The growing efforts by state and local governments to stop hydraulic fracturing, or “fracking,” to extract natural gas could end up in the Supreme Court—because they may unconstitutionally limit property owners’ ability to profit from their mineral rights.
More than 170 New York towns and cities have used zoning laws to restrict or prohibit fracking, and in June New York’s Supreme Court turned back a challenge to these zoning laws. Pennsylvania allows local municipalities to restrict fracking, while Colorado and California are struggling with the issue.
Even in pro-energy Texas, the relatively small town of Denton, about 30 miles north of Dallas, has a fracking moratorium in place, as the city considers whether to impose a permanent ban. At a recent contentious Denton city council meeting, in which 500 people attended, the council moved to let voters decide the issue in November.
Nevertheless, landowners and drillers are threatening to sue Denton if a ban is implemented. They may have a case.
The Fifth Amendment to the U.S. Constitution says, in part, that private property cannot be taken for public use “without just compensation.” Historically, that provision comes into play when a city or county government wants private land to build a public road. If a landowner won’t sell voluntarily, the government can “take” it through eminent domain, but still has to pay. Sometimes a government may let the owner keep most of the property but pay the individual the difference between its current value and the estimated reduced value after the road is built.
Government regulations that substantially reduce the value of an owner’s property may also constitute a taking, according to the Supreme Court. For example, suppose a family buys expensive, beachfront property, and the government later prohibits its development. This would reduce the value of the land. The owners may be entitled to compensation.
With respect to oil and gas drilling, there is a precedent for when the government effectively prohibits property owners’ right to profit from their mineral rights. In 1983, Miller Brothers Oil Corporation, based in Traverse City, Mich., leased privately owned mineral rights below the Nordhouse Dunes Wilderness, also in Michigan. When the company submitted its drilling plan to the state’s Department of Natural Resources, the agency rejected it, saying state law prohibited “any and all” energy development on the land.
Miller and the mineral owners sued. In 1989 state Circuit Court Judge Peter Houk ruled that the state’s action was a taking of private property, and awarded the plaintiffs $71.5 million, upping that figure to $120.8 million in 1995—and the company never even had to drill.
The court tried to accommodate the state’s environmental concerns by encouraging it to allow directional drilling under the ground, but the state refused. The government’s unwillingness to find a reasonable compromise triggered the award.
Of course, state and local governments have a compelling interest in protecting the health and safety of their citizens, and regulations that do may override a takings claim. Although there are no clear, documented cases—as opposed to anecdotes—of fracking harming the public, the courts are likely to approve reasonable restrictions, such as prohibiting drilling less than a prescribed distance from a housing development or school.
But absent such circumstances, courts may rule that an outright ban on fracking or drilling would constitute a taking—and that would likely mean that the municipality (i.e., taxpayers) would have to financially compensate mineral-rights holders for their loses.
How would that work? There is a process for estimating the net present value of untapped minerals—drillers often use that process when contracting to drill on someone’s property, paying the mineral rights’ holder a flat amount, plus some royalties. Municipalities that refuse to let property owners drill might be required to use that or a similar process to assess the lost value.
Not every citizen with mineral rights would necessarily seek an immediate remedy in case of a ban on fracking. Many might prefer to hold onto their mineral rights, hoping the next election would lead to elected officials with a more favorable attitude toward drilling. But the citizens of communities that want to be “green” could end up paying a lot for the privilege.
August 1, 2014