HomeMy WebLinkAboutItem 01 - Oil and Gas DrillingOIL AND GAS DRILLING
Regulations and authority.
• Barnett Shale- Expanded in known limits
• Wise County- #7 Statewide in gas
reserves
• Current drilling in Denton and Tarrant
Counties
Natural gas leases being pursued in
Eastern Dallas County
City regulation of drilling a growing trend
Jurisdictional
The Texas Railroad Commission has jurisdiction
over oil and gas wells in Texas an•, over all
persons owning or engaged in drilling or
operating such oil or gas wells. The jurisdiction
of Railroad Commission,does
prevent a mun-ic.ipal-ity from: exercising its police
power to regulate and control drilling.
TEX. NAT. RES. CODE ANN. §81.051 (Vernon
2001).
• ! • •still
lit
—Well location/spacing
— Well safety
— Well drilling and production rights
— Environmental
,MUNICIPAL P POWER
TexasIt is well settled that
under their po,lice power, not only to regulate oil and gas
development but i' totally prohibit such development.
The • cases mostoften"• for this proposition
Unger,, • Helton•
Neither of these cases, however, address whether the
ordinances complained of in Unger and Helton constitute
r. taking.
Aelton v. City of Burkburnett, 619 S.W. 2d 23 (Tex. App.
Fort Worthrefused,
Takings
Issues
occurA compensable regulatory taking can
regulation o
Mayhew v. Town of Sunnyvale, 964 S.W. 2d
389 (Tex. 1978).
Current Regulation
Chapter 49- Zoning Ordinance
Special Use Permit required for gas and
oil drilling and production
Only allowed in nonresidential districts-
• Status quo- Zoning regulation via SUP.
• Affirm compliance with RRC requirements.
• Permitting.
• Location.
S afety.
Application/permit fees.
Alk
e 'Argyle, Keller,
i Westlake
le Fort and Haslet
The Texas •.• Commission has primary
responsibility to regulate oil and gas drilling.
' City I legal I• to also regulate • I •
• a • •:
* Municipal regulation • • •' ranging.
Thank You. for Your Time
Any Questions?
BOYLE & LOWRY, L.L.P. ATTORNEYS AND COUNSELORS
4201 WINGREN, SUITE 108
NMMO IRVING, TEXAS 75062-2763
(972) 650-7100 telephone
(972) 650-7105telecopier
www.boyle-lowry.com
DATE:. . October 11, 2005
TO: Mayor William D. Tate and the City of Grapevine City Council
FROM: John F. Boyle, Jr., City Attorney
Matthew C. G. Boyle, Assistant City Attorney
RE: .. Municipal Regulation of Oil and Gas Development
I. JURISDICTIONAL CONTROL
The Texas Railroad Commission has jurisdiction over all oil and gas wells in
Texas and over all persons owning or engaged in drilling or operating such oil or gas
wells.' The jurisdiction of the Railroad Commission, however, does not prevent a
municipality from exercising its police power to regulate and control drilling.
In KLEPAK V: HUMBLE OIL & REFINING, the City of Tomball adopted an
ordinance that gave the city exclusive authority under its police power to regulate and
control the drilling of oil and gas wells within the city, that divided the city into "drilling
blocks," that restricted drilling to one well per block, and that required a city -issued
permit. Two years later Henry Klepak obtained a permit from the Railroad Commission
to drill within the city on lots that were .not within any of the drilling blocks designated
by the ordinance. Klepak challenged the ordinance on the grounds, among others, that
the Railroad Commission was the sole source of any authority to drill. The trial court
dismissed.the suit and the court of appeals affirmed, holding:
":here is no dispute — not could there properly be under the settled law — that the
Railroad Commission ofTexas has authority under the statute conferring -that duty
upon 'it to regular the production of oil and gas within this state, and to issue its
permits accordingly." 3
The Court continued:
"The Legislature — in so delegating ... authority to the Railroad Commission — did
not thereby intend, to nor accomplish the repeal of the fundamental law thereof, as
'TEX. NAT. RES. CODB ANN. §81.051 (Vernon 2001).
2 Klepak v. Humble Oil & Refining, 177 S.W. 2d 215 (Tex. App. — Galveston 1944, writ refused, w.o.m.).
' Id at 217.
well as subsequently, existing, that municipalities in Texas have, under the police
power, authority to regulate the drilling for and production of oil and gas within
their corporate limits, when acting for the protection of their citizens and the
property within their limits, looking to the preservation of good government,
peace, and order therein. ,4
In UNGER V. STATE OF TEXAS,' the City of Burkburnett, a home -rule city,
adopted Ordinance No.'309 that required a drilling permit within the city limits. Unger
drilled an oil well without obtaining a permit and was convicted and fined for violating
the ordinance. The court of appeals upheld Unger's conviction and held that the city had
thefull authority, under its police power to regulate the drilling of oil wells within the
city and that the ordinance was a valid exercise of such police power.
