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January 22, 2013

Finally Ready To Drill: NY Shale Development - Part 1

In 2012, New York State's environmental review of high-volume hydraulic fracturing "“ a technology necessary to develop deep shale formations "“ surpassed the four year mark. This process, consisting of a myriad of regulatory documents and significant public comment and controversy, has resulted in a complete halt on shale development in New York. Optimistically, this unimaginably lengthy and tiresome process is expected to conclude in early 2013.

New York's Department of Environmental Conservation ("Department") recently elected to extend its ongoing rulemaking for high-volume hydraulic fracturing rather than let its proposed regulations expire. Revised regulations were released to the public and thereafter published in the State Register on December 12, 2012. The requisite public comment period, with the Department declining to hold public hearings, expired on January 11, 2013. Under the Department's rulemaking extension, the proposed regulations must be finalized by February 27, 2013.

Also moving forward toward a conclusion is the ongoing Supplemental Generic Environmental Impact Statement ("SGEIS"). The final piece of the SGEIS is the New York State Department of Health's review of the Department's public health impact study, a review that is being conducted with the assistance of an independent panel of health consultants. Once completed, and in fact it may already be completed, this review will enable the Department to finalize and release the SGEIS. And while issuance of the final SGEIS will commence one final public comment period that must be at least ten days under state law, it is expected that the comment period for the final SGEIS will conclude prior to the February 27, 2013 deadline for the revised regulations.

All of this is positive news, as it appears that New York has finally signaled an end to its four plus year environmental review. Indeed, the process appears close to concluding and it is estimated that the Department will be in a position to start processing and issuing permits in the Spring of 2013. Unfortunately, that may not be the end of the story as other potential obstacles to shale development in New York are brewing.

It is almost a foregone conclusion that those opposed to shale development will challenge the final SGEIS and associated regulations in Court. Such challenges, and many are anticipated, inevitably will argue that the Department's ultimate determination to allow shale development via the final SGEIS and associated regulations was (1) made in violation of lawful procedure, (2) affected by an error of law, (3) arbitrary and capricious and/or (4) an abuse of discretion. And while the legal standards generally favor the State and suggest that the Department ultimately will be successful, all expectations are that the opposition will request a stay of permitting during the course of the litigation. Delay has always been part of their strategy. To succeed in any request for an interim stay of permitting, the opposition will need to establish a likelihood of success on the merits and may be required to put up a substantial bond, both heavy endeavors.

Even assuming no judicial stay of permitting, the permitting process contemplated under the SGEIS and associated regulations is daunting at best. The Department has proposed a permit application process that rivals anything the industry has previously faced in New York or perhaps anywhere else in the United States.

Applications to drill a well proposing to use high-volume hydraulic fracturing must be completed on a much-expanded application form and must include a robust and all-encompassing environmental assessment form ("EAF"), details on the hydraulic fracturing fluid to be used, a stormwater pollution protection plan, and permit fees, which may include discretionary fees to recoup the Department's cost in preparing the SGEIS. Further, if the application triggers the need for additional Departmental permits, such as a wetlands permit, then the additional permit application(s) must be submitted simultaneously or the applicant must demonstrate that good cause exists not to do so.

The mandatory EAF requires information concerning, among other things, subsurface geology, water source(s), proximity to protected resources and existing wells, air emission information and control technology and information concerning whether the proposed well is consistent with local laws. It also requires numerous documents and plans to be included as addenda such as a fluid disposal plan, cuttings disposal plan, invasive species management plan, transportation plan, greenhouse gas mitigation plan, visual impact mitigation plan, noise impact mitigation plan, partial site reclamation plan and a blowout preventer use and test plan.

The required hydraulic fracturing fluid disclosure is to be submitted by the applicant either directly or through the service company and/or chemical supplier(s). The information to be disclosed is quite detailed and includes information such as product volumes, additive names and descriptions, each additive and proppant's percent by weight, CAS numbers, maximum concentration of additives and the name of the proposed service company. This disclosure must also include a green fracturing plan, or as explained by the Department, documentation "utilizing existing data and studies that proposed additives exhibit reduced aquatic toxicity and pose at least as low a potential risk to water resources and the environment as all known available alternatives; or documentation, to the [D]epartment's satisfaction, that available alternative products are not effective in achieving the desired results or economically feasible."

