Saturday, November 22, 2014

Why an Oil Company Plans to Sue County for $1.2 Billion After Voter-Approved Fracking Ban

by Nomad

Following a vote against fracking and other enhanced oil extraction processes, voters and local officials in one California county are learning what happens when you cross an ambitious corporation.

Local government officials in central California's San Benito County have every reason to feel bullied and bruised by recent events in the area. 

Measure J
In a November ballot, a referendum known as Measure J was put before its citizens. That initiative was a proposed ban on all "enhanced petroleum extraction such as fracking, cyclic steaming and well acidizing along with all petroleum activities in rural residential zones."

Supporters argued a so-called fracking ban was necessary to prevent possible environmental impacts. According to Measure J supporters, the toxic chemicals used in the extraction process had the potential to cause cancer and other illnesses through groundwater and watershed contamination. The impact to endangered species in a nearby national park was also cited as a cause for worry. 

The Washington-D.C.-based Center for Biological Diversity pointed out 
“These enhanced recovery methods include steam extraction, acid extraction, and hydraulic fracturing ("fracking"). Although all of these methods involve chemistry not used in traditional oil and natural gas extraction, in California none of them is regulated or tracked any differently than are the traditional methods. Statewide, there is no requirement that companies declare the chemicals used in their extraction operations, or even that they are using enhanced extraction methods. Any regulation on these activities therefore (need to be) enacted at the county level.”
Finally, Measure J supported also noted  in quake-prone California,  the possible impact of fracking  on fault-lines should be matter of grave concern. Even in areas where there is little seismic activity, where fracking has been used, there has been a dramatic increase in the number of tremors. San Benito County already has its risks. The notorious San Andreas Fault runs through the region. 

Opposing the ballot initiative was in Newport Beach- based, Citadel Exploration. The oil company, founded in 2006, was set to begin its Project Indian in the Bitterwater area near Pinnacles National Park. In 2013, the company had received approval from county supervisors, over the objections of environmental groups, for a this limited pilot project.

While still in the testing and initial production stage, the oil drilling project was expected to recover an estimated millions of barrels of heavy (11-14 gravity API) oil. Alongside the oil companies were local farmers ready to sign lucrative real estate deals. The company pointed out that strictly speaking the technique to be used was not fracking

It turned out to be a showdown between environmental groups and powerful corporations which reportedly spent $2 million in advertising to defeat the initiative. That's not surprising. Armen V. Nahabedian, President and CEO of Citadel Exploration. has talked up the project
"Having worked on this project for over seven years, I can't overstate the importance and magnitude of our discovery at Project Indian."
When the measure passed by a strong majority (57.36%) in this month, citizens might have thought that would have been the end of the matter. As of Jan 1 next year, because of the vote, all enhanced extraction practices are to be banned and existing projects would have up to three years to comply with the provisions. 
End of story? 
Not quite.

Immediately after the election, Citadel Exploration filed an 8-K form with the U.S. Securities and Exchange Commission (SEC). In the document, Citadel   announced that it would sue San Benito County for a staggering $1.2 billion on the basis of a diminished value claim.  

Had the measure not been passed, the company would have extracted an estimated 20-40 million barrels of oil over the life of the project valued at over a billion dollars. Now they want compensation for their losses from the county "based on the reasonable Unrisked Resource Potential the property would ultimately yield, or allow Citadel to proceed with full field development and steam injection under the exemption ordinance.”

(Naturally such compensation is only based on potential profits, and does not include the damages paid out in the case of possible environmental accidents -which might well go beyond $1.2 billion.)
As one source puts it:
The company is arguing that Measure J constitutes "regulatory taking," meaning, government regulation limits on the use of private property.
According to the document submitted to the SEC:
"The County has attempted to avoid liability created by the aforementioned regulation by adopting an ordinance which addresses the taking issue. However, that ordinance does not provide the County with that coverage and it will in fact be a Court of law that determines the issue of a "regulatory taking" on a case by case basis."
Wikipedia explains the term "regulatory taking" as a "situation in which a government regulation limits the uses of private property to such a degree that the regulation effectively deprives the property owners of economically reasonable use or value of their property to such an extent that it deprives them of utility or value of that property, even though the regulation does not formally divest them of title to it."