In both Klepak and Unger, the courts upheld the authority of the cities to regulate
oil and gas development within their city limits; and in Unger, the court frequently
referred to the city's status as "home -rule." Home -rule cities have full authority of local
self-goverriment,8 limited only. by their charter, estate law, and the Texas Constitution.
Cities, however, have broad authority under the Texas Local Government Code to adopt
ordinances.9
II. MUNICIPAL POLICE POWER
It is well settled that Texas cities have the authority, under their police power, not
only to regulate oil and gas development but to totally prohibit such development. The
two cases most often cited (particularly by attorneys representing cities) for this
proposition are Unger v. State, supra and Helton v. City of Burkburnett1Q Neither of these
cases, however, address whether the ordinances complained of in Unger and Helton
constitute a taking.
In Helton v: City of Burkburnett, Robert Helton wanted to drill an oil well within
a relatively undeveloped portion of the City. The ordinance provided, in relevant part,
that the City' Commissioners had the authority to refuse any permit to drill a well "where
by reason of such particular location and the character and value of the permanent
improvements already etected on or adjacent to the particular location in question, for
school, hospital, park, civic purposes, health reasons, safety reasons, or any of them
where the drilling .of such wells on such particular location might be injurious or be a
disadvantageto the city or its inhabitants as a whole or to a substantial number of its
inhabitants or would not promote orderly growth and development to the city.""' The
court concluded that "the ordinance merely provided rules facilitating the orderly and
4 ra.
s Unger v. State, 629 S.W. 3d 811 (Tex. App. — Fort Worth 1982, petition refused).
6Iat 812. '
Id at 813.
8 Texas Local Government Code, Section 51.072.
9 Texas Local Government Code; Section 51.012 (authority of Type A general -law cities), Section 51.032.
10 Helton y, City of Burkburnett, 619. S.W. 2d 23 (Tex. App. — Fort Worth 1981, writ refused, n.r.e.).
uldat24.
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harmonious development of both oil exploration and city growth." 12 But even if there
had been a deprivation of Helton's rights, the court held that "the deprivation of
individual rights cannot prevent the operation of the police power, once it is shown that
its exercise is within the meaning of due process of law. ,13
In Unger, City Ordinance No. 309 was challenged by Unger on the grounds,
among others, that the city had no police power to prohibit drilling. The city asserted that
under its police power it had full authority not only to regulate but also to prohibit the
drilling of wells within the city. 14 The court of appeals agreed with the city and held that
the ordinance was a valid exercise of the police power of the city."
The fact that a city ordinance regulating or prohibiting oil and gas development
constitutes a valid exercise of the police power that does not necessarily defeat a claim
that the ordinance constitutes a taking or inverse condemnation.
In Shelby Operating Company v. City of Waskom, 964 S.W. 2d 75, Texarkana
Court of Appeals, 1997, the plaintiff presented an interesting challenge to the city's right
to retroactively change its ordinances. Shelby had a 1945 mineral lease that allowed it to
drill within 200 feet of any building then in existence on property owned by Aztec
Manufacturing Company. In 1981, the City of Waskom annexed the property in which
Aztec Manufacturing property was located. In 1986, the City of Waskom asked for an
ordinance prohibiting construction within 500 feet of a building without the express
permission of the landowner. In 1996, Shelby sought a permit to drill more than 200 feet
from a structure on the Aztec property, but less than 500 feet to such structure. Shelby
argued that it need not obtain the consent of Aztec because it was by contract given the
right to drill within 200 feet of a structure owned by the circus owner, Aztec. The City of
Waskom, after such application was pending, amended its ordinance further to not allow
any drilling less than 500 feet of a structure even if consent of the owner was first
obtained, Shelby was unable to persuade the reviewing courts of its "vested rights" to
drill within 200 feet of the Aztec building as provided by the 1945 lease. The Court of
Appeals citing Unger, supra, found that the development of oil and gas within the city
limits is clearly an area subject to regulation under the powers given to municipalities.
Maguire Oil Co. v. City of Houston, 69 S.W.3d 350 (Texarkana 2002), writ ref d.;
places some limits upon the holding in the Shelby Operating Company decision, supra.
