The ruling, which a three-judge panel of the Colorado Court of Appeals handed down Thursday, remands the case back to the state District Court of Denver County for further action.

The plaintiffs in the case, Cary and Ruth Weldon and Wesley and Marcia Kent, own property located directly above the Project Rulison test site just outside Battlement Mesa. They sued the Colorado Oil and Gas Conservation Commission in December 2008, for not allowing the residents to have a hearing before the commission to protest applications by Denver-based EnCana Oil and Gas for permits to drill for gas less than three miles from the site.

Two environmental groups, the Grand Valley Citizens' Alliance and the Western Colorado Congress, quickly joined the case as plaintiffs.

Acting on motions filed by Encana and the COGCC, the district court ruled that the plaintiffs lacked standing to file the suit.

COGCC Director Dave Neslin said Monday that the commission would examine the appeals court decision before deciding whether to file an appeal.

"We are evaluating the decisions and considering our options," he said.

An Encana spokesman declined to comment on the appeals court ruling.

Luke Danielson, an attorney for the residents, said Monday they were pleased with the ruling.

"The days of saying oil and gas production is the most important value in our society has to come to an end," Danielson said.

The Project Rulison site was created when the former US Atomic Energy Commission exploded a nuclear device deep beneath a Colorado mountainside as part of an experimental program to see if nuclear explosions could fracture the rocks to let trapped pockets of gas flow free.

Although the explosion did cause some gas to be released, it was deemed to be too radioactive to be sold commercially and the test site was sealed.

After the conclusion of the experiment, the US Department of Energy, the successor agency to the AEC, established a three-mile buffer zone around the blast site and required anyone attempting to drill a gas well to notify DOE before proceeding.

In addition, the COGCC determined that any applications to drill within a half-mile radius of the site must be heard before the entire commission.

Last June, the DOE released a report saying that drilling could be conducted safely within the state's half-mile zone, and called for a program of phased drilling with each succeeding well in a project being drilled closer to the site's ground zero.

Although the proposed Encana wells would not be within the half-mile zone, Danielson said residents still are worried about the potential effects of allowing drilling anywhere in the vicinity of the site.

Danielson said his clients fear the threat of groundwater contamination from the site.

"There's just no doubt that there are a lot of very serious toxic and radioactive materials down there," he said. "The concern is that this material could be released into the environment by drilling."

--Jim Magill, jim_magill@platts.com