House Bill 40: The Texas Legislature's Response to Denton's Fracking Ban

First published in Texas Lawyer, July 29, 2015

By Mark C. Rodriguez and Brock Skelley

On November 5, 2014, the city of Denton made national headlines when it became the first city in Texas to pass an ordinance banning hydraulic fracturing. Although local fracking bans have become increasingly common throughout the United States, Denton's ban garnered significant attention given Texas's prominent role in the oil and gas industry. Moreover, because Denton sits directly atop the Barnett Shale, the ban would have a real and significant impact on exploration and development.

Immediately after the ordinance passed, the Texas Oil & Gas Association, an industry trade association that represents various facets of the Texas oil and gas industry (including both small independents and major producers), sued the city of Denton. Shortly thereafter, the Texas General Land Office, the state agency charged with overseeing state-owned mineral interests, filed a similar lawsuit. Both suits claimed that the Texas Legislature had granted the Texas Railroad Commission exclusive authority to regulate oil and gas operations in Texas and that Denton's ban directly undermined that authority and was therefore preempted by Texas law. Many expected these lawsuits to trigger a long, drawn out legal battle — one that was inevitably destined for the Texas Supreme Court. The Texas Legislature, however, stepped into the fray and changed all of that.

On March 16, House Representative Drew Darby introduced H.B. 40, which quickly became known as the "Denton fracking bill." The bill expressly preempts local regulation of oil and gas development, with limited exceptions for "aboveground activity." Despite significant protest from environmental groups and municipal leaders, H.B. 40 moved quickly through the House and Senate. On May 18, Governor Greg Abbott signed an amended version of H.B. 40 into law.

Key Impacts

The most notable impact of H.B. 40 is its express prohibition of local fracking bans. H.B. 40 amends Chapter 81 of the Texas Natural Resources Code by adding §81.71, entitled "Exclusive Jurisdiction and Express Preemption." Subsection (b) of §81.71 leaves little doubt that outright bans on fracking will not be permitted: "Except as provided by Subsection (c), a municipality or other political subdivision may not enact or enforce an ordinance or other measure, or an amendment or revision of an ordinance or other measure, that bans, limits, or otherwise regulates an oil and gas operation within the boundaries or extraterritorial jurisdiction of the municipality or political subdivision."

Another key impact of H.B. 40 is the restriction and burden it places on municipalities that seek to regulate surface activities related to oil and gas operations. Under subsection (c) of Section 81.71, a municipality may enforce an ordinance or measure that: "(1) regulates only aboveground activity related to an oil and gas operation that occurs at or above the surface of the ground, including a regulation governing fire and emergency response, traffic, lights, or noise, or imposing notice or reasonable setback requirements; (2) is commercially reasonable; (3) does not effectively prohibit an oil and gas operation conducted by a reasonably prudent operator; and (4) is not otherwise preempted by state or federal law."

Prior to H.B. 40's passage, cities relied on their constitutional "home-rule" authority to regulate oil and gas operations within their borders. Article XI, §5 of the Texas Constitution authorizes cities with populations of 5,000 or more ("home-rule cities") to pass local ordinances provided they do not contain "provision[s] inconsistent with the Constitution of the State, or of the general laws enacted by the Legislature of this State." Home-rule cities exercised authority to impose restrictions such as setback requirements that prohibit operators from drilling within a specified distance of homes, schools, and other non-industrial structures. §92.007 of the Texas Natural Resources Code recognizes the "authority of a home-rule city to regulate exploration and development of mineral interests within its boundaries."

H.B. 40 and the new §81.71 afford municipalities less deference than they enjoyed in the past. H.B. 40 defines "commercially reasonable" as "a condition that would allow a reasonably prudent operator to fully, effectively, and economically exploit, develop, produce, process, and transport oil and gas, as determined based on the objective standard of a reasonably prudent operator and not on an individualized assessment of an actual operator's capacity to act." Municipalities that seek to impose setback or notice restrictions on surface operations must now satisfy §81.71's "commercially reasonable" standard.

Although H.B. 40 provides that ordinances that have been in effect for at least five years and that have permitted oil and gas operations to continue during that period are "considered prima facie to be commercially reasonable," the new law clearly recognizes the ability to challenge existing ordinances. For example, in 2013, the city of Dallas enacted an ordinance that imposes a 1,500-foot setback. Whether such a requirement, if challenged, can pass §81.71's "commercially reasonable" standard remains to be seen.

In addition, what is "commercially reasonable" may vary depending on the facts and circumstances of a particular case. An ordinance that is commercially reasonable in one city under one set of facts may not be in another city under different facts. Moreover, given H.B. 40's reliance on Texas' "reasonably prudent operator" standard, the process of determining what is and what is not commercially reasonable will be highly fact intensive and may require expert testimony.

H.B. 40 brought a quick end to Denton's fracking ban and dealt a blow to municipalities' ability to limit, regulate, or prohibit oil and gas operations. In light of this new law, one can expect producers and operators to respond aggressively to municipalities' efforts to regulate oil and gas operations and surface activities.

Reprinted with permission from the July 29, 2015 edition of Texas Lawyer. © 2015 ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited.


This information is provided by Vinson & Elkins LLP for educational and informational purposes only and is not intended, nor should it be construed, as legal advice.