Given this complicated application process and unprecedented litany of information and plans that will be required, initially it will be very hard to comprehend what a "complete" application looks like, either from the viewpoint of Department staff charged with processing permits, or an applicant. This likely will create permitting uncertainty and delays in permit processing and issuance. And this uncertainty is only compounded by the fact that the proposed application process contemplates involvement by a number of divisions and bureaus within the Department, other State agencies such as the Department of Health and Department of Transportation and local municipalities.

Moreover, for the first time, draft drilling permits will be subject to a formal public notice period as well as advanced notice to impacted municipalities. And while the Department has indicated that it will not reconsider comments already evaluated as part of the SGEIS process, it will consider comments on local and site-specific issues that have not been addressed previously. This raises considerable concern that those opposed to drilling may be able to delay permit issuance and trigger the Department's administrative hearing process, a process that historically has been long and protracted. What's more, the end result of the lengthy administrative process could be permit denial or the imposition of additional permit conditions on top of the already stringent permit conditions detailed in the SGEIS and associated regulations. So, while the permit application process ultimately may be mastered, the potential for the opposition or an impacted local municipality to stop, delay or further complicate a well permit is a concern.

Unfortunately, the mere issuance of a drilling permit from the Department may not guarantee an operator's ability to actually drill. This is because many local municipalities across New York, faced with enormous anti-drilling pressure and scare tactics, have enacted bans and moratoria on drilling. Luckily, the majority of these bans and moratoria are not in areas considered prospective for shale development. However, that may not always be the case and a mere change in a local board's composition could mean the difference between drilling or not drilling in a particular municipality.

Notably, some of these bans and moratoria have faced legal challenges. The arguments center on (1) whether state law, specifically section 23-0303(2) of New York's Environmental Conservation Law ("ECL"), expressly preempts local laws that regulate drilling or, in the alternative, (2) whether such local laws are preempted nonetheless due to their conflict with and frustration of ECL Article 23's regulatory scheme, purpose and policy objectives as well as the explicit directive in New York's Energy Law to promote development of the State's natural gas resources.

To date, the two legal challenges to outright bans, one by an operator and another by an impacted landowner, have failed. The lower courts in both cases determined that a local ban on drilling is not expressly preempted, irrespective of the legislative history, nor is one impliedly preempted. Anschutz Exploration Corp. v. Town of Dryden (N.Y. Sup. Ct. Tompkins County); Cooperstown Holstein Corp. v. Town of Middlefield (N.Y. Sup. Ct. Otsego County).

The one successful legal challenge was brought against the City of Binghamton's moratorium on drilling. Jeffrey v. Ryan (N.Y. Sup. Ct. Broome County). Although the Jeffrey Court agreed, without any analysis, that the moratorium was not preempted, it ultimately held that the City had failed to satisfy the requirements for a moratorium; namely that: (1) it must be enacted in response to a dire necessity; (2) it must be reasonably calculated to alleviate or prevent a crisis or condition; and (3) the municipality must be presently taking steps to rectify the problem. Significantly, although recognizing that the issue of natural gas development is controversial, the Court held that it is insufficient and improper for a municipality to use its police powers as a pretext to assuage strident community opposition.

The Dryden, Middlefield and Jeffrey cases are all on appeal, pending before an intermediate appellate court in New York. Oral argument in the Dryden and Middlefield cases is expected in March 2013 with a decision likely in late Spring while the schedule in the Jeffrey case is projected to be longer.

While these appeals are pending, another case has been filed in New York challenging a local law prohibiting natural gas development. This time it is Lenape Resources challenging the Town of Avon's moratorium on oil and gas exploration and extraction. Lenape Resources v. Town of Avon (N.Y. Sup. Ct. Livingston County). The lawsuit mirrors Dryden and Middlefield, in part, by claiming express preemption under the ECL, as well as implied preemption. It then follows the successful argument made in the Jeffrey case by alleging that the Town failed to satisfy the requirements for a moratorium. And while other claims were brought, of significance is Lenape's additional claim that if the moratorium is valid, then it is a regulatory taking entitling Lenape to damages totaling at least $50 million dollars. Lenape is the first operator to assert a takings claim in New York and the only entity to actually file such a claim in court. Previously, only one landowner had filed a notice of claim in response to a drilling ban.

