The Battle over Local Control Heats up Again as Thornton’s Oil and Gas Regulations Challenged in Court

Six weeks following the City of Thornton’s adoption of strict new regulations on oil and gas operations, the Colorado Oil and Gas Association (“COGA”) and the American Petroleum Institute (“API”) have filed suit, in what looks to be just the latest clash in Colorado’s struggle over who manages oil and gas in the state – the Colorado Oil and Gas Conservation Commission (“COGCC”) or cities and towns?

In August, after what COGA described as “an extremely limited stakeholder process,” Thornton’s City Council adopted Ordinance No. 3477 by a 7-2 vote. The ordinance provides for much stricter standards than the rules of the COGCC. Some of the differences are highlighted below:

   Thornton's Ordinance COGCC Rules
Setback from Buildings/Lots Well pad must be at least 750 feet from existing or planned buildings and existing or platted residential lots (Section 18-881.(a)(1), (2)) Well must be at least 500 feet from a Building Unit (Rule 604.a.(1))
Setback from Water Bodies Well pad must be at least 500 feet from the ordinary High Water Mark (HWM) or the edge of the bank of any irrigation or lateral ditch (Section 18-881.(a)(3)) Setbacks only required for Drilling, Completion, Production and Storage Operations within Public Water System Surface Water Supply Areas (Rule 317B)
Surface Disturbance Multiple wells proposed by Operator must be located on a multi-well pad
(Section 18-881.(b)(1))
Operators must consolidate wells on multi-well pads only in Designated Setback Locations and only where technologically feasible and economically practicable (Rule 604.c.(2)E.i.)
Liability Insurance Operator must maintain general liability insurance of $5 million per occurrence (Section 18-881.(y)) Operator must maintain general liability insurance of $1 million per occurrence (Rule 708)
Flowlines  Abandoned flowlines must be removed (Section 18-881.(c)(1))  Flowlines may be abandoned in place if disconnected, buried, and permanently sealed (Rule 1103)

 

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State or Local Control for Colorado?

In September, the Colorado Supreme Court agreed to hear two cases that have the potential to settle the state/local battle over fracking regulations. The conflict roots back to 2013, when voters in Longmont passed a ban on hydraulic fracturing, and Fort Collins passed a five-year moratorium. In response, the Colorado Oil and Gas Association (“COGA”) filed lawsuits challenging the ban and moratorium, arguing that they are illegal because case law and regulations give only the state the right to regulate drilling. The legal issue is “preemption” – when state and local laws conflict has the state “preempted” the area of oil and gas regulation invalidating local laws in conflict?

Local communities across the state have exerted limited control over oil and gas operations within their boundaries for decades under their “health, safety and welfare” authority. But, when it comes to the permissibility of fracking, which is essential to the majority of oil and gas development in the state, COGA asserts that Colorado’s state statutes and Colorado Oil and Gas Conservation Commission (“COGCC”) regulation should prevail. The COGCC estimates that more than 90% of the oil and gas wells in that state currently utilize fracking techniques. Indeed, fracking has permitted economic recovery of reserves that were previously too expensive to produce through traditional drilling techniques.

In response to COGA’s challenges, lower courts in Boulder and Larimer counties overturned the ban and the moratorium. Both courts found that the regulation of fracking is under control of COGCC, thereby preempting any local rules. Both cases moved into the Colorado Court of Appeals, where Longmont and Fort Collins asked to have the ban and moratorium restored. In a rare move, the Court of Appeals requested that the lawsuits bypass the intermediary court: “In light of the public interest in and the importance of the subject matter of these cases and of the legal issues implicated, they would seem to be cases as to which certiorari review by the Supreme Court is eminently appropriate.” On Wednesday, December 9, 2015 attorneys argued both cases in front of the Colorado Supreme Court.

The Colorado Supreme Court has already spoken on the preemptive scope of the Colorado Oil and Gas Conservation Act in a pair of decisions from the early 1990s: Voss v. Lundvall Bros., 830 P.2d 1061 (Colo. 1992); Bd. of Cnty. Comm’rs v. Bowen/Edwards Assocs., Inc., 830 P.2d 1045 (Colo. 1992). These decisions, and the preemption tests provided by each, proved to be the focus of both arguments. Longmont v. COGA, 15SC667, and Ft. Collins v. COGA, 15SC668, essentially differ only by type of regulation. The question for both boils down to what type of preemption analysis the courts must employ.

The cities argue operational conflict is the appropriate test:  Does the local regulation materially impede the efficient and economic production of oil and gas consistent with health, safety, and welfare of citizens? Using the operational conflict analysis, the Colorado Supreme Court in Bowen/Edwards Associates, held that the Colorado Oil and Gas Conservation Act, C.R.S. §34-60-101, et seq. did not entirely preempt a county from exercising its land use authority over any and all aspects of oil and gas development and operations in unincorporated areas.

At oral argument, the cities attempted to distinguish fracking from overall oil and gas operations, arguing that gas production can be achieved as efficiently by other methods including underbalanced production. The cities want the courts to apply the operational conflict analysis so that, on remand, the lower court will have to make certain factual conclusions about fracking including whether valid development alternatives exist.

COGA believes the defining case is Voss. Voss and its progeny set out Colorado’s implied preemption test for state/local regulation issues. There, the Colorado Supreme Court struck down a Greeley home rule ordinance completely banning oil and gas development within the city limits. The court determined that the ordinance was inconsistent with City and County of Denver v. State of Colorado, 788 P.2d 764 (Colo. 1990), which held that, in matters of mixed local and state concern, a home rule municipal ordinance could co-exist with a statute only so long as there was no conflict between the ordinance and the statute. The Voss Court noted that should there be such a conflict, it would be the state statute that would supersede the conflicting local ordinance.

The conflict described in Voss came before the Supreme Court in Colorado Min. Ass'n v. Bd. of County Com'rs of Summit County, 199 P.3d 718 (Colo. 2009). Facing a similar question on which preemption analysis applied, the Court held that Summit County's ordinance banning the use of cyanide or other chemicals in heap or vat leach mining operations for all zoning districts in the county was impliedly preempted by Mined Land Reclamation Act (“MLRA”). Because the general assembly had identified the field of chemical use in mining operations for mineral processing as a matter of significant and dominant state interest, and because the ordinance impeded MLRA's goal of encouraging mineral development while protecting human health and the environment, the court found it to be inconsistent with the general assembly's decision to authorize mining operations that use chemicals for extraction. Thus, the implied preemption analysis resolved the conflict between the MLRA and the ordinance in favor of the state law.

COGA emphasized Summit County at oral argument, analogizing the cyanide situation to the fracking cases in front of the Court, explaining that state statutes regulating an industry dominate when in conflict with local bans or limitations on “techniques” of the industry. As such, COGA argued that under the correct test of implied preemption, summary judgment is always the proper remedy and lower courts need not reach the facts of the case.

Ultimately, the dispute comes down to a supremacy battle involving the most significant energy innovation of the century. Colorado’s high court ruling on the cases will determine what preemption test applies, and consequently whether under certain facts local governments can limit or ban hydraulic fracturing rather than deferring to oil and gas regulation by the state agency.

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