Moratorium Sparks Shut Off of Existing Gas Wells
In an apparent first in New York State, a natural gas production company has shut off its existing production wells in response to a town’s enactment of a moratorium on the development of natural gas facilities. On July 6, 2012, eight days after the Town of Avon, New York enacted its 12-month moratorium, Lenape Resources Inc. advised the landowners in the Town who lease their property to Lenape that it would begin “shutting-in” Lenape’s approximately 16 existing vertical production wells and their supporting gathering lines “effective immediately.”
In doing so, Lenape invoked the force majeure provision in its gas leases covering approximately 5,050 acres in the Town that allow Lenape “to suspend performance of its lease obligations due to Government acts.” Those suspended obligations include the payment in the aggregate of approximately $13,000 a year in gas royalties and the provision of $65,000 a year in free gas. In addition, as a consequence of suspending its natural gas production, Lenape had to suspend the sale of natural gas to an unspecified number of paying customers located in Avon, including a large Kraft Food manufacturing facility and the Town’s highway garage. Presumably, the taxpayers of Avon will ultimately bear the financial burden associated with Lenape’s decision.
Lenape’s existing vertical wells are operated under permits issued by the New York State Department of Environmental Conservation (“NYSDEC”), with the earliest ones dating back to 1983. Although Avon’s moratorium contains a provision intended to exempt the production from Lenape’s existing gas wells, Lenape concluded that the law may nevertheless still “affect Lenape’s ability to conduct operations… within the Town of Avon,” due among other things to case law indicating that Article 23 of the Environmental Conservation Law (“ECL”) preempts all local laws other than town-wide bans on natural gas production. Therefore, Lenape stated that it was shutting in its Avon operations in order to consult with state regulatory agencies, including the New York State Attorney General’s Office and NYSDEC on the validity of the moratorium and to evaluate internally the moratorium’s potential affect on Lenape’s existing operations.
A similar broad moratorium (with a similarly worded provision that purports to exempt existing wells) was adopted by the Town of Caledonia Town Board in June of this year. Caledonia adjoins Avon, and Lenape has approximately 48 active wells there. Interestingly, Lenape has thus far declined to suspend performance under those leases as it did in Avon while it seeks direction from its counsel and various state agencies. In addition, the adjoining Town of York where Lenape has approximately 41 active wells has proposed a similar moratorium. On July 24, 2012, the York Town Board held a public hearing on the proposed moratorium and is currently considering public comments before proceeding further.
On July 26, 2012, Lenape sent a letter to the Commissioner of the NYSDEC in which Lenape claims that the towns of Avon, Caledonia and York are violating, or threatening to violate, Article 23 of the Environmental Conservation Law (“ECL”), which establishes the state regulatory and permitting regime for natural gas facilities. That statute provides that the Article 23 regime shall “supersede all local laws or ordinances relating to the regulation of the… gas… mining industr[y]”, with the exception of local jurisdiction over local roads and real property taxes. ECL §23-0303(2). Earlier this year, two trial level courts in Central New York ruled that town-wide bans on natural gas drilling and related activities are not preempted by this rule. Both decisions are under appeal. See Hiscock & Barclay, LLP Legal Alert, “Did the Dryden and Middlefield Courts Get it Wrong?” March 1, 2012 at http://www.hblaw.com/alerts/Did-the-Dryden-and-Middlefield-Courts-Get-It-Wrong-03-01-2012.
Lenape’s position is that the two courts did indeed get it wrong and, therefore, its letter requests that the NYSDEC: (1) advise the Towns of Avon, Caledonia and York that their actions banning the exploration and extraction of natural gas are illegal and unenforceable as a result of being preempted by Article 23; (2) affirm to Lenape that the continued operation of its existing wells in the towns is lawful and permitted; and (3) take legal action to extinguish the Avon law as being in conflict with Article 23.
To date, Lenape appears to be the only natural gas producer in New York State to cease operating its existing gas wells in a municipality that has enacted a moratorium or outright ban on the development of new natural gas wells. While Lenape’s actions appear measured and may be calculated, at least partially, to pressure the NYSDEC into taking a position on the preemption issues noted above, the NYSDEC may be unwilling to take a legal position at this point. Published news stories quoted a spokeswoman for NYSDEC as saying that the “scope of the preemption must be left to the courts.”
Until the courts do decide the scope of preemption, or NYSDEC relents and adopts an official position on preemption, Lenape’s decision to shut in its production in Avon in response to the moratorium has the potential to be replicated by other existing producers in other communities that enact moratoriums aimed at forestalling the development of new or expanded high-yield wells using the newer high volume horizontal hydrofracturing method.
Hiscock & Barclay LLP has extensive experience in successfully challenging regulatory over reach if there is a particular state regulation or local zoning ordinance about which you have a question. If you require further information regarding the issues presented in this article, please contact Thomas Walsh, Chair of the Municipal & Land Use practice area, at 585-295-4414 or email@example.com.