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Energy and Environment Monitor

Oil & Gas Development Wins Significant Case in Third Circuit

July 10, 2018

By: Robert G. McLusky and Blair M. Gardner

   The U.S. Court of Appeals for the Third Circuit has just given oil and gas development in northeastern Pennsylvania a new boost with a decision issued on July 3.  It reversed a district court’s decision that the Delaware River Basin Commission may bar oil and gas drilling and the associated hydraulic fracturing within the Delaware River watershed under the guise of regulating a “project” that may affect “water resources”.  Relying on these definitions, the Commission has effectively blocked oil and gas development in parts of Pennsylvania bordering on the Delaware River since 2009.

   In 1961, the four states comprising the drainage area of the Delaware River (Delaware, New Jersey, New York and Pennsylvania) and the U.S. entered the Delaware River Basin Compact and established the Delaware River Basin Commission to administer it.  The Compact gives the Commission broad authority to plan for the development and use of water resources.  This includes authority for the Commission to review “projects” in the Basin if they will have “a substantial effect on the water resources of the Basin.”  At issue in the case is the Compact’s definition of “project”, meaning, “any work, service or activity which is separately planned, financed, or identified by the Commission, or any separate facility undertaken or to be undertaken within a specified area, for the conservation, utilization, control, development or management of water resources. . .”

   As gas development and hydraulic fracturing grew in Pennsylvania, interest in drilling began to include the Delaware River watershed.  In 2009 the Commission issued a moratorium on all drilling in the watershed north of Trenton, New Jersey.  In theory, wells could be drilled with the prior approval of the Commission.  Although the Commission has rule making authority, no regulations have subsequently been adopted to determine how an oil and gas developer might secure that approval.

   Shale gas development has been a sensitive political issue in the region for more than a decade.  New York has prohibited it.  New Jersey needs the energy, but also needs to develop infrastructure to bring it into the state.  Apart from whatever internal interests the Delaware River Basin Commission staff might have about the issue, the Commission has been a useful tool for at least these two states (as well as Pennsylvania environmentalists) to avoid difficult political choices needed about gas development regionally.

   Wayne Land and Mineral Group, the plaintiff before the district court, owns 180 acres in Wayne County in northeastern Pennsylvania.  About 75 of those acres fall within the Delaware River watershed.  It brought a declaratory action in the U.S. District Court in Scranton seeking to build a well pad and related infrastructure, drill an exploratory well and possibly drill a horizontal well and fracture any gas bearing zones in the shale within its property.  Because the breadth of the term “project” effectively grants the Commission authority over any human activity that uses water, Wayne asserted that the Commission’s moratorium prohibited any oil and gas development.

   The Commission moved to dismiss the complaint on the grounds of ripeness and standing.  It also claimed that because Wayne Land had failed to seek any “jurisdictional determination” about its proposed activity, the Commission had made no determination about whether drilling would be authorized.  Hence, there was no final agency action which could be appealed.  (This defense was particularly bold given that the Commission, as it conceded in the trial court, had no procedure in place by which a person could seek such a “jurisdictional determination”).  The Commission, however, did not challenge the interpretation of “project” alleged by Wayne Land.

   The district court determined that it had subject matter jurisdiction to consider the merits of the complaint and rejected each of the procedural defenses offered by the Commission.  It also concluded, however, that the term “project” was sufficiently broad to provide the Commission with authority over any drilling within the watershed.  This was the central question appealed to the Third Circuit.

   The three-judge appellate panel decided that the district court had correctly decided the procedural questions, but reversed the district court on the substantive issue, whether “project” unambiguously covers the act of drilling a well and fracturing the shale zones to permit gas removal. For this reason, it remanded the case to the district court for further fact finding.  In doing so, however, it laid down some principles which the district court will need to follow in reaching a final decision.

   First, the Delaware River Basin Compact must be interpreted under the rules of contract law, and not as a statute.  For this reason, whatever the future might be of Chevron deference might be, it will have no role in the future of this case. Second, the Third Circuit went into considerable detail about why the terms “water resources” and “project” were ambiguous and therefore outside of the Commission’s authority to control under the Compact.  The fact that the panel did so at this stage indicates that the Commission will have a heavy burden to demonstrate that its interpretation of the terms and its authority are unambiguously correct.  Finally, members of the Pennsylvania legislature participated as amici and argued that the breadth of the power asserted by the Commission over nearly all land use activities in the Delaware River watershed assumes a session of the state’s sovereignty.  The panel noted this without further comment.

   The opinion is notable for one other reason.  Although he did not write the opinion, Circuit Judge Thomas Hardiman sat as one of the panel members and joined the opinion.  He has been mentioned in recent press reports as a potential nominee to the U.S. Supreme Court.

   The decision is Wayne Land and Mineral Group LLC v. Delaware River Basin Commission, No. 17-1800, U.S. Court of Appeals for the Third Circuit (July 3, 2018).

 

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