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pipelineWe now know what it takes to establish common carrier pipeline status in Texas.  According to the Texas Supreme Court in Denbury Green Pipeline Texas LLC v. Texas Rice Land Partners Ltd., all that is required is a reasonable probability that the pipeline will, at some point after construction, serve the public by transporting a product for one or more customers who will either retain ownership or sell it to parties other than the carrier. A “reasonable probability” is “more likely than not”.

Summary judgment evidence established a reasonable probability that at some point after construction, Denbury Green’s CO2 pipeline known as the Green Line would serve the public, and thus Denbury Green is a common carrier as a matter of law. This means no jury trial in Jefferson County at which common-carrier status would be the issue.

A long history

In its original opinion first time up the appellate ladder, the court held that “checking the box” on Railroad Commission Form T-4 was insufficient to establish that a pipeline is a common carrier. The record showed only the possibility of future customers, which is not the same as a probability. Plus, there was objective evidence – from Denbury’s own web site – of its intent to use the pipeline solely for its own purposes. After that opinion, the court of appeals found that the facts at the trial court did not establish common carrier status.

This time around, though, Denbury presented evidence necessary to make its case. For example:

  • Testimony that the line was designed to be close to refineries, plants and other facilities that could use the line to transport and store CO2.
  • Transportation agreements with two unaffiliated entities and a sister company acting on behalf of itself and working interest owners unaffiliated with Denbury.

This was “reasonable proof of a future customer”, thereby demonstrating that the line will transport to or for the public for hire and is not limited in its use to the wells, stations, plants and refineries of the owner.

How else can we make it easier?

The Supreme Court removed two court of appeals-imposed hurdles to common-carrier status:

  • The court eliminated the requirement that agreements with third parties be sufficiently substantial to establish common-carrier status as a matter of law. The Supreme Court ruled that the public interest need not be “substantial”. Evidence of a “reasonable probability”, etc. is substantial enough to satisfy the public use requirement.
  • Evidence is no longer limited to pre-construction events or the proponent’s subjective intent or beliefs at the time of its plan to construct the line.  Post-construction contracts are relevant to the analysis.

Left for another day is whether a contract between affiliated entities that may benefit unaffiliated working interest owners is sufficient to establish common carrier status.

A musical interlude.

ernieCo-Author Martin P. Averill

Is Denbury’s Green Pipeline a common carrier? That question is alive and well in Texas. In Texas Rice Land Partners Ltd. v. Denbury Green-Texas Pipeline, LLC,  the Beaumont court of appeals reversed a summary judgment granted by the trial court to Denbury, applying the Texas Supreme Court’s “reasonable probability” of public use standard (announced in the original Denbury Green appeal).  The case will now be in the hands of a Jefferson County jury unless the Texas Supreme Court reviews the decision.

What’s Next?

This decision is likely to strike fear in the hearts of pipeline operators.  For many decades in Texas, the power to condemn private land for a pipeline project was nearly absolute.  Landowners were relatively powerless to prevent a taking.  The original Denbury Green decision gave landowners a way to challenge a pipeline’s right to take their property. Pipeline operators will now likely face extended battles in courthouses throughout the state, including discovery and other procedures that never would have been allowed in years past.

Takeaways

  • Texas Business Organizations Code §2.105’s “fill-in-the-blank” process is not an independent ground for common carrier status—the pipeline operator still must meet the “reasonable probability” of public use standard.
  • Denbury’s proofs were not sufficient to rule out an issue of fact for a jury to decide. The public-versus-private intent of the operator must be judged at the inception of the plan to construct the line.  Contracts executed well after that time, as Denbury’s were, are not definitive.  The court also noted that whether these contracts establish a public use is a matter for “reasonable jurors” to decide.
  • The subjective beliefs of an operator are not probative; for instance, anticipating future contracts, third party use, or availability for public use.  A use is a public use “only when there results to the public some definite right or use in the business or undertaking to which the property is devoted.”
  • Contracts between Denbury Green and Denbury Onshore, ratified by some other small working interest owners, were not enough to establish public use, at least for purposes of summary judgment.  Also, ExxonMobil did not ratify these contracts for its 9.7% interest, and other interest owners do not take title to nor possession of CO2.
  • The public interest in a pipeline project must be substantial.  According to the court, “Specifically, the evidence raises a fact issue regarding whether the taking serves a substantial public interest.”
  • A jury trial is the best way to decide issues of knowledge and intent. Those faccts are rarely appropriate for summary judgment.

