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Zoning Hurdles For E&Ps Seen Likely After Divided Ohio Supreme Court Opinion

A long-awaited decision by the Ohio Supreme Court that was expected to clarify the conflicts between local zoning and the state's preemptive regulatory authority over the oil and gas industry did little to resolve the issue, with sources in agreement that the opinion was more of a setback than a gain for drillers.

The case, which pitted the Northeast Ohio city of Munroe Falls against conventional driller Beck Energy Corp., resulted in a narrow ruling from the high court last month in favor of the company (see Shale Daily, Feb. 17). Justices zeroed in on five zoning ordinances that Munroe Falls passed between 1980 and 1995, which the city claimed Beck had violated in justifying its stop-work order that led to the closely watched litigation (see Shale Daily, Dec. 30, 2013). The court found that those specific ordinances clearly conflicted with the Ohio Department of Natural Resources' (ODNR) "sole and exclusive authority to regulate the permitting, location and spacing of oil and gas wells and production operations" under Revised Code (RC) 1509 of state law.

The court, however, left the door open to the broader question of whether municipalities should have leeway in exercising their home rule powers under the state constitution, with local ordinances that can both protect their interests and legally coexist with the state's centralized regulatory authority. The justices also cited recent opinions in Colorado, Pennsylvania and New York in which state courts preserved, to some extent, local governments' right to zone for oil and gas operations. The Ohio justices suggested that they could make a similar ruling if a different case were to come before the court again.

Nearly a month after the high court issued its decision, energy attorneys throughout the state agree that the preemption battle is likely to rage on. They claim the Ohio General Assembly, which passed RC 1509 in 2004, could take further legislative action to clarify zoning conflicts. Absent such a change, they also contend that there's a strong likelihood that the issue will go before the high court again with a different case -- if it makes it that far at all.

In any event, oil and gas companies are likely to face continued local government hurdles in some parts of the state, or in rare instances, outright denials to drill in some urban areas.

"They got what they wanted in terms of issues with Munroe Falls and what Beck was doing. John Keller won, Vorys Sater won, but it is not a landslide victory for the industry or a sea change," said Alan Wenger, chairman of the oil and gas law group at Ohio-based Harrington, Hoppe & Mitchell, referring to the attorney and firm that represented Beck. "[The ruling] did not provide complete clarification or vindication of state preemption over anything local. That has not happened, or maybe the court was signaling it would do something similar to what other states have decided about zoning if it came to that."

Unfavorable Precedent

As oil and gas operations have crept closer to backyards across the country in recent years with the advent of high-volume horizontal fracturing, state and federal courts have increasingly been asked to weigh in on how such development affects local communities and the rights of landowners. In a concurring opinion that sources widely agreed was the swing vote in the court's divided 4-3 ruling, Justice Terrence O'Donnell wrote to "emphasize the limited scope of our decision." He cited cases in Colorado, New York and Pennsylvania in which state courts upheld local governments' right to zone for oil and gas drilling.

In 2013, the Pennsylvania Supreme Court struck down key provisions of the state’s omnibus oil and gas law, Act 13, and undercut centralized regulation by returning to municipalities their right to change or enforce local zoning laws (see Shale Daily, Dec. 20, 2013). More than a year after, several townships across the state are facing similar challenges to plans for wells in residential and agricultural zones. In most cases, opponents are claiming that those zones are not suitable for unconventional wells sites, arguing that natural gas drilling threatens homes, businesses and public safety under the state constitution (see Shale Daily, Dec. 1, 2014).

Last year, a common pleas court judge cited the Act 13 case and invalidated a conditional-use permit in Lycoming County, effectively ending Denver-based Inflection Energy LLC's bid to construct a well pad there (see Shale Daily, Sept. 4, 2014). Wenger and other sources said similar issues could occur in Ohio after the high court's ruling. He added that many municipalities are now likely reexamining and possibly amending their zoning ordinances to limit oil and gas development to certain areas within their borders.

Police Powers

Although RC 1509 preserves certain regulatory powers granted to local governments under state law, it expressly prohibits them from exercising those powers "in a manner that discriminates against, unfairly impedes or obstructs oil and gas activities and operations." Moreover, the state's home rule amendment does not allow municipalities to exercise their police powers in a manner that conflicts with general laws such as RC 1509.

Built in to Munroe Falls' zoning ordinances for oil and gas development was a permitting provision that clearly conflicted with the state's role. It required an applicant to pay a fee of $800 and deposit $2,000 for a performance bond at the time of filing, as well as a public hearing. If those stipulations were violated, an applicant could have faced imprisonment or fines. 

