Texas City's Fracking Ban Will Likely Cost Taxpayers Millions

AUSTIN, Texas — The decision by voters in the North Texas oil and gas city of Denton to pass an ordinance that would ban fracking could cost their city millions of dollars a year, with several lawsuits already filed and more potentially on the way.

Hydraulic fracturing, or “fracking,” is a process by which rock is fractured by injecting hydraulically pressurized sand and other chemicals suspended in water into the deep-rock formations where resources like natural gas and petroleum are found. The technique has been around since the 1950s, but recent advances have made it possible to access resources that were previously not commercially viable. 

Fracking has led to a massive increase in Texas’ energy production, with the state contributing heavily to the United States becoming the world’s largest natural gas producer in 2010 and even beating Saudi Arabia to become the world’s largest producer of petroleum this year. According a report released this week by the Congressional Budget Office, fracking has increased the United States’ gross domestic product, reduced energy prices for consumers, and increased tax revenues. The budget surpluses that Texas has enjoyed the past few years are due in no small part to the exponential increases in tax revenues from the state’s energy sector. However, fracking is not without its critics and opponents cite concerns over the chemicals used in the process, the noise generated, and other environmental issues.

The City of Denton is located on the Barnett Shale, one of the largest natural gas fields in the country, and city records show that there are currently 277 active wells within the city limits. The city had already enacted setback requirements for wells that amounted to a “de facto ban” on fracking, as described by the Energy in Depth blog. Denton became the first Texas city to officially ban fracking after voters approved an ordinance on the November 4th ballot, as Breitbart Texas reported. According to the Fort Worth Star-Telegram, both Texas Land Commissioner Jerry Patterson and members of the Railroad Commission have told city leaders that this ban is not valid under Texas law. Railroad Commission Chairwoman Christi Craddick also publicly voiced her opposition to the ban at an event sponsored by the Texas Tribune in November, vowing that her agency would continue to issue permits. “I believe it’s my job to give permits, not Denton’s,” said Craddick. “We’re going to continue permitting up there because that’s my job.”

Richard Burleson of Burleson LLP wrote an op-ed for the Houston Chronicle back in August that outlined some of the detrimental financial effects that a fracking ban could have on Denton:

“A recent report from The Perryman Group estimates that if fracking were barred, it could potentially cost Denton $251.4 million in economic activity and 2,000 jobs over the next 10 years; slash tax revenues by $5.1 million to the city; and reduce revenues to the Denton Independent School District by $4.6 million. That money would have to be made up somewhere in order to maintain essential city services. The guess here is that it would ultimately have to come out of residents’ pockets.”

Litigation costs are expected to be another major drain on Denton’s finances. The strong opposition to the ban from owners of mineral rights and the oil and gas industry, plus the large amount of money at stake, means that there is a long list of potential litigants. 

The fracking ban has already drawn at least two lawsuits. The Texas Oil and Gas Association (TXOGA) filed for an injunction against the ban last month, as Breitbart Texas reported. Thomas R. Phillips, a former Texas Supreme Court Justice who is representing TXOGA in the litigation, described the key legal issue as whether or not Denton voters actually had the power under Texas law to impose such a ban. “While home-rule cities like Denton may certainly regulate some aspects of exploration and drilling, TXOGA does not believe that they may enact ordinances that outlaw conduct, like hydraulic fracturing, that has been approved and regulated by state agencies such as the Railroad Commission or the Texas Commission on Environmental Quality,” Phillips said in a statement released to the media. 

The second lawsuit was filed by Patterson in his role as Commissioner of the Texas General Land Office (GLO), and similarly argues that the city’s fracking ban is preempted by state law, and that it should be overturned for being “arbitrary, capricious, and unreasonable.” Moreover, the GLO owns and has active leases for mineral rights within the city limits and stands to lose millions in oil and gas interests if the ban is allowed to stand. “The Prohibition against hydraulic fracturing will completely destroy the value of the [GLO’s] minerals,” states the complaint. The lawsuit argues that even if the city’s ban is permitted, that it should not apply to those interests held by the GLO.

Additional potential litigants include the private citizens who own property with mineral rights within the city limits of Denton, who may wish to file suit for eminent domain claims against the city. Eminent domain is the legal process by which a government entity takes private property, thereby entitling the owner to compensation. There is well-established case law that certain regulatory actions by governments can constitute a “taking” of all or part of the owners’ property interests, and entitle them to compensation for the lost value. 