Finally, it is noteworthy that the Department has been named a mandatory party to the Lenape lawsuit and will now have to formally react and, perhaps, take a position on local preemption. To date, the Department has indicated only that it will defer to the courts on the legal issue and consider local law consistency as part of the permitting process.

The next potential obstacle facing shale development is the New York Legislature. January 9, 2013 marked the beginning of a new legislative session and industry can expect a significant number of bills targeting natural gas development. For example, legislation has already been introduced proposing bans and moratoria for all of New York or in some cases specific geographic areas such as the New York City and Skaneateles (Syracuse) watersheds, both of which have received filtration avoidance determinations from the Environmental Protection Agency.

Legislation has also been proposed to date in 2013 to amend the preemption language in the ECL at the center of the home rule cases discussed above and, in each of these proposals, the amended language is expected to explicitly provide for local municipalities to regulate where drilling may occur, whether it be through a municipal-wide ban or zoning. And just days into the current legislative session, other topics for legislation in 2013 already include waste disposal, hydraulic fracturing fluid constituents, leasing issues, the rights of landowners compulsorily integrated into a well spacing unit under existing state law and liability allocation and clean-up funds.

Legislative proposals to deal with Department staffing can also be expected in 2013. This is likely to include a severance tax. Although New York has a robust ad valorem tax, a tax that was instituted in 1981 in conjunction with the ECL's preemption provision and provides local municipalities with a significant economic windfall when a well is drilled, New York does not have a severance tax. And, the lack of a formal severance tax proposal in recent years is likely to give way in 2013 as the State looks for ways to generate revenue irrespective of the existing ad valorem tax. This will, of course, add to the already significant tax burden facing industry in New York and could face challenges of improper double taxation. Additionally, the ultimate recipient of any severance tax (e.g., the Department for staffing, the state's General Fund, etc.) is likely to be hotly debated.

Also of concern going forward in New York is the Delaware River Basin Commission's ("DRBC") ongoing moratorium. Despite the preparation and public release of draft regulations for natural gas development, to date the DRBC has failed to act on its proposed regulations and there is currently no timeline for a final decision on the DRBC's regulatory proposals. As a result, the ongoing DRBC moratorium remains in effect. The 2011 legal challenges to the draft regulations, filed by New York's Attorney General and other environmental groups asserting a failure to conduct an environmental review under the National Environmental Policy Act ("NEPA"), were dismissed on September 24, 2012 when a federal district court ruled that the plaintiffs lacked standing and that the issue was not ripe because the regulations had yet to be finalized. The court's ruling avoided any analysis or decision on the underlying merits and effectively deferred the substance of the allegations for another day. Therefore, if and when the DRBC moves forward and finalizes regulations, additional legal challenges are expected and will center on whether the DRBC is a federal agency and whether NEPA applies.

Finally, it is worth noting the next set of challenges for development in New York. As the debate surrounding high-volume hydraulic fracturing has grown, opposition groups have begun to focus their efforts on gathering lines and compressor stations. This trend will continue and grow in 2013. The New York Public Service Commission ("PSC") will move to the forefront of the debate and controversy in terms of when to certificate a gathering line for shale wells (historically the PSC has waited until production is established at a well), siting, the nature and extent of public involvement in the process, odorization requirements, and the scope of construction and operation conditions necessary to minimize environmental impacts.

In conclusion, all signs indicate that New York State is finally ready to move forward with shale development perhaps as early as the Spring, 2013. And while development is expected to be slow in the beginning as applications are processed under permitting requirements and standards that far exceed anything we have seen in New York, one outstanding question as to timing will be the impact of the myriad of obstacles still facing industry in New York.

Hiscock & Barclay has first-hand experience in New York's ongoing regulatory review of shale development and has been involved in the process since the very beginning. Please contact Frank V. Bifera, Chair of the Firm's Environmental Practice Area at (518) 429-4224 or, or Yvonne E. Hennessey at (518) 429-4293 or for more information.


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