to LNG and petroleum. How this pans out in the long term depends on the baseline belief by the U.S. voting base that there is merit in drilling for and burning of fossil fuels. As the largest energy consumer (soon to be surpassed by China), the U.S. is in a position to drive global energy markets. Without an abiding belief in fossil fuels, demand for the products of shale gas development and fracking will lag and the market incentives for drilling and fracking will weaken. Of course there are other complicating factors. The strength of the economy is a wild card, as the demand for energy tends to rise when times are good. Economic policy… Energy policy…  For more insights into these variables, look to the presidential campaigns that will culminate with November’s elections.