Here, the owners of mineral rights on property in Denton who are now unable to use, sell, or lease those rights have arguably been damaged by the government’s regulation. Their claims are helped by the fact that there is case law precedent directly stating that fracking is necessary in order to get any production out of wells in the Barnett Shale, where Denton is located. A 2008 Texas Supreme Court opinion stated that “development in the Barnett Shale in north Texas…is entirely dependent on hydraulic fracturing,” and another opinion from the Court in 2011 similarly held that “wells in the Barnett Shale require fracture stimulation in order to produce.” 

Eminent domain cases are determined on a case-by-case basis whether the property owner was in fact damaged by the government action and entitled to damages, and the damages are calculated individually as well. Still, there are some estimations that can be made to predict what the damages may be. 

The most recent data from the Texas Railroad Commission (RRC) is from September 2014, and it shows that Denton County produced 16.9 billion cubic feet of natural gas that month. The RRC only keeps records by county, not city, but Denton County had 2,931 regular producing gas wells in September, and the City of Denton had 277 wells. The city’s wells add up to a little more than nine percent of all the wells in the entire county, and constitute an estimated 1.52 billion cubic feet of natural gas produced by wells within the city in September, with the caveat that wells are not equally productive.

The U.S. Energy Information Administration reported that the “spot price” for natural gas in September 2014 ranged from $3.82 per thousand cubic feet ($/mcf) to as high as $4.14/mcf. The Texas Alliance of Energy Producers, an oil and gas trade group, said that the average price in September was $3.91/mcf. To be conservative, using the lowest figure of $3.82/mcf, the 1.52 billion cubic feet of natural gas produced inside Denton’s city limits was worth a estimated $3.82 million in total. 

Most mineral owners will not engage in drilling and fracking themselves, but will instead contract with a producer to be paid a set fraction of the value of whatever minerals are extracted from the property. The most common figure for oil and gas wells is a “3/16 royalty,” which pays the owner 3/16 of the value of the oil or gas that is produced. Applying the 3/16 royalty to the $3.82 million worth of natural gas produced by Denton’s oil wells in September, results in the mineral owners getting paid $716,250 for that month, or an estimated $8.6 million per year. 

Again, not every well produces at the same level, and Denton’s ban only purports to apply to the wells that were not already permitted to engage in fracking. Still, considering that a gas well can produce for decades, it is clear that eminent domain lawsuits from even a small percentage of Denton mineral owners would quickly add up to millions in damages, and that does not include the substantial attorneys’ fees and costs that the city will also have to pay to defend the litigation. 

Jerry Simmons, executive director of the National Association of Royalty Owners (NARO), agreed with the TXOGA and GLO that the Denton fracking ban is not valid under state law. “A drilling ban in Denton is going to cost the city millions of dollars in avoidable litigation,” Simmons told Breitbart Texas. “Our members have property rights protected under the U.S. Constitution, and they subsequently have a right to just compensation if that property is taken from them, which is exactly what happens under a scenario in which oil and gas development is banned.”

Even if it passes muster in the courts, Denton’s fracking ban could be short-lived. Several legislators, including State Rep. Phil King (R-Weatherford), have vowed to file bills this session that would prohibit cities from banning fracking. King told the Star-Telegram that the oil and gas industry needed to have uniform statewide regulations.

A source within the oil and gas industry, speaking on condition of anonymity, told Breitbart Texas that he predicted that “within a year, that ban will be gone.” As the litigation costs mount, they will soon overcome the city’s budget, explained the source, and there will be few options except to either issue debt or raise taxes. Accordingly, even if the lawsuits have not reached a point of final resolution, “the political pressure will force the Denton City Council to act to reverse this decision,” he said. 

The Denton City Council is scheduled to discuss the fracking ban, implementation, and pending and potential litigation at a City Council meeting at 1:00 pm Central Time on Tuesday. Some portions of the meeting will be closed so that the Council may discuss “legal issues and strategies,” but other portions will be open to the public. The city’s Planning and Zoning Commission will also hold a City Council Work Session at 6:30 pm Central Time Tuesday in order to receive public input.

For more information:

Denton Code of Municipal Ordinances, Subchapter 22, Gas well drilling and production.

Texas Oil and Gas Association v. City of Denton, Denton County District Court, No. 14-08933-431.

Jerry Patterson, Commissioner, Texas General Land Office v. City of Denton, Travis County District Court, 53rd Judicial District, No. D-1-GN-14-004628.

Follow Sarah Rumpf on Twitter @rumpfshaker.