The judge released a 42-page ruling against the National Wildlife Federation and two local groups, the Powder River Basin Resource Council and the Wyoming Outdoor Council.
The groups filed the lawsuit in 2012 and claimed that the Bureau of Land Management did not properly analyse how opening the area to development would affect the local elk herd.
The judge rejected the argument that the agency had failed to do an adequate job of considering the effects on elk herds and on water and soil resources.
The state of Wyoming intervened in the lawsuit in support of the federal government’s drilling plans for the area.
A spokesman for Wyoming Governor Matt Mead said: “Wyoming supported the Bureau of Land Management decision because it balanced protection of elk and elk habitat while facilitating natural gas production beneficial to Wyoming and its economy.”
It is unknown whether the environmental groups will appeal the decision.
Production of coal bed methane in Wyoming has sharply declined in recent years from a peak of more than 580 billion cubic feet of gas in 2009 to just over 300Bcf in 2013.