Can County Laws Preempt State and Federal Laws on Oil and Gas Regulation?

Title: Can County Laws Preempt State and Federal Laws on Oil and Gas Regulation?

Author: Susan L. Aldridge, Member; Brent D. Chicken, Associate, Beatty & Wozniak, P.C

Publication: The Outcrop, March 2008, p. 6-7, 10

INTRODUCTION

Board of County Commr’s of Gunnison County v. EDS Int’l., LLC represents the most recent case concerning the imposition of oil and gas development regulations at the county level in Colorado. BDS International, LLC (“BDS”) and Gunnison Energy Corporation (“GEC”) owned working interests in federal oil and gas leases covering lands in the Grand Mesa, Uncompahgre, and Gunnison National Forests in Gunnison County, Colorado. BDS and GEC refused to comply with Gunnison County’s permit process and regulations related to oil and gas operations, on the basis that such regulations were preempted by state and/or federal law. In 2003, the Board of County Commissioners of Gunnison County brought an action in federal court, seeking to enjoin BDS and GEC from maintaining or drilling wells without compliance with the County’s oil and gas development regulations. However, the federal case was dismissed, the County refiled substantially the same legal action against BDS and GEC in the Gunnison County District Court, and the Colorado Oil end Gas Conservation Commission (“COGCC”) was granted permission by the court to intervene in the case.

Prior to trial in the Gunnison County District Court, BDS and the COGCC filed motions for summary judgment, challenging the Gunnison County regulations as facially preempted by state and federal law. The trial court partially granted the motions of BDS and the COGCC, that the state statute preempted certain Gunnison County regulations, including those dealing with wildlife, vegetation, drainage end erosion control, livestock, cultural and historic resources, access to records, and financial guarantees, citing operational conflicts with state law. However, the trial court also held that a number of other Gunnison County regulations were not preempted by state or federal law, and therefore denied BDC [sic] and the COGCC’s summary motions as to those regulations, ruling instead in favor of Gunnison County.

BDS, GEC, and the COGCC appealed the trial court’s ruling to the Colorado Court of Appeals, which relied heavily on the law set forth in Board of County Commr’s v. Bowen/ Edwards Assocs., Inc. to arrive at its decision. [830 P.2d 1045 (Colo. 1992)]. Bowen/Edwards clearly sets forth the three circumstances in which state statutes may preempt local government regulations: express preemption in the state statute, implied state legislative intent to completely occupy a given field, and operational conflict with application of the state statutes and administrative rules. Regarding operational conflict preemption, Bowen/Edwards mandates that courts determine the extent of the conflict “on an ad hoc basis under a fully developed evidentiary record,” unless it is all but clear that a local regulation affecting oil and gas drilling is not preempted by state statute. Based on these foundations, the Colorado Court of Appeals ultimately affirmed in part, and reversed and remanded in part, the trial court’s ruling as to the BDS and COGCC summary judgments.

The appellate court first addressed the Gunnison County regulations dealing with financial requirements and access to records. As to Gunnison County’s financial requirements regulations, the court held that its mandates regarding impact mitigation costs and financial guarantees conflicted with the COGCC’s financial assurance and fine maximums, and were therefore preempted. Likewise, Gunnison County’s regulations which attempted to require oil and gas operators to keep records available for inspection by Gunnison County for a period of five years were similarly preempted, as state statutes and COGCC Rules exclude counties by omission as entities authorized to inspect such records. The Gunnison County regulations dealing with financial requirements and access to records were therefore preempted by the court based on their inconsistency with, material interference with, or destruction of, state statutes and administrative rules. Moreover, in setting forth its decision here, the Colorado Court of Appeals also expressly confirmed that a county may not impose technical conditions on the drilling or pumping of wells under circumstances where no such conditions are imposed by state law or regulation.