Lagniappe

Here is a link to an excellent presentation by Marty to the Energy Law Section of the Houston Bar Association.

Here is another pipeline reaction.

Northern National Gas Company vs. Approximately 9117 Acres in Pratt, Camden and Reno Counties, Kansas shows the relationship between Kansas oil and gas law and the Kansas Underground Storage Act (KSA §55-1201 et seq).

The result: Obtaining authority to condemn a subsurface reservoir works no instantaneous change of ownership in storage gas under Kansas law. Ownership rights are determined by KSA § 55-1210. Under that statute, an injector’s right to retain title to injected storage gas is limited to the certified area where it has already obtained the necessary storage rights and the “adjoining property”.

This case is a good history of not only Northern’s bad fortune, but also the evolution of the relationship between the Storage Act and Kansas oil and gas law and Northern’s misfortune in its litigation on this issue.

Northern’s Predicament

The Cunningham Storage Field is an underground natural gas storage facility in south central Kansas that was substantially depleted after decades of native gas production. Northern had three FERC certificates allowing it to acquire and store gas, first in an underground area covering more than 26,000 acres, second an additional 1,760 acres, and third, in 2010, an additional 12,320 acres. The latter two extension acres were after Northern litigated (and lost) several lawsuits in which it sued nearby operators for producing gas that had migrated from the storage field.

Storage gas had migrated into the 2010 extension area as of the “date of taking” of that area by Northern. The question was Did Northern had to compensate for taking storage gas that migrated into the 2010 extension area, or did the Storage Act require Northern to pay only for native gas?

The Effect of Kansas Oil and Gas Law

Under the “ownership in place” theory, landowners own a present estate in oil and gas in the ground, but when oil and gas escape into other lands or come under another’s control, title in the former owner is lost. That interest is a defeasible interest and under the rule of capture, migrating gas becomes the personal property of the first person to produce it.

Under the Storage Act, when a public utility condemns property it must determine the amount of recoverable native gas and award damages to the owner of the subsurface formations. The result under Natural Gas Act is the same.

Under earlier cases, the rule of capture applied where an entity injects captured gas into a common reservoir underlying its own property and neighboring property, but has no permission to use the neighboring property. When a producer from the neighboring property produced the gas the original injecting entity lost it. That applied when the injector has no condemnation authority from the Kansas Conservation Commission.

When an injecting (see *5) party is a public utility, an exception to the rule of capture is created. At that point the rule is no longer recognized and title to the injecting party’s gas remains with that party.

In 1993, the Storage Act was amended to provide that all natural gas previously reduced to possession and injected into underground storage field or reservoir shall all times be the property of the injector. Thus, only the value of native gas is to be considered when determining compensation.

Jessie Winchester … RIP.  From Bossier City, Louisiana, by way of  Williams College.

Suppose I own a large tract of land in the region of the Barnett Shale, the exclusive right to allow (or prevent) drilling on the aforesaid land, and a desparate need for funds. You have $19 million and the desire to exploit the minerals. I take your $19 million, and when you ask for permission to drill I refuse, and I don’t even offer to return your $19 million. What would you do?

As expected, we learned what Trinity East Energy, LLC would do. They’ve sued the City of Dallas for breach of contract (the lease), inverse condemnation (for taking their leasehold interest without compensation), and fraud (for representing that special use permits would come, knowing they wouldn’t) in connection with a 2008 oil and gas lease over 3,600 acres of City of Dallas land. After collecting the $19 million bonus, the city prevented Trinity from developing the lease by denying special use permits necessary to drill wells, both on the property and on land near enough to the property to exploit the minerals. The damages sought are far greater than the $19 milliion bonus.

Someone who expected this result was Mayor Rawlings, who warned the council of potential litigation in the meeting at which Trinity’s permits were denied. So would anybody who believes that, upon paying $19 million for something and then being denied the right to do anything with it by the party who took the money in the first place, most self-respecting businesses would demand to be made whole.

When trying to understand this situation, the notion of sowing and reaping comes immediately to mind. You have the sowers – the City Council and the City Plan Commission members who denied the special use permits. Then you have the reapers – that would be the same as the sowers. Often overlooked in these discussions are the unwilling reapers, otherwise known as the losers, the collateral damage if you will. As in all cases of governmental chicanery, that would be the citizens of Dallas, who can expect a large legal bill and then, potentially, a large judgment or settlement, not to mention lost revenues from production, should the wells have been successful.

