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he past two years have seen major shots fired in abattle over how much regulatory influence a municipalitymay exert over oil and gas development in its ownbackyard. The case of Denton is representative of a

nationwide struggle over the power to regulate—or, insome cases, prevent—oil and gas development. On oneside, communities concerned with the environmental,safety, health, and aesthetic impacts of oil and gas activityhave become bolder about asserting their autonomy. Onthe other side, industry players and private mineral ownersseek to protect their investments and operate independently.The state has so far come to be on the industry’s side.

Regulatory Scheme and Denton’s Fracking BanThe Texas Constitution provides that “home-rule” munic-

ipalities may pass local ordinances as long as they are notinconsistent with the general laws of the state.1 The TexasSupreme Court has held that cities’ zoning ordinances may bepermissible even if they affect private-property rights as longas they are not arbitrary and are substantially related to pro-tecting their citizens’ health, safety, and general welfare.2 Buta state agency, the Texas Railroad Commission, governs thepermitting, drilling, producing, and other oversight of oil andgas wells in Texas.3 Put broadly, under this scheme the stateregulates the minerals, and the local government regulatesthe surface and protects local health and safety. But what hap-pens when municipal regulations that are ostensibly aimed at

the surface estate or public safety actually impose on the Rail-road Commission’s governance of the minerals? This is thequestion that many Texas cities have been asking—and in2015 the Legislature answered loudly.

To understand this state-city tension, consider the tumul-tuous past 18 months for Denton. Like most urban Texascities, Denton had little concern over oil and gas developmentfor most of its history. There was no reason to believe oil or gascould be produced there. But that changed after operatorsbegan using innovative stimulation techniques to maximizerecovery from shale formations and employing horizontaldrilling to access gas under previously inaccessible land. Overthe past 20 years, hydraulic fracturing, or fracking, became theindustry standard for producing natural gas from formationssuch as the Barnett Shale in North Texas. Without fracking,the Barnett Shale would have remained undeveloped.

By the mid-2000s, many Barnett Shale communitiesbegan enacting ordinances to retain some control over thisnew industry activity. Denton was among these cities, and itadopted its first drilling ordinance to require local permittingand to provide for minimum required distances (“setbacks”)between drilling locations and protected-use areas like resi-dences, schools, and hospitals.4 These protections were ade-quate for the first Barnett wells, most of which were on thecity’s outskirts. But by 2009, as drilling crept closer to citycenters, opposition developed with questions arising aboutthe health, safety, and environmental impacts of fracking.

Too Close for Comfort?BY WALKER FRIEDMAN AND JACK PRICE

T

The fight between local and state governmentsover fracking bans and oil and gas development.

ENERGY

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Local activist opposition groups negotiated with the city,and the ordinance was amended to increase the setbacks to1,000 feet.5 A 2013 amendment further extended setbacksto 1,200 feet and prohibited many operational practicesbased on concerns about negative environmental impact.6

Still, many Denton citizens were unsatisfied and believedexceptions swallowed up the new rules. State law grandfatheredold well sites, and primitive early permits allowed perpetualnew drilling on existing sites as close as 200 feet from resi-dences.7 The city became divided more sharply between pro-and anti-drilling factions. Finally, in May 2014, the citycouncil declared a moratorium on issuing any new drillingpermits while it worked on rewriting the ordinance.8 Mean-while, a citizen alliance called the Denton StakeholderDrilling Advisory Group had partnered with national envi-ronmental organizations and began efforts to ban fracking inDenton altogether.9 DAG crafted a proposed ordinancemaking fracking within city limits a misdemeanor, punish-able by fines of up to $2,000 for each day in violation. Theproposal cited concerns over the city’s environment andinfrastructure, public health and safety, noise, road use, haz-ardous materials management, insurance, gas venting, airpollution, groundwater contamination, and property devalu-ation.10 DAG collected nearly 2,000 signatures supportingthe ordinance. In July, the group presented its proposal tothe city council as a voter-initiative petition. The councilrejected the petition, opting to put it on the November bal-lot for the city’s voters to decide.11

In November 2014, after an expensive campaign, themeasure passed with 59 percent of voters in favor, and Dentonbecame the first Texas city to explicitly ban fracking.12

Legal Challenges and HB 40The Denton victory was short-lived. The next day, the

Texas Oil and Gas Association and Texas General LandOffice separately sued the city. Their petitions alleged thatthe ordinance was preempted by state law and they soughtan injunction prohibiting its enforcement.13 Other litigationagainst the city raised questions about Denton’s potentialliability to mineral owners: Even if the city had the power toregulate drilling, did Denton’s regulations preventing devel-opment amount to a compensable taking of property? Min-eral owners said they did, because the regulations effectivelyprevented development altogether, which “destroyed theirproperty’s value” or “denied them all its economically viableuse.”14 Whether a city with an effective drilling ban wouldowe damages to mineral owners for devaluing their propertywould likely turn on (1) whether the minerals were severedfrom the surface (thus eliminating any potential value fromthe surface estate) and (2) assessing the economic, regulatory,and political climate at the time the property was acquired.15

If the property retained any practical value at all or if theowner had no reasonable expectation of economic developmentwhen he or she acquired it (for example, if the regulation atissue was already in place or had been proposed), then a com-pensable taking claim would fail.

But before these issues could be litigated, Texas legislatorsquickly introduced bills to overturn the Denton frackingban and prevent similar bans elsewhere. In March 2015,Rep. Drew Darby introduced House Bill 40, which easilypassed both houses. Gov. Greg Abbott signed the bill intolaw on May 18.16

HB 40 was codified as Texas Natural Resources Code sec-tion 81.0523 and provides that oil and gas “operations” (whichexpressly include fracking) are subject to the exclusive juris-diction of the state; municipalities may not enact ordinancesthat ban, limit, or otherwise regulate them. Local regulationis expressly preempted except for measures satisfying a four-part test, which allows a regulation if it: (1) is “limited toaboveground activity”; (2) is “commercially reasonable”; (3)does not “effectively prohibit an oil and gas operation con-ducted by a reasonably prudent operator”; and (4) is not other-wise preempted. The law’s safe harbor provision considersordinances that have been in effect for at least five years andthat have allowed operations to take place during that timeto be prima facie commercially reasonable.17

The Legislature’s swift and strong action invalidated theDenton fracking ban specifically and also made clear toother state municipalities that attempts to substantiallyrestrict oil and gas development would be preempted bystate law and met with great scrutiny.

Aftermath and National TrendsBack in Denton, once HB 40 became effective, the Texas

Oil and Gas Association and Texas General Land Officepromptly amended their petitions to focus on the facial ille-gality of the fracking ban and the moratorium’s de facto pro-hibition against development.18 The city council eventuallyrepealed the fracking ban on June 1719 and allowed thedrilling moratorium to expire in August.20 In September, thelawsuits were dismissed.21 To comply with the new law’scommercial-reasonableness requirement, the city councilamended its ordinance to restore setbacks to their pre-2013distance of 1,000 feet and went back to the drawing board,fashioning new ordinances that use a zoning framework todiscourage drilling near residential areas and impose new“co-location” rules requiring operators to consolidate opera-tions onto fewer pad sites.22

Outside Texas, versions of the Denton drama have playedout similarly. In 2015, courts in Ohio, New Mexico, andColorado invalidated local regulations designed to inhibitoil and gas development.23 Oklahoma recently enacted pre-emption legislation, and Florida’s Legislature is debatingsimilar measures.24 Pennsylvania and New York are thenotable outliers at the moment; courts there have routinelyupheld local drilling prohibitions.25

As for Texas after HB 40, questions remain about howthe law will be applied. Approximately 30 municipalities havestanding bans on drilling, but most of them are in placeswhere there is no real expectation of commercial production,so the regulations are unlikely to be challenged.26 In otherplaces with ordinances enacted before HB 40, it is possible

216 Texas Bar Journal • March 2016 texasbar.com

that previously uncontroversial provisions could suddenly beripe for challenges due to the new law. Eventually, test casesare likely to emerge and define the boundaries of the “com-mercially reasonable,” “effectively prohibit,” and “reason-ably prudent operator” language. But as long as oil and gasprices remain severely depressed, it is unlikely that the statewill see the flurry of litigation that some predicted in thebill’s immediate aftermath. TBJ

Notes1. Tex. Const. art. XI, § 5. 2. City of Coll. Station v. Turtle Rock Corp., 680 S.W.2d 802, 805 (Tex. 1984). 3. See TEX. NAT. RES. CODE §§ 81.051, 81.052. 4. See Denton, Tex., Dev. Code Code subch. 22 (2014) (prior versions of subchapter gov-

erning gas well drilling and production date back to 2004); Frack Free Denton, DentonFracking Facts, http://www.frackfreedenton.com/fracking-facts (last visited Dec. 15,2015) (“In 2001, Denton passed the first drilling and production ordinance on the Bar-nett Shale.”).

5. See Jim Malewitz, Dissecting Denton: How a Texas City Banned Fracking, THE TEXAS TRIBUNE

(Dec. 15, 2014), available at http://www.texastribune.org/2014/12/15/dissecting-denton-how-texas-city-baned-fracking (last visited Dec. 8, 2015).

6. See id.7. See id.(explaining that early city well permits were issued in perpetuity, so that an oper-

ator with an early permit could drill additional wells on the same site without new per-mit applications). See also TEX. GOV’T CODE §§ 245.002(a)-(b) (applications for permitsshall be considered solely on the basis of rules and regulations in effect at the time ofapplication, including the original permit application if a series of permits is required).

8. See Peggy Heinkel-Wolfe, Residents Present Petition to City, DENTON RECORD-CHRONICLE

(May 7, 2014), available at http://www.dentonrc.com/local-news/local-news-headlines/20140507-residents-present-petition-to-city.ece (last visited Dec. 15, 2015).

9. See Peggy Heinkel-Wolfe, Gap Over Gas Rule Rewrite Widens, DENTON RECORD-CHRONICLE

(Jan. 12, 2013), available at http://www.dentonrc.com/local-news/local-news-headlines/20130112-gap-over-gas-rule-rewrite-widens.ece (last visited Dec. 15, 2015).

10. See City of Denton Fracking Ban Initiative (November 2014), Ballotpedia, https://ballotpedia.org/City_of_Denton_Fracking_Ban_Initiative_(November_2014) (last visited Dec.8, 2015).

11. Peggy Heinkel-Wolfe, Voters to Decide Ban Issue, DENTON RECORD-CHRONICLE (July 15,2014), available at http://www.dentonrc.com/local-news/local-news-headlines/20140715-voters-to-decide-ban-issue.ece (last visited Dec. 15, 2015).

12. Peggy Heinkel-Wolfe, Fracking Banned, DENTON RECORD-CHRONICLE (Nov. 5, 2014),available at http://www.dentonrc.com/local-news/local-news-headlines/20141105-fracking-banned.ece (last visited Dec. 15, 2015).

13. Peggy Heinkel-Wolfe, Lawsuits Follow Fracking Outcome, DENTON RECORD-CHRONICLE

(Nov. 5, 2014), available at http://www.dentonrc.com/local-news/local-news-headlines/20141105-lawsuits-follow-fracking-outcome.ece (last visited Dec. 15, 2015).

14. Nicholas Sakelaris, Mineral Owners Call Denton’s Drilling Moratorium a Ban, Sue for $1M,DALLAS BUSINESS JOURNAL (Sept. 30, 2014), available at http://www.bizjournals.com/dallas/news/2014/09/30/mineral-owners-call-dentons-drilling-moratorium-a.html (last visitedDec. 15, 2015). See also Mayhew v. Town of Sunnyvale, 964 S.W.2d 922, 933 (Tex.1998) (setting out standard for finding that a regulation constitutes a regulatory taking).

15. See Mayhew, 964 S.W.2d at 935-36 (reciting two factors in determining whether a gov-ernment unreasonably interfered with property rights: the regulation’s economic impactand “the extent to which the regulation interferes with distinct investment-backedexpectations”).

