In another blow to oil and gas companies that have been waiting years for permission to develop leases in the state, a New York appeals court has sided with opponents of hydraulic fracturing from the town of Dryden who used the municipality's zoning powers to block unconventional oil and gas operations within its borders, with the court saying the town's action does not subvert the state's sole regulatory authority over energy activities.

Norse Energy Corp. USA, a Norwegian energy company, appealed a lower court decision from February 2012 that threw out challenges by Anschutz Exploration Corp. to Dryden's zoning ordinances. The court allowed Norse to substitute in the case for Anschutz after Norse acquired the Dryden acreage from the Colorado-based company.

In a unanimous decision issued May 2, four New York Supreme Court Appellate Division justices upheld a ruling by the Supreme Court of Tompkins County that found that the right of a municipality to control land use through zoning ordinances did not violate sections of the state's Oil, Gas and Solution Mining Law (OGSML) barring "local regulation" of the industry-even if the town's action blocked oil and gas development entirely.

Under the law, municipalities cannot impose additional requirements on oil and gas companies like cement specifications or well completion procedures. But localities are allowed to control where the activity takes place to ensure the development does not disrupt other land uses-giving New York municipalities authority to effectively block energy development through zoning.

"The zoning ordinance at issue…does not seek to regulate the details or procedure of the oil, gas and solution mining industries," the Supreme Court decision said. "Rather, it simply establishes permissible and prohibited uses of land within the town for the purpose of regulating land generally.

"While the town's exercise of its right to regulate land use through zoning will inevitably have an incidental effect upon the oil, gas and solution mining industries, we conclude that zoning ordinances are not the type of regulatory provision that the legislature intended to be preempted by the OGSML."

The court also denied claims by Norse that Dryden's right to control land use within its borders violated the legislative intent of OGSML. The court said there was no support for Norse's argument in the law's language or legislative history. To the contrary, the court noted the state has superseded local zoning authority over other industries, but chose not to do so with oil and gas development.

Likewise, the court dismissed an argument by Norse that the zoning ordinance conflicted with OGSML because it hampered the efficient development of New York's natural gas resources. Though the court agreed that the law's expressed intent was to reduce waste during oil and gas development, it disagreed with the company that those provisions knee-capped local zoning rights.

"This does not equate to an intention [in OGSML] to require oil and gas drilling operations to occur in each and every location where such resource is present, regardless of the land uses existing in that locale," the court said.

"The well-spacing provisions of the OGSML concern technical, operational aspects of drilling and are separate and distinct from a municipality's zoning authority, such that the two do not conflict, but rather, may harmoniously coexist; the zoning law will dictate in which, if any, districts drilling may occur, while the OGSML instructs operators as to the proper spacing of the units within those districts in order to prevent waste."

The court's decision comes as New York's effort to develop regulations for hydraulic fracturing has dragged on for more than four years, keeping a state-imposed moratorium on fracking in place.

New York Gov. Andrew Cuomo (D) says the state needs to conduct a careful review of fracking impacts to develop appropriate regulations to protect public health and safety. However, critics say the governor-who is widely rumored to harbor presidential ambitions-is struggling to reconcile conflicting pressures from anti-fracking environmentalists who are staunch Democratic allies and economically struggling areas in upstate New York eager for the economic benefits of oil and gas development.

On April 22, IOGA-NY Executive Director Brad Gill wrote to Cuomo to express "deep concern for the future of natural gas development in this state." Gill told Cuomo that oil and gas production activity-limited to conventional wells-is faltering in New York as companies leave to pursue opportunities in other states. The letter deplored "rumor-mongering" and "pseudo-science" by fracking opponents that has led to public concern about the safety of fracking.

In June 2012, rumors surfaced that Cuomo was mulling a plan that would allow local governments to decide whether to open their lands to shale gas drillers-a compromise approach that drew cautious support from the industry and a divided response from green groups. The court decisions in favor of the municipal fracking bans would appear to give Cuomo a green light for such a local option approach.

Reportedly, more than 50 New York towns have moved to ban hydraulic fracturing within their borders.

This article was published by S&P Global Commodity Insights and not by S&P Global Ratings, which is a separately managed division of S&P Global.