By - Michael Drost

What will be the impact of New York’s fracking ban?


By Michael Drost

On December 17, New York officials banned fracking in the Empire State, citing the potential risks to public health. The measure affects the largest number of potential oil and gas deposits by far compared to existing moratoriums on fracking in Maryland and New Jersey, as New York sits atop a large piece of the coveted Marcellus Shale deposit, home to trillions of tons of cubic feet of recoverable natural gas.

The move follows a number of similar bans enacted in recent years, though these have mostly been at the local level (one other U.S. state, Vermont, officially bans fracking, however that ban is largely symbolic as Vermont has no deep earth natural gas deposits). Many are worried that the decision will embolden lawmakers elsewhere, say in resource-rich Pennsylvania or California, to ban the practice outright themselves. Federal officials, sensing that New York’s sentiment may spread to other states, have already jumped in to say that such bans are a bad move, with Interior Secretary Sally Jewell calling fracking bans “the wrong way to go”.

For the oil and gas industry, whether or not New York’s ban will have larger ramifications is a huge unknown, and although it’s impossible to say with certainty that other states will follow, we can expect some of the consequences of the decision to start becoming apparent over the next few months.

Lawsuits…..or talk of lawsuits: Before New York Governor Andrew Cuomo announced with his top health and environmental officials to ban fracking, his decision was foreshadowed by a state court decision which allowed towns to use zoning laws to effectively ban fracking within their borders. This effectively put leaseholders and landowners at odds with city councils, since many of these landowners paid millions to obtain the mineral rights to drill in the gas-rich Marcellus region. Now that the state has banned fracking outright, the case becomes stronger that the government has just deprived landowners of property without payment. Governor Cuomo predicted this himself when he announced the ban, as his administration has been subject to lawsuits in the past over unwillingness to make a decision on the matter.

Whether a case could be won is a different matter, as there was never any guarantee that fracking would commence in the state after the 2008 moratorium. Furthermore, the length of time between when talk of allowing fracking started in 2008 and the decision to ban fracking last month means that many companies which were initially interested in drilling in New York have largely moved out and moved on, and may be unwilling to invest in expensive litigation. There is also the pesky matter of collapsing oil prices, which have hurt smaller and mid-sized energy companies.

Where fracking supporters may have the best legal argument is in the fact that Cuomo based his decision on a New York Health Department study which cited risks to public health that are common with any large industrial project, risks a 2011 New York Department of Environmental Conservation report also cited but dismissed since they are easily controlled via existing regulations. In fact, the same risks the Health Department associated with fracking (noise pollution, vehicle emissions, impact on local ecology) are also associated with casino construction, and a state panel signed off on building three of those the very same day Cuomo decided to ban fracking. The likelihood of winning a suit on these grounds is still slim, however, as courts tend to defer to the decisions of administrative agencies.

Less fracking….for now: This was a given, although not for reasons you might think. New York has not allowed fracking in the state since 2008, so the long-term consequence of the fracking ban, at least in New York, is simply the permanent enactment of the status quo. So why should we expect less fracking in 2015? Simple: the collapse in the price of oil over the past 6 months. This has given the entire oil and gas industry reason to worry. The stubborn refusal on the part of anybody (U.S., Russia, Canada, OPEC) to reduce production has led to a supply glut, which combined with lessening demand has resulted in the steepest drop in energy prices in years. The current price of a barrel of oil (just under $50 as of January 6, 2015) is now well below the $60-100 per barrel break-even price, which, by itself, should convince a number of oil producers to curb back production until prices recover. That means no expanded use of fracking, the same technique which helped increase production rates in North Dakota from 200,000 barrels of oil a day in 2007 to more than 1 million barrels a day now.

The early signs of this are already becoming clear, with major Bakken players Continental Resources, ConocoPhillips, and Apache Corp recently announcing budget cuts, while the U.S. Energy Information Administration has cut its 2015 domestic oil production growth estimate. International expectations for the U.S. shale boom are also waning, with the Paris-based International Energy Agency predicting last month that investment in U.S. energy resources will decline in 2015. There are also fears that the low price of oil will cause financial headaches for smaller oil and gas companies needing to make repayments on loans, further hindering exploration efforts.

An emboldened environmental movement: Now that one of the biggest electricity consumers in the country has decided to abandon fracking, expect environmentalists to turn to other issues, both within and beyond New York, confident that lawmakers will take action.  Environmentalist group Riverkeeper, which at one point was mulling whether to scale back plans to stop trains with fracked gas from traveling through New York, is now opting for a more aggressive approach, including going forward with plans to pressure the Cuomo administration against completing a crude oil facility in Albany.

Outside New York, environmentalists are planning to intensify movements to ban fracking in California, Maryland, and North Carolina. Deb Nardone, director of the Sierra Club’s “Keeping Dirty Fuels in the Ground” initiative, told National Geographic that the Cuomo decision is likely to have a domino effect, with other states opting to follow New York’s lead. Whether more states join the New York bandwagon remains to be seen, but it is likely that movements in these states and others will view the New York fracking ban as evidence that it can be done.

As with any ambitious effort, however, there is always the chance that environmentalists will overplay their hand. They will have to be especially cautious in states where the established power players have a vested interest in keeping the oil and gas industry afloat. In Colorado, for example, one small city which recently voted to ban fracking is learning this the hard way, as state officials, energy companies and industry groups are taking the city to court over what they argue were illegal actions that amounted to voter-approved theft. At least three recent court rulings have overturned fracking prohibitions in Colorado, and the court cases are being used as a legal litmus test by other energy companies and state governments on how to tackle the complicated relationship between a landowner’s right to extract underground minerals and a municipality’s concern over the environmental impact of fracking.

While it’s too early to tell what the impact of New York’s fracking ban will be, rest assured that 2015 will be an interesting year for regulators, industry players, and environmentalists alike.

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