Who’s responsible for this statutory, contractual, constitutional and moral failure? Here are the votes by council and plan commission members. Ask them why they voted against. Note: The council measure didn’t “pass”. A three fourth’s vote was required because it failed at the CPC.

In the name of good government, hope it didn’t happen this way: Intimidated by the few but animated anti-fracking troglodytes (mentioned previously in this blog and other places) the commission and council members followed the politically expedient course: Deny the permits, thereby escaping the proximate wrath of the anti’s.  When the repercussions come home to roost, hope the fallout will be dispersed and the voters won’t notice. 

Here, revealed to me by insiders at city hall, is the trial strategy of the City and its lawyers.

The first step in successfully challenging the Keystone Pipeline: Choose a court that has jurisdiction. Mr. Bishop learned that lesson the hard way in Bishop v. TransCanada Keystone Pipeline.

Mr. Bishop lived in Nacogdoches County, Texas, when TransCanada attempted to negotiate an easement and pipeline right-of-way. Those negotiations failed and TransCanada brought a condemnation proceeding. Bishop believed TransCanada didn’t have the right of eminent domain and didn’t agree with the special commissioners assigned to the project (the process for Texas condemnation proceedings that aren’t resolved by agreement). The parties settled and executed a mediated settlement agreement.

Mr. Bishop wasn’t happy with the document, and as a pro se plaintiff (that is, without a lawyer to speak for him), filed a new suit in the County Court at Law of Nacogdoches County. He alleged in his petition that the agreements were as a result of coercion, duress and fraud. The question for the court was whether the dispute was over the ownership of land or over a breach of a contract. The significance is that as a statutory county court, the County Court at Law of Nacogdoches County does not have jurisdiction over “a suit for recovery of land.”

The real question was whether an easement involves an interest in land. In his petition Bishop requested that the court prohibit TransCanada from exercising its rights under the easement negotiated at the settlement and to rescind the easement and pipeline rights-of-way. The appellate court concluded that an easement is an interest in land and that the county court at law had no jurisdiction.  Mr. Bishop’s claims were dismissed.

Takeaway

If you are making a trip to the courthouse, bring along a lawyer.

Co-author Alexandra A. Crawley

In Walton v. City of Midland, the surface owner of a 35 acre tract within the city limits of Midland, Texas, contended that a provision in a city permit for an oil or gas well was a regulatory taking because it required the lessee to drill a water well on the surface owner’s property for landscaping purposes and that this requirement exceeded the lessee’s right to use water under its oil and gas lease.

The city granted the lessee a permit to drill a well for oil or gas on the surface owner’s property with the following requirement:

Operator shall drill one (1) freshwater well for the provision of irrigation water to maintain the trees required above. Said water well shall not be closer than five hundred (500) feet to the permitted oil and gas well. Operator shall maintain all required trees in a healthy and growing condition. The operator is authorized to drill only one well for irrigation purposes.

The Elements of a Taking Claim

The elements of an inverse condemnation claim are (1) the governmental entity intentionally performed an act in the exercise of its lawful authority, (2) that resulted in the taking, damaging, or destruction of the claimant’s property, (3) for public use. Such a claim may be based on a physical or regulatory taking. Walton alleged a regulatory taking.  (It is referred to as “inverse” bcause it is the opposite of the typical eminent  domain case, in which the government is the claimant.)

The Reasoning

The court determined there was no regulatory taking, focusing on the various tests applied by the United States Supreme Court that aim to identify regulatory actions that are functionally equivalent to the classic taking in which government directly appropriates private property or ousts the owner from his domain. The tests focus on the severity of the burden that government imposes upon private property rights. Several facts support th result in this case:

  • The provision did not require lessee to drill the well on the surface owner’s property, only that it could not be located closer than 500 feet to the permitted oil and gas well; therefore, the surface owner did not “suffer a permanent physical invasion of his property.”
  • Because the surface owner acquired the property subject to the mineral severance, granting the permit was consistent “with the parties’ already existing property rights” and no affirmative rights were granted to the lessee “to occupy or use” the land.
  • The value of the surface after the lessee drilled the well was $3,000 per acre, which shows “the granting of the permit did not deprive him of all economically beneficial use of the property to the extent that he was only left with a token interest.”

Takeaway

If the government is not specