Locke Lord QuickStudy: Texas Enacts House Bill 40 To Regulate Oil And Gas At State Level

Locke Lord LLP
May 20, 2015

The Texas Legislature recently passed House Bill 40, which is intended to keep the bulk of oil and gas regulation at the state level—as opposed to myriad standards set by cities, counties, or other political subdivisions.  The new law, which was effective May 18, 2015, expressly preempts local governments from regulating oil and gas operations.  

The law, which has been referred to as the “Denton fracking bill,” appears responsive to recent local ordinances that seek to limit or ban oil and gas drilling operations.  While House Bill 40 largely limits local regulation of oil and gas operations, it does not entirely shut the door.  The law provides that the “authority of a municipality or other political subdivision to regulate oil and gas operation is expressly preempted, except that a municipality may” enact and enforce ordinances that:

1. Are “commercially reasonable;”
2. Regulate only aboveground activity;
3. Do not “effectively prevent an oil and gas operation” from occurring; and
4. Are not preempted by other state or federal law.

Municipalities’ Rights
The preemption language quoted above provides that the authority of a municipality or other political subdivision to regulate oil and gas operation is expressly preempted.  However, in setting forth the four-part test for avoiding preemption, the “other political subdivision” language is omitted—perhaps indicating that only municipalities (not counties or other local governments) have a chance of overcoming preemption.  As such, a regulation enacted or enforced by a non-municipal government would likely be preempted regardless of how it may fair under the four-part test.

Commercially Reasonable
Whether an ordinance is “commercially reasonable” may require additional guidance from Texas courts, although the statutory definition appears geared so that the bulk of ordinances will be preempted.  The statute provides that a local ordinance is “commercially reasonable” if it “would allow a reasonably prudent operator to fully, effectively, and economically exploit, develop, produce, process and transport oil and gas.”  Thus, an ordinance that does not allow for full, effective and economical exploitation of resources will likely fail the test and be preempted.

Above Ground Activity
A local ordinance may only avoid preemption if it is limited to “aboveground activity.”  This provision—which was argued for by municipalities during the legislative session—appears to allow local control over issues such as emergency response teams, traffic control, setback requirements, and nuisance violations.  Some municipalities may seize on this clause in an attempt to make oil and gas operations more difficult.  For example, a municipality may seek to apply noise and traffic restrictions in a way that oil and gas operations become difficult or unfeasible.  However, such an ordinance, if effective, would likely be vulnerable to preemption on the ground that the regulation effectively prohibits operations or is not “commercially reasonable.” 

Safe Harbor for Older Regulations
The statute includes a limited safe-harbor provision for those ordinances that have been on the books for at least five years and have “allowed the oil and gas operations at issue to continue during that period.”  Such ordinances are considered “prima facie” to be commercially reasonable.  
While the statute provides older ordinances with an additional protection, such ordinances are hardly bulletproof.  A “prima facie” finding (which simply means, “at first glance”) of commercial reasonableness is a finding that can be rebutted by oil and gas operators.  If an operator is able to overcome the initial “prima facie” finding of reasonableness, a court could find the ordinance to be commercially unreasonable and, therefore, preempted.  

Further, the safe-harbor protection is limited to the “commercially reasonable” prong—which is just one aspect of the four-part test.  So an ordinance that falls within the safe-harbor provision must still satisfy the remaining three prongs to avoid preemption, and it must do so without the benefit of any “prima facie” presumption.  Thus, a preexisting ordinance that has been in force for more than five years would now be preempted if, for example, the ordinance is not limited to aboveground activity.  Consequently, preexisting ordinances that have regulated underground operations for more than five years will be preempted and unenforceable once the statute takes effect.  Such a situation should prompt municipalities to review their ordinances and conduct future enforcement accordingly.

Finally, some ambiguity rests in the safe-harbor language stating that an ordinance is commercially reasonable if it has “been in effect for at least five years” and has “allowed the oil and gas operations at issue to continue during that period.”  On one hand, the exception could apply to those municipalities, such as Fort Worth, which have comprehensive ordinances that have allowed continuous operations.   On the other hand, the phrase limiting the safe harbor to “operations at issue” could be interpreted as restricting the prima facie finding of reasonableness only to the specific wells that have operated since the enactment of the ordinance.  This issue will likely not be resolved without assistance from Texas courts.  

For more information on the matters discussed in this Locke Lord QuickStudy, please contact the authors.