In the Maguire Oil Co. decision, the city issued to the plaintiff three permits which vested
the Plaintiff with the right to drill wells within 1;000 feet of Lake Houston. Plaintiff, in
good faith reliance of the issuance of such permits, spent nearly $200,000 in preparing its
sites to drill in the areas provided in the permits issued by the City of Houston. The City
of Houston, for reasons it claimed public welfare, placed a stop order on the drilling
activities of Macguire Oil Co. The City of Houston, based on the statements of the
official that issued the stop order, obtained a Summary Judgment at the Trial Court level.
12,Id.
13 Id.
14 Unger at 812.
1s Id.
3
The Court of Appeals, however, found that there were elements in the actions of the City
of Houston that brought about a promissory estoppel that precluded the affirmance of the
City of Houston's Summary Judgment. The Court of Appeals found that unless the City
of Houston could establish that plaintiff's wells were a genuine "threat" to the public
welfare, it could not stop the work that was initiated after the issuance of its permits. The
record in this cause indicates that the City of Houston's enforcement of its 1,000 foot
ordinance was inconsistent and the record indicated that the City of Houston allowed and
permitted a drilling of several other wells within the 1,000 foot limitations of the
applicable ordinance. The Court of Appeals did make clear that estoppel will interfere
with a City's exercise of governmental functions only in "exceptional cases" where the
circumstances "clearly demand its application." 69 S.W.2d 350, 365. This decision does
not bar the enforcement activities of a municipality after the issuance of its permits, but
does put some limits to the extent to which it can revoke and/or limit its enforcement
activities after its issuance of a permit.
III. COMPENSABLE REGULATORY TAKINGS.
The standard for compensable regulatory takings in Texas is set forth in detail by
the Texas Supreme Court in Mayhew, 1964 SW 2d 922 (Tex, 1998). A compensable
regulatory taking can occur if (i) if a regulation does not substantially advance a
legitimate governmental purpose, (ii) if the regulation denies the owner of all
economically viable use of the property, or (iii) if the regulation unreasonably interferes
with the owner's use and enjoyment of the property. 16
A. WHAT IS A LEGITIMATE GOVERNMENTAL INTEREST?
A compensable regulatory taking will occur if a property regulation does
not substantially advance a GOVERNMENTAL INTEREST. The
standard requires that the ordinance substantially advance the legitimate
state interest sought to be achieved rather than merely analyzing whether
the government could rationally have decided that the measure achieved a
legitimate objective. 17 The application of this standard to municipal oil
and gas regulations makes for an interesting academic discussion, but the
probability that a regulation will fail to meet the "substantially advance"
standard is remote.
B. A LOSS OF ALL ECONOMICALLY VIABLE USE.
A compensable regulatory taking can also occur when governmental
restrictions deny landowners ALL ECONOMICALLY VIABLE USE of
their property. According to the Court in Mayhew, "a restriction denies
the landowner all economically viable use of the property or totally
destroys the value of the property if the restriction renders the property
16 Mayhew v. Town of Sunnyvale, 964 S.W. 2d 389 (Tex. 1978).
17 Mayhew at 935.
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"worthless."18 In Mayhew there are two factors to be considered in
determining whether an unreasonable interference has occurred. These
factors are "the economic impact of the regulation and the extent to which
the regulation interferes with distinct investment -backed expectations."19
The first factor, economic impact, "merely compares the value that has
been taken from the property with the value that remains in the property,"
and "the loss of anticipated gains or potential future profits is not usually
considered in analyzing this factor."20 The second factor, the investment -
backed expectations of the owner, is primarily based on "the existing and
permitted uses of the property. The courts have traditionally looked to the
existing use of the property as a basis for determining the extent of
interference with the owner's primary expectation concerning the use of
the parcel .,,21
C. UNREASONABLE INTERFERENCE WITH USE AND ENJOYMENT.
Unreasonable interference with use and enjoyment has been determined in
the Sheffield v. City of Glenn Heights decision decided by the Texas
Supreme Court in March, 2004.
In the mid 1990's, the City adopted a new land use plan and zoning
regulation, one purpose of which was to increase the minimum residential
lot sizes; however, the city did not rezone PD 10 or any of the other 13
- planned development zoning district in the city.
In 1995, Gary Sheffield, plaintiff, contracted to purchase the undeveloped
land .within then existing PD -10. None of the city representatives
expressed any objection or reservation to Mr. Sheffield's plan. Mr.
