Oil and Gas Lawyer Blog
In 2014 the City of Denton banned drilling of wells within its city limits. In response the Texas Legislature quickly passed HB 40, giving the Texas Railroad Commission exclusive jurisdiction to issue drilling permits within municipalities and allowing cities to regulate oil and gas activity only if their ordinances relate to “aboveground activity .. at or above the surface of the ground, including … fire and emergency response, traffic, lights, or noise, or imposing notice or reasonable setback requirements,” are “commercially reasonable,” and “do not effectively prohibit an oil and gas operation conducted by a reasonably prudent operator.”
The hubbub over drilling in municipalities arose after companies developed the technology to tap the Barnett Shale, which underlies the cities of Dallas and Fort Worth, as well as Denton. Dallas did not prohibit wells in its limits but required operators to obtain a city permit for a well. Dallas also owns substantial lands within its limits and in 2007 issued a request for proposals to lease municipal lands owned by the City. The City eventually leased more than 2,000 acres to Trinity East Energy in 2008, receiving a $19 million bonus; the lease designated potential drillsites from which multiple horizontal wells could be drilled.
By March 2010 Trinity was ready to start drilling and in 2011 it submitted applications for drill site locations on two sites identified in the City’s lease. The City Planning Commission considered those applications and denied them in December 2012. Trinity appealed to the City Council, but it failed to reverse the Planning Commission’s denial. Trinity then sued the City, alleging a “regulatory taking.” The trial court ruled that the City’s denial of the permits resulted in a regulatory taking; the amount of damages was submitted to a jury which found the City liable for $33,639,000 in damages. The City appealed, and last year the Dallas Court of Appeals affirmed that judgment. 2022 WL 3030995. This week the Texas Supreme Court denied the City’s petition for review.
A “regulatory taking” is an appropriation of property by a governmental entity that, by the entity’s regulation, deprives the owner of all “economically viable use” of its property. The Dallas Court of Appeals held that the City’s denial of permits had deprived Trinity of access to Barnett Shale reserves that could not be exploited in any other way.
A similar regulatory takings case was decided by the 14th District Court of Appeals in Houston in 2012. City of Houston v. Trail Enters., Inc., 77 S.W.3d 873 (Tex.App.-Houston [14th Dist.] 2012, pet. denied). That litigation involved the City of Houston’s ordinance restricting drilling of wells near Lake Houston, a major source of the City’s drinking water. Trail’s suit against the City took 19 years to finally resolve–and it ultimately lost: the Court concluded that no “compensable taking” had occurred, reversing the trial court’s judgment.
When I wrote about Trail v. Houston in 2014, I predicted that municipalities’ increasing efforts to restrict oil and gas drilling “may end up in takings cases like” Trail. That prediction has now come to pass.