However, the appellate court then moved on to discuss the myriad Gunnison County oil and gas regulations which, in its view, the trial court had improperly held to be preempted. Applying the operational conflict test, the court held that pursuant to Bowen/Edwards, an evidentiary hearing was required to determine the scope of operational conflict between state statutes and administrative rules, and Gunnison County’s regulations dealing with water quality, soil erosion, wildlife, vegetation, livestock, geologic hazards, cultural and historic resources, wildfires, recreation, and permit duration. For each Gunnison County regulation under scrutiny, the court discussed the specific reasons regarding the need to develop an evidentiary record, and remanded such considerations to the trial court, so that a proper operational conflict analysis could be undertaken. Therefore, if a county has a regulation that furthers the state’s interest without imposing conflicting requirements, they are not, on their face, contrary to state law, and an evidentiary hearing is required to determine the existence and scope of operational conflicts.

The Colorado Court of Appeals then discussed GEC’s cross-appeal, which argued that the Gunnison County regulations concerning oil and gas development were also impliedly preempted by federal law when the U.S. Congress enacted a comprehensive oil and gas regulatory scheme, including the Property Clause of the U.S. Constitution; the Mineral Leasing Act of 1920; the Mineral Leasing Act for Acquired Lands of 1947; the Federal Onshore Oil and Gas Leasing Reform Act of 1987; the Energy Policy Act of 2005; the National Forest Management Act; and the Federal Land Policy Management Act. GEC’s specific argument was that the U.S. Congress intended to occupy the field of oil and gas regulation, and that since none of the legislation in the U.S. Congress’ comprehensive regulatory scheme required the approval of local governments, or the adherence to local regulations promulgated by those governments, the U.S. Congress necessarily intended full preemption of those local regulations. However, despite GEC’s citations of many cases in support of their argument, the appellate court was unconvinced, and held that nothing within the federal regulatory scheme, nor anything in the jurisprudence cited by GEC, led the court to believe that the U.S. Congress intended to occupy the entire field of oil and gas regulation. The Colorado Court of Appeals therefore affirmed the trial court’s ruling that none of the Gunnison County oil and gas regulations were preempted by federal law under a field occupation analysis.

Based upon the appellate court’s reluctance to directly address or discuss in detail the operational conflict issues surrounding the majority of the county-level regulations at issue in BDS Int’l., perhaps the court itself best stated its position in the case:

In determining whether the County Regulations are in operational conflict with state statute or regulation, [the court] will construe the County Regulations, if possible, so as to harmonize them with the applicable state statutes or regulations. Where no possible construction of the County Regulations may be harmonized with the state regulatory scheme, we must conclude that a particular regulation is invalid.

The main significance, therefore, of BDS Int’l. concerning state or federal preemption of county-level oil and gas regulations is this: oil and gas operators must be extremely careful in evaluating whether an operational conflicts analysis, based upon a fully-developed evidentiary record, and recognizing a court’s duty to attempt to harmonize local, state, and federal regulations and law, would require the operator’s adherence to a county-level regulations dealing with oil and gas development. Because BDS Int’l. lacks a detailed discussion of operational conflict facts as applied to law, this determination may be rather difficult for most operators, particularly where the evidence necessary to show state or federal preemption via operational conflict is somewhat weak or unavailable.

BDS Int’l. therefore advances the State of Colorado’s jurisprudence in at least two ways. First, BDS Int’l. makes it clear that state statutes and COGCC Rules concerning financial assurances and access to records, under a facial analysis, will typically preempt county-level regulations dealing with those issues. Second, BDS Int’l. further defines the county-level oil and gas regulation subjects, and terms used, which may be susceptible to state or federal preemption under an operational conflicts analysis.

The COGCC and BDS filed Petitions for Writ of Certiorari with the Colorado Supreme Court, while other parties filed amicus briefs. On June 11, 2007, the Colorado Supreme Court denied the Petition for Writ of Certiorari. A denial of a Petition for Writ of Certiorari does not confirm or deny the appellate court decision – it simply means the Colorado Supreme Court will not hear the petition. On July 2, 2007, BDS Int’l. was remanded back to the Gunnison County District Court. It therefore appears that only time, and a regulation-by-regulation analysis, will determine the ultimate impact of BDS Int’l. on oil and gas operations in Colorado.