Recently, Colorado voters rejected Proposition 112, which would have changed Colorado law to require 2,500-foot setbacks between new oil and gas development and homes or other (vaguely described) “vulnerable areas.” It has been alleged that the measure would have devastated the oil and gas industry in Colorado—and maybe that was the point of it. But the measure did not pass. Defeated but not deterred, opponents to oil and gas development have taken a new approach recently in Colorado and elsewhere: constitutional challenges to the approval process by which oil and gas companies develop resources.
While this short article focuses on a recently filed lawsuit in Colorado, the thoughts we present have broader applicability to other oil and gas-producing states and, really, to any situation (e.g., dealing with groundwater) where separately owned property interests must be reconciled with the use of a common source of supply.
An underground oil and gas reservoir typically covers a large area encompassing hundreds or thousands of separately owned tracts of land. Thus, many states have implemented laws and regulations to deal with this situation and the rights of the separate owners.
Colorado enacted such a law decades ago, C.R.S. § 34-60-116, and its purpose is clear: to prevent inefficient production of oil and gas (i.e., caused by drilling too many wells into the reservoir and dissipating its natural pressure) and keep the separate owners from unreasonably draining each other’s resources. This law presumes that the oil and gas development is in the public interest. And the Colorado Supreme Court recently held that the people of Colorado—through the State’s legislative body—have decided that it is in the public interest to foster the development of oil and gas resources. Colorado Oil and Gas Conservation Comm'n v. Martinez, 2019 CO 3, ¶ 41 (interpreting C.R.S. § 34-60-102).
So Colorado—like most other oil and gas producing states—has a law that allows for the “pooling” (i.e., combining) of separate ownership interests within a spacing unit for a well (e.g., 640 acres or 1,280 acres or more for horizontal wells) in furtherance of oil and gas production. If an interest owner does not want to include its mineral interests (or its leases of mineral interests) in the spacing unit to participate in the well, then Colorado’s oil and gas regulators can “force-pool” the holdouts. The regulators can force the holdouts to include their mineral interests in the spacing unit and be part of the combined effort, as long as they do so on terms that are “just and reasonable.” C.R.S. § 34-60-116. When the separate interests are combined together, oil and gas production from anywhere within the spacing units is shared by all mineral owners in the spacing unit, whether or not the wellbore is actually located within the lands owned by a mineral owner. When a well is drilled, the law provides for how the costs for—and proceeds from—the operation are to be allocated among the consenting and nonconsenting parties.
Oil and gas production and urbanized residential areas have crept toward each other in the front range of Colorado and elsewhere, and, at the same time, oil and gas companies have developed technology to produce from geographically larger areas from their wellsites. So it was perhaps inevitable that conflict would arise when a common industry practice (i.e., force-pooling) increasingly involved residents who had no involvement with oil and gas business, or desire or plans to be part of an oil and gas project. And it should not be surprising that residents get angry and feel powerless when they first learn about the force-pooling process.
But constitutional challenges to laws like Colorado’s are not new, and a recent challenge to a similar law in Ohio failed at the trial-court level. In that case (Kerns v. Chesapeake Exploration, LLC), the plaintiffs sought to overturn a law in Ohio on the basis that it authorizes an “impermissible taking” in violation of the Fifth and Fourteenth Amendments of the U.S. Constitution, but a federal court in Ohio dismissed the lawsuit last summer. See Case No. 5:18-cv-389 (N.D. Ohio June 13, 2018). The court held that the plaintiffs did not establish a claim because of U.S. Supreme Court precedent holding that “‘a state may adopt reasonable regulations to prevent economic and physical waste of natural gas,’ even if those regulations have the effect of impacting the property rights of individual landowners.” Id. (quoting Cities Serv. Gas Co. v. Peerless Oil and gas Co., 340 U.S. 179, 185 (1950)). This is a common result. See id., n.4 (collecting cases). Courts generally hold that “pooling” laws and similar laws are legitimate exercises of a state’s “police power”—which is a state’s general power to establish and enforce laws protecting the health, safety, and welfare of the public. As Professor Bruce Kramer has explained, when a regulatory program achieves important police-power objectives while also protecting the landowners’ “correlative” rights (which basically means that the State will not allow landowners to steal oil and gas out from each other’s land), no constitutional violations occur. (We note that the Kerns case is currently on appeal.)
Not dissuaded by the Ohio result, a group in Colorado is now attempting to invalidate Colorado’s pooling law using the same basic theory as in the Ohio case but with the addition of other alleged constitutional violations.
On January 23, 2019, Colorado Rising, the group behind Proposition 112 (the defeated setback initiative discussed above), filed a lawsuit on behalf of several Denver-area mineral owners in federal court in Colorado seeking to invalidate C.R.S. § 34-60-116. In addition to claiming relief under the “impermissible taking” doctrine of the Fifth and Fourteenth Amendments (i.e., the claim rejected by the federal court in Ohio), the mineral owners, who are calling themselves the Wildgrass Oil and Gas Committee, have also put forth three other theories for why C.R.S. § 34-60-116 violates the U.S. Constitution. First, they argue that C.R.S. § 34-60-116 violates the privileges and immunities clause of the Fourteenth Amendment, and the Court may have to address whether the mineral owners can use that clause to protect in-state property rights. Second, they argue that C.R.S. § 34-60-116 violates the First Amendment because it forces the mineral owners to engage in “speech” by allegedly “coercing” them to give money to subsidize oil and gas operations that they may object to as “sinful and tyrannical.” The Court may have to reconcile whether a generally accepted use of the police power, which is intended to protect these mineral-owners’ rights and results in them receiving a royalty, is a First Amendment violation. Finally, they argue that C.R.S. § 34-60-116 violates the U.S. Constitution’s prohibition on state laws impairing the obligation of contracts, and the Court may have to determine whether the State is forcing contracts on the mineral owners, and whether doing so would equate to impairing their obligations under other contracts.
The case is Wildgrass Oil and gas Committee v. State of Colorado, No. 1:19-cv-190 (D. Colo.).
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