In a decision that could further torpedo shale development in New York, the state's highest court ruled Monday that local governments can enact bans on oil and gas activities, including hydraulic fracturing (fracking), because the statewide oil and gas mining law doesn't trump municipalities' zoning powers.

In a 5-2 decision, the New York State Court of Appeals ruled in favor of the towns of Dryden and Middlefield, two municipalities in the state's Southern Tier region atop the Marcellus Shale that banned oil and gas activities. At the heart of the decision in both cases -- Norse Energy Corp. USA v. Town of Dryden (No. 130) and Cooperstown Holstein Corp. (CHC) v. Town of Middlefield (No. 131) -- was the wording of the state's Oil, Gas and Solution Mining Law (OGSML).

Specifically, OGSML contains a supersession clause that stipulates its provisions "shall supersede all local laws or ordinances relating to the regulation of the oil, gas and solution mining industries; but shall not supersede local government jurisdiction over local roads of the rights of local governments under the real property tax law."

In the majority opinion, Judge Victoria Graffeo wrote that Norse and CHC were seeking a broad interpretation of the supersession clause.

"In light of [its] plain language, its place within the OGSML's framework and the legislative background, we cannot say that the supersession clause -- added long before the current debate over high-volume hydrofracking and horizontal drilling ignited -- evinces a clear expression of preemptive intent. The zoning laws of Dryden and Middlefield are therefore valid."

Chief Judge Jonathan Lippman and Judges Susan Read, Jenny Rivera and Sheila Abdus-Salaam concurred. Judges Eugene Pigott and Robert Smith dissented.

"The zoning ordinances of Dryden and Middlefield do more [than] just regulate land use, they regulate oil, gas and solution mining industries under the pretext of zoning," Pigott wrote in his dissenting opinion. "They purport to regulate the oil, gas and solution mining activities within the respective towns, creating a blanket ban on an entire industry without specifying the zones where such uses are prohibited.

"In light of the language of the zoning ordinances at issue -- which go into great detail concerning the prohibitions against the storage of gas, petroleum exploration and production materials and equipment in the respective towns -- it is evident that they go above and beyond zoning and, instead, regulate those industries, which is exclusively within the purview of the Department of Environmental Conservation [DEC]. In this fashion, prohibition of certain activities is, in effect, regulation.

"Where zoning ordinances encroach upon the DEC's regulatory authority and extend beyond the municipality's power to regulate land use generally, the ordinances have run afoul of [the supersession clause]."

Thomas West -- of The West Firm pllc in Albany, NY, who represented Norse in the Dryden case -- told NGI's Shale Daily on Monday that he thought the majority's "construct is right, they just don't see the value of protecting the correlative rights of mineral owners the way we do. But that's their prerogative as the high court in this state to make those decisions and so that is the final word."

West said he thought the cases would have ruled in the industry's favor by a 4-3 vote.

"I thought it would have been a little closer, but obviously my count was wrong," West said. "I had two of them right but two of them wrong, including the author of the decision. But it's a straightforward issue of law, and different people are going to see it differently. Obviously the majority sided with the appellate division both in terms of the result and the analysis following the mining decisions that we just don't think are relevant.

"The big losers are the landowners in New York State, particularly the landowners who end up in towns where their mineral resources get stranded by this type of result. They're the ones that lose out. Industry has already fled from the state with the six-year moratorium on high-volume hydraulic fracturing [HVHF]. There aren't many industry players that are going to be impacted to any great extent at this point in time, but it's the landowners that are the big losers in this decision."

Brad Gill, executive director of the Independent Oil and Gas Association of New York (IOGA), said the ruling could have a "chilling effect" on the oil and gas industry's investment in the state.

"Obviously we're disappointed that the state's highest court has rendered a decision that has the potential to impact not only the unconventional industry but also the conventional operators in New York," Gill said Monday. "We've got operators who want permits to drill, explore and produce natural gas and oil in various areas. And now, given this decision, municipalities have the ability to block that.

