The Wall Street Journal ran a great piece yesterday that should send shivers up the spine of every town anywhere that has banned fracking. Fracking bans carry potentially enormous price tags.
The op-ed article, by Merrill Matthews, from the Institute for Policy Innovation in Dallas, may also be viewed here and articulates what our contributor Bryant La Tourette, said several weeks ago – towns who adopt fracking bans are absconding with the mineral rights of owners and face huge potential lawsuits, especially where those mineral rights represent 100% of the property interests of the aggrieved party. The Delaware River Basin Commission should also pay close attention.
Matthews cites one particular case from Michigan to make his point. It caught my eye because I know one of the principals of the company that successfully brought the case. They’re a great operator and the case was a marvelous demonstration of how to assert one’s property rights in the face of government officials who would be kings.
The Ban on “Any and All” Energy Development
The case, Miller Bros. v. DNR, was brought originally in 1988 and wasn’t finally resolved until 1995, when the State of Michigan Department of Natural Resources (DNR) settled with the plaintiffs for roughly $95 million. There were several plaintiffs, actually, but Miller Brothers Oil Company (now Miller Energy Company) was the principal aggrieved party, having secured leases to develop the privately-owned minerals lying below approximately 3,500 acres of the Nordhouse Dunes Wilderness. The surface owner was the federal government, and, according to the Michigan Court of Appeals decision in 1994, it owned all the land, including everything below the surface, except what was owned by the mineral rights owners. They had no other uses for those rights if they could not extract the minerals.
The history of the case is, ironically, laid out nicely (although with considerable bias) here and here by the Michigan Land Use Institute (MLUI), a recipient of Park Foundation largesse, having later been drawn into the latter’s web of fracking deceit and undue influence. The Institute recently, in fact, served as a conduit for funding the fractivist organization FLOW which, of course, ignores the case while promoting ordinances that run the same risk.
MLUI, while clearly sympathetic to the DNR position at that time, also noted how badly the DNR Director and the state had acted. Here’s some of what MLUI observed about their behavior after earlier pointing out “Miller Brothers has argued with some merit for nearly a decade that it had prepared a sensitive drilling plan that would not have produced lasting scars in the Nordhouse Dunes and that Mr. Guyer’s order was unreasonable.”
In 1987, when former DNR director Gordon E. Guyer prohibited oil drilling in the magnificent Nordhouse Dunes Wilderness north of Ludington, he was applauded for adding to Michigan’s reputation as a trend setter in natural resource policy…
How this happened, according to some who played instrumental roles, is a case of administrative overreaching and legal blundering…
According to lawyers from the Attorney General’s office and former DNR officials, the state’s response to the lawsuit was marked by consistently missed opportunities.
The first problem was that the lawsuit was a surprise. DNR officials said they wanted to compel Miller Brothers to use directional drilling technology to tap the oil from sites outside the protected area. Mr. Guyer said he expected the company to react to his 1987 order by filing an amended development plan using directional drilling.
Instead, the company’s lawyers took advantage of an opportunity to reap a windfall without a single turn of the drillbit. How? Because Mr. Guyer’s order was unusually specific. It banned “any and all” energy development within the Nordhouse Dunes…
In 1989, Circuit Court Judge Peter D. Houk ruled that Mr. Guyer’s order was a taking of private property. But in his ruling, the Judge also provided the state with an out. He urged the government to modify the order to allow directional drilling.
The Attorney General’s office declined the opportunity…
After a trial in 1991, in which he called into question the competence of the state’s expert witnesses, Judge Houk awarded the plaintiffs $71.5 million. In 1995, the judge increased the takings award to $120.8 million, with interest accruing at about $35,000 a day.
“Judge Houk sent messages to the Attorney General in open court that he would strongly encourage the state to reconsider its strategy and issue some sort of permit,” said an Assistant Attorney General. “At one point he demanded assurances from the lawyers working the case that they had conveyed the message. I don’t know why, but the strategy never changed.”
The Reverberations of Fracking Bans (and Drilling Bans)
The DNR Director at that time, in other words, thought he was king and had no obligation to be reasonable or to compromise, even after being all but ordered by the judge to do so. He appears to have been one of those “what part of “no” don’t you understand?” bureaucrats who believe public service is a matter of lording it over the public. If you didn’t like his “no” or his ban on “any and all” you were apparently, by act of divination, supposed to know he really wanted drilling, just not that sort of drilling.