The court found that Munroe Falls' ordinances were an exercise of police power in direct conflict with the state statute.

"The city's ordinances do not regulate the form and structure of local government. Instead, they prohibit -- even criminalize -- the act of drilling for oil and gas without a municipal permit," wrote Justice Judith French for the majority. "...We make no judgement as to whether other ordinances could coexist with the General Assembly's comprehensive regulatory scheme. Rather, our holding is limited to the five municipal ordinances at issue in this case."

Ohio Environmental Council attorney Nathan Johnson -- who supported Munroe Falls' arguments -- said the permitting scheme was a way for the justices to narrow their ruling without deciding on broader zoning issues.

"While it is sort of uncertain at this point, Justice O'Donnell, for example, went out of his way to suggest this is an open issue, clearly hinting that it looks like he was open to zoning," Johnson said. "I think they were intentionally circumspect. They were very careful in part because it's a big issue, and I think in part because this was an overall permitting scheme that Munroe Falls had in place."

Indeed, in his dissenting opinion, Justice Paul Pfeifer wrote that RC 1509 does "leave room for municipalities to employ zoning regulations that do not conflict with the statute." While O'Donnell wrote in his concurring opinion that nothing in RC 1509 "expressly addresses zoning or requires compatibility with local land use."

"The five ordinances under review clearly attempted to impact the drilling operation," said Calfee, Halter & Griswold's Don Fischbach, who serves as chairman of the energy and natural resources group at the Cleveland-based law firm. "If that impact is ancillary and indirect, as opposed to direct -- now what? The line between impact and non-impact -- that line has yet to be drawn."

Growing Concerns

Munroe Falls is located in Summit County, where no Utica Shale wells have been drilled or permitted. The case involved a more urban area, far removed from the state's shale boom in the rural southeastern part of the state where support has generally been stronger for the industry. Founded in the 1970s, privately-held Beck Energy primarily targets the shallower Clinton Sandstone in the state. Some of its wells are located in Cleveland suburbs, on golf courses, church properties and within the city limits of many other communities.

Munroe Falls officials could not be reached to comment for this story. It remains unclear if and when Beck plans to proceed with its operations in the city. Keller, who represented the company in the case, did not return a call for comment, saying instead in an email that "we don't want to advertise our plans," when asked if the company would proceed with its operations in the city.

Although the ruling "absolutely" applies to companies drilling the Utica, Fischbach said, it has created significant concern for conventional drillers working in urban areas.

"There is concern from that part of the industry that drills a lot of wells in what you might not consider metropolitan areas, but definitely incorporated areas," said Fischbach, who has clients in the oil and gas industry. "There's not a lot of drilling in the confines of Cleveland for example, but there are a lot of wells that have been drilled in the suburbs, predominantly vertical Clinton wells. The operators that have built a career on drilling Clinton wells, they run across municipal rules and ordinances that attempt to restrict their access to projects."

He added that the ruling would likely embolden restrictive ordinances in some parts of the state and could encourage more ballot initiatives seeking to ban oil and gas drilling within city limits. Wenger, however, said those efforts would likely fail in state courts, as they have elsewhere in the country, because their language is too vague.

Justice French put some of the onus back on the state legislature to clarify its position on ODNR's authority and the role of local zoning in oil and gas development.

"The city of Munroe Falls presents a variety of policy reasons why local governments and the state should work together, with the state controlling the details of well construction and operations and the municipalities designating which land within their borders is available for those activities," she wrote. "This is no doubt an interesting policy question, but it is one for our elected representatives in the general assembly, not the judiciary."

Sources said that could mean additional legislative efforts or more litigation. Wenger said the issue might not reach the high court again if an appeals court resolves it by reading the Munroe Falls opinion in favor of local zoning. 

Ohio Oil and Gas Association (OOGA) Executive Vice President Shawn Bennett dismissed those concerns. For now, he said, there is no worry about the issue flaring up again. He had no comment when asked if his organization would push for clearer legislation on the issue and said OOGA views the ruling as favorable.

"Unfortunately, people want to make more of the comments included in the ruling," he said. "The case law created in the Munroe Falls case strengthens our position in regards to preemption even further and more as it applies to zoning rules."

But to Fischbach and others it's more complex than that. If the issue comes before the high court again, especially with its current makeup, the justices could issue an opinion similar to those that have recently supported local zoning in other states, they agreed.

"This decision is obviously the first step of explanation and clarification. That will affect how this will be interpreted not only by the municipalities, but by the state legislature," Fischbach said. "The state may take a position of clarification with legislation if it does decide to answer these questions about a point beyond which a municipality can go.

"Where the fence is at is still subject to debate."

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