"I hate to have readers reading more negative news coming out of New York, but I have to say it like it is. This will have a chilling effect on investments that people have considered in New York. We've got many of our member companies who have already made the decision to leave New York and I'm sure hearing this they're not looking back at all on their decision. I'm very concerned about the patchwork of green lights and red lights that an operator would have to navigate through in New York to put a lease position together and to operate effectively."

Graffeo said lawmakers in the New York State Legislature could change the OGSML to prohibit municipalities from banning oil and gas activities.

"At the heart of these cases lies the relationship between the state and its local government subdivisions, and their respective exercise of legislative power," Graffeo said. "These appeals are not about whether [fracking] is beneficial or detrimental to the economy, environment or energy needs of New York, and we pass no judgment on its merits. These are major policy questions for the coordinate branches of government to resolve.

"The discrete issue before us, and the only one we resolve today, is whether the state legislature eliminated the home rule capacity of municipalities to pass zoning laws that exclude oil, gas and [fracking] activities in order to preserve the existing character of their communities. There is no dispute that the state legislature has this right if it chooses to exercise it."

But Gill said it was unlikely that the law would be changed anytime soon. Democrats, who generally oppose shale development, hold a 99-49 edge in the state Assembly. Meanwhile, Republicans hold 29 seats in the 63-member Senate, compared to 27 Democrats. Five dissident Democrats -- who form a bloc known as the Independent Democratic Caucus (IDC) -- and Sen. Simcha Felder (D-Brooklyn) also caucus with the GOP, giving Republicans a 35-26 edge in the chamber.

Gill said state Sen. Jeffrey Klein (D-Bronx), who chairs the IDC, had recently threatened to have the bloc caucus with the Democrats.

"Certainly we could run the risk of losing Republican control in our Senate this fall," Gill said. "If that happened, then you're not going to see a legislative fix to this judicial decision. The [oil and gas] industry has some strong allies in the Senate who certainly could push for this, but it still takes two houses to pass a bill."

The saga in Dryden began in 2006 when Norse, through its predecessors, began acquiring oil and gas leases from landowners in the town. But in August 2011, the town board unanimously voted to amend its zoning ordinance to ban all oil and gas exploration, extraction and storage activities. It also invalidated any oil and gas permits issued by state or federal regulators. Anschutz Exploration Corp. (AEC) sued Dryden that year over the ordinance, but a Tompkins County judge sided with the town in February 2012. Norse replaced AEC as the lead plaintiff in October 2012 (see Shale DailyOct. 5, 2012Feb. 23, 2012Sept. 21, 2011).

The Middlefield case went along a similar track. In 2007, CHC, a dairy operation, leased 400 acres for natural gas development. Four years later, Middlefield's town board voted unanimously to amend its master plan by adopting a zoning provision that classified oil and gas drilling as a heavy industrial use, effectively banning it. CHC sued the town in September 2011, but an Otsego County judge ruled in the town's favor the following February (see Shale DailyFeb. 29, 2012Sept. 19, 2011).

Norse and CHC both appealed, but got the same result. An appellate court ruled unanimously in favor of the towns in May 2013 (see Shale DailyMay 6, 2013Oct. 5, 2012).

The Norse case took an added twist after its subsidiaries entered Chapter 7 bankruptcy last October (see Shale Daily, Oct. 18, 2013). Norse -- which holds oil and gas leases for about 130,000 net acres in the state's portion of the Marcellus and Utica shales -- sued Gov. Andrew Cuomo and other state officials in the state's Supreme Court (see Shale DailyDec. 19, 2013) in an attempt to compel the DEC to release of a supplemental generic environmental impact statement (SGEIS) on HVHF.

Release of the SGEIS could give value to the leases as part of Norse's bankruptcy (see Shale Daily, July 31, 2013). Last April, the court-appointed trustee in the Norse bankruptcy case filed a motion to assume control of two of Norse's leases in Dryden (see Shale DailyApril 25).