The DNR, therefore, got exactly what it deserved and, the Court of Appeals agreed, disagreeing only on the value of the taking, which ultimately got resolved by an act of the Legislature in settlement. Here is some of what the court said (citations and footnotes deleted, emphasis added):
Both our federal and state constitutions mandate that when private property is taken for public use, its owner must receive just compensation. In the regulatory context, a compensable taking occurs when the government uses its power to so restrict the use of property that its owner has been deprived of all economically viable use.
Plaintiffs’ mineral interests in the Nordhouse Dunes Area had one, and only one, economically viable use: the extraction of any oil or gas that might be found under the land. To extract oil and gas from the land, a well is needed. To be able to drill a well, a permit issued by the Supervisor of Wells is required. The director of the DNR is the Supervisor of Wells. The director’s administrative action made it clear that no permits would be issued for drilling in the protected area. The director’s action prevents plaintiffs from extracting any oil or gas from the land. Consequently, by the exercise of its regulatory power, the government had so restricted the use of plaintiffs’ property rights that plaintiffs had been deprived of all economically viable use.
The parties dispute whether the order prohibited directional drilling to get at oil and gas in the protected area from drilling sites located outside the protected area…If allowed, directional drilling could not be used to extract all the oil and gas there may be under the protected area. Consequently, the director’s action completely deprived plaintiffs of all use of at least some portion of their property holdings in the protected area…
It is also immaterial that all but one plaintiff have extensive property holdings outside the protected area. This case is not similar to the cases defendants cite wherein development of a portion of a parcel of land was limited or restricted. In this case, development of thousands of acres of property was totally prohibited.
The state contends that plaintiffs’ lawsuits were premature, that they should have been required to apply for drilling permits or appeal the director’s decision before claiming that their property had been taken. Again, we disagree. Applying for individual drilling permits would have been a futile gesture. Plaintiffs are not required to pursue futile remedies. The director’s decision was final and absolute. As Supervisor of Wells, the director is the person empowered to decide whether to issue drilling permits; his decisions are final. They are not rendered less final because they are appealable…
The state contends that, even if a taking did occur, it need not pay compensation because development within the protected area could have been enjoined under nuisance law. We disagree. Under nuisance law, plaintiffs could have been ordered to keep their activities from having a detrimental effect on adjoining property. However, the director expressly stated that his action was necessary in order to protect the surface owner’s property. Plaintiffs could not have been ordered to refrain from exercising their rights to extract oil and gas merely because it might have had some detrimental effect on the surface property: the surface owner had a contractual duty to allow plaintiffs to exercise their rights to extract oil and gas, even if it caused some harm to the surface property.
The decision is written in plain language that’s easy to grasp and astute readers will note it touches on every angle and excuse cited by fractivists, whether they be from: Longmont, Colorado where another ban just got overturned; Denton, Texas; West Bloomfield, Michigan; or the Village of Oxford, New York, which thinks it could evade a potential lawsuit by just banning surface development. Answer: it cannot if directional drilling cannot be used to extract all the oil and gas there may be there.
The Implications of Fracking Bans
Obviously, every case is unique. This one involved an usually obstinate state agency (at that time) but it illustrates that, regardless whether or not communities are legally entitled to enact fracking bans, they remain vulnerable to takings lawsuits if they do so and, in the process, restrict the use of property rights to the point the owners are deprived of all economically viable use. This is clearly the case where the mineral rights are owned separately.
Enterprising investors who purchase those rights, therefore, have an opportunity to profit from either drilling or a takings suit. You can’t simply steal someone’s property. Sooner or later there will be another successful lawsuit. Will it be against one the above-named towns? Will it be the Joint Landowners Coalition of New York’s suit against New York State, now an appeal? Will it be a case against the DRBC? Whichever case it is, expect this Michigan case to be cited. It’s that important.
Now, for the real irony. Miller Energy Company and Michigan’s other oil and gas companies are funding DNR through something called the Michigan Natural Resources Trust Fund. This source of public revenue has been so successful, the fund has periodically reached its constitutionally mandated cap of $500 million and produced excess funds that helped pay for other conservation programs.
This program, largely financed from Michigan oil and gas development, has allowed the state to give out over $1 billion through over 2,100 grants throughout all of Michigan since it began in 1976. Today’s DNR is not same DNR that Miller Brothers confronted and no one should suppose it is, but isn’t is amazing that the king’s empire was built with funds provided by the entities with whom he wouldn’t compromise? Such arrogance deserved a rebuke and he learned fracking bans (gas drilling bans in that case) are risky business indeed. May some others learn as well.