As one lawyer (not affiliated with the oil company) said:
"When you start taking people’s property rights you have to pay for them and in this case you talking about the mineral rights to natural gas and crude oil which have substantial value over long period of time."
That's one man's opinion, of course, and lawyers have a lot of opinions.

The Power to Protect
The county officials were appalled at the prospect of facing the corporation in court. One local politician told reporters:
"$1.2 billion. That's like asking for the moon. The county will file for bankruptcy and reorganize. He’s not going to get anything.”
Declaring bankruptcy may not be necessary. According to the California Constitution, local governments in the state are authorized with the power "to enact local planning and land use regulations to protect the public health, safety, and welfare of their residents through their police power."
Zoning laws are a typical example of this policing power authority in practice.

This provision in the Constitution gives the statutory authority to...
Regulate the use of buildings, structures, and land as between industry, business, residences, open space, including agriculture, recreation, enjoyment of scenic beauty, use of natural resources, and other purposes...."
In numerous cases, the US Supreme Court has supported state courts ruling that prohibited particular contemplated uses of land based on the health, safety, moral or general welfare of the public.  
As a Wall Street Journal noted in a article about the use of zoning laws to prohibit fracking:
State and local governments have a compelling interest in protecting the health and safety of their citizens, and regulations that do that may override a takings claim. Although there are no clear, documented cases—as opposed to anecdotes—of fracking harming the public, the courts are likely to approve reasonable restrictions, such as prohibiting drilling less than a prescribed distance from a housing development or school.
The article also points out that more than 170 New York towns and cities have used zoning laws to restrict or prohibit fracking. New York's Supreme Court refused to reverse a challenge to the law. Pennsylvania allows local municipalities to restrict fracking while both Colorado and California are trying to sort out what is permissible or not.  
How much a ballot vote would weigh in that decision making process is anybody's guess.

Full Impact Unclear 
There's another problem with the case, as pointed out by the Monterey Bay Partisan.

Earlier this summer, before the ballot initiative, exploration efforts by Citadel Exploration had already been halted by a Monterey judge. Monterey Superior Court Judge Tom Wills wrote  that San Benito County official hadn't seriously contemplated  the “numerous opportunities for toxic spills” at the Indian Wells project, part of the company’s “Project Indian.”  

Judge Wills ruled that the county had violated state environmental protections by unlawfully giving permission to Citadel to begin the an steam-injection oil drilling project. That ruling overturned a previous ruling by a lower court judge. 

According to Judge Wills, because of the potential dangers to the community, a complete environmental impact report was needed for 15 test wells.
The question before the court was whether an oil company should be required "to analyze just the isolated repercussions of the test of individual wells or the impact of the full potential development.

A limited test of the pilot project from a single well would not suffice, said the judge, when the project might well have included, "if the pilot project demonstrated commercial viability," drilling ‘hundreds’ of wells,  

In an official statement regarding the courts decision back in the summer, company representatives said that in spite of the adverse ruling by the judge, the company would continue "to defend our rights that our mineral lease has afforded us and develop this field with the highest standards of safety and environmental stewardship."

(It is not clear whether or not the company has provided a complete environmental impact study of the project since this superior court ruling in   August.)

If the outcome of the ballot initiative is any indication, the citizens of San Benito were not convinced by Citadel's assurances.
Now the people have spoken, the company has decided to take off the gloves and teach the San Benito county government a lesson.  

Implications of Case
If the Citadel's case is not thrown out, a decision in favor of the oil company could have serious consequences on the legitimacy for all bans on fracking and enhanced extraction projects across the country.
Ballot measures at a local level restricting the use of controversial extraction techniques, (including fracking) will count for nothing.  
If oil companies can ignore local bans and can intimidate local officials with threats of legal action, then why not other corporations such as private prisons, waste disposal plants, nuclear power plants? These two can make the same regulatory taking argument.

The case therefore opens up some important questions about the corporations that believe their own financial interests come before the authority of local governments. 
The message that corporate profits outweigh the will of the people to decide on issues could have a direct impact on their lives, their health and- ironically- the value of their own property. 

It would mark, in short, the day that the New Age of the Corporatocracy took its first baby steps.