Sheffield wrote the city just days prior to his scheduled closing requesting
that he be advised of any plans to rezone his PD -10. Three days after the
closing, the city met in executive session to discuss a moratorium and
down -zoning and three days after the executive session, the city imposed a
moratorium which prevented Mr. Sheffield's development of his existing
PD -10 zoning. Shortly after the moratorium was imposed, the city
consultant presented a plan to downzone PD -10 to square foot lots
from its prior 6,500 square foot lots.. This down -zoning, without a doubt,
reduced the value of the PD property by as much as 50%. The trial court
rendered judgment for Sheffield for some slightly less than one-half
million dollars for down -zoning damages. The Court of Appeals affirmed
the award of the damage on the down -zoning and remanded the case for
determination on damages on Sheffield's moratorium takings claim. The
18 Id
19 Id.
20 Id at 936.
21 Id.
Supreme Court, however, reversed and held that Sheffield could not
recover damages for either the down -zoning or the moratorium.
While the Supreme Court acknowledged that the impact of the down -
zoning was "unquestionably severe;" however, "it did not approach a
taking." The Supreme Court in its review of the actions of the City of
Glenn Heights, pointed out that it is more important that, according to the
jury verdict, the property was still worth four times what it cost, despite
the rezoning by the City of Glenn Heights. The Supreme Court found that
the rezoning did not cause a compensable taking.
IV. OPPOSING VIEWS.
Although controlling Texas law on the subject of compensable regulatory takings
of mineral interests based on the denial of all economical viable use remains to be
written, there is one case in which the oil industry might point to indicate that a possible
recovery should be obtained if a municipality denies all rights to enjoy a mineral lease.
The Vulcan Materials Company v. City of Tehuacana, 5th Cir. May 21, 2004, found a
recovery when the involved city prohibited all mining of limestone on four tracts owned
by Vulcan. The ordinance in that case denied Vulcan of all value of its property interests
which had as its sole purpose the mining of limestone from approximately 298 acres that
included multiple, contiguous acres of land. The Fifth Circuit Court of Appeals found
that this was a compensable taking. The Court, however, did remand the case for a trial
on whether or not Vulcan's proposed operation of the quarry constituted a nuisance under
Texas law under which the city might well bring action to abate or stop such use.
V. HARMFUL OR NOXIOUS USES — HAS NO PROTECTED PROPERTY
RIGHT.
When a regulation is designed to prevent "harmful or noxious uses" of property
akin to public nuisances, federal law provides that no compensation is owing under a
takings claim regardless of the effect of the regulation on the value of the property. 22 No
compensation is owed if the regulation simply "makes explicit what already inheres in
the title itself, in the restrictions that background principles of the state's law of property
and nuisance already place upon land ownership."23 ,If the regulated activity is a nuisance
at common law, the owner simply does not have a property right to the activity.
Texas cities have the statutory authority under the Texas Local Government Code
to regulate nuisances.za
22 Lucas v. South Carolina Coastal Council, 112 S. Ct. 2886,2887 (1992).
21 Id at 2888.
24 Texas Local Government Code, Chapter 217, Municipal Regulation of Nuisances and Disorderly
Conduct.
0.
It must be pointed out one Texas court has held that drilling an oil well is not a
nuisance per se and, based on the specific facts in the case, was not a nuisance in fact.
See Domengeaux v. Kirkwood Company 25
VI. CONCLUSIONS.
l: Cities (both general -law and home -rule) have the police power and
statutory authority to regulate and prohibit oil and gas development within
their corporate limits.
2. Home -rule cities have additional statutory authority to regulate oil and gas
development within their ETJ for the protection of watersheds. City
regulation of oil and gas development is not preempted by the jurisdiction
of the Texas Railroad Commission.
3. Cities (both general -law and home -rule) have the statutory authority to
regulate and prohibit nuisances within their corporate limits. Home -rule
cities have the statutory authority to regulate and prohibit nuisance within
5,000 feet of their corporate limits.
4. Oil and gas development is not a nuisance per se; however, there may be
facts and circumstances under which such development would be a
nuisance in fact.
5. A compensable regulatory taking is highly unlikely based on a claim that
the regulation is not substantially related to a legitimate state objective or
on a claim that the regulation unreasonably interferes with use and
enjoyment of property.
6. A compensable regulatory taking will likely be based on a claim that a
regulation denies all economically -viable use; i.e., totally destroys the
value of the property or renders the property worthless. No compensable
taking occurs, however, if the regulation regulates or prohibits a harmful
or noxious use (a nuisance based on background principles of Texas law).
7. A claim for compensable regulatory taking cannot be pursued until there is
a "final decision" after all variances, appeals, or other forms of relief have
been exhausted which would give the city an opportunity to abate any
alleged taking.
8. A city should grant permits for drilling only when it finds that the issuance
is clear and consistent with the application and enforcements of its
ordinances. No drilling permit should be granted until there has been a
review that gives due and fair consideration of the safety and welfare of
the public prior to such issuance.
25 Domengeaux v. Kirkwood Company, 297 S.W. 2d 748 (Tex. App. — San Antonio 1956)
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