16. Peggy Heinkel-Wolfe, HB 40 Signed into Law, DENTON RECORD-CHRONICLE (May 18,2015), available at http://www.dentonrc.com/local-news/local-news-headlines/20150518-hb-40-signed-into-law.ece (last visited Dec. 15, 2015).

17. TEX. NAT. RES. CODE § 81.0523.18. Peggy Heinkel-Wolfe, Ban on Hydraulic Fracturing Repealed, DENTON RECORD-CHRONICLE

(June 17, 2015), available at http://www.dentonrc.com/local-news/local-news-headlines/20150617-ban-on-hydraulic-fracturing-repealed.ece (last visited Dec. 9, 2015).

19. Id.20. Peggy Heinkel-Wolfe, Council Turns to Zoning Powers After Reducing Well Setbacks to 1,000

feet, DENTON RECORD-CHRONICLE (Aug. 4, 2015), available at http://www.dentonrc.com/local-news/local-news-headlines/20150804-council-turns-to-zoning-powers-after-reducing-well-setbacks-to-1000-feet.ece (last visited Dec. 9, 2015).

21. Peggy Heinkel-Wolfe, Suits Against City Being Dismissed, DENTON RECORD-CHRONICLE

(Sept. 11, 2015), available at http://www.dentonrc.com/local-news/local-news-headlines/20150911-suits-against-city-being-dismissed.ece (last visited Dec. 9, 2015).

22. Heinkel-Wolfe, supra note 20.23. See State ex rel. Morrison v. Beck Energy Corp., 37 N.E.3d 128 (Ohio 2015) (Ohio

Supreme Court defining limits of Ohio home-rule law and invalidating regulation thatconflicted with state oil and gas permitting schemes); Swepi, LP v. Mora County, 81F. Supp. 3d 1075 (D.N.M. Jan. 19, 2015) (holding that New Mexico state law governingoil and gas drilling preempted a local fracking ban); Bruce Finley, Colorado High CourtHears Cases on City Oil and Gas Fracking Bans, THE DENVER POST (Dec. 9, 2015), avail-able at http://www.denverpost.com/news/ci_29223451/state-high-court-hears-cases-city-oil-and (last visited Dec. 15, 2015) (The Colorado Supreme Court recently heardarguments in cases challenging trial court decisions that overturned fracking bans).

24. See 52 Okl. St. § 137.1 (2015); Jeff Burlew, Counties Oppose Bills to Pre-empt Fracking Bans,TALLAHASSEE DEMOCRAT (Nov. 27, 2015), available at http://www.tallahassee.com/story/news/2015/11/27/counties-oppose-bills-pre-empt-fracking-bans/76379914/ (last visitedDec. 9, 2015).

25. See Robinson Township v. Commonwealth of Pennsylvania, 83 A.3d 901 (Pa. 2013)(Supreme Court of Pennsylvania holding that state Legislature is “not the sole trustee ofthe public natural resource” and local municipalities have constitutional authority toregulate local drilling activity); Kate Taylor and Thomas Kaplan, New York Towns CanProhibit Fracking, State’s Top Court Rules, N.Y. TIMES (June 30, 2014), available athttp://www.nytimes.com/2014/07/01/nyregion/towns-may-ban-fracking-new-york-state-high-court-rules.html (last visited Dec. 15, 2015).

26. See Mose Buchele, After HB 40, What’s Next for Local Drilling Rules in Texas?, StateImpact Texas (July 2, 2015), available at https://stateimpact.npr.org/texas/2015/07/02/after-hb-40- whats-next-for-local-drilling-bans-in-texas (last visited Dec. 9, 2015).

WALKER C. FRIEDMAN is a shareholder in Friedman, Suder & Cooke in Fort Worth. His practiceis limited to business litigation, including oil and gas litigation.

JACK PRICEis a commercial litigator with a focus on business and oil and gas dis-putes. He is a shareholder in Friedman, Suder & Cooke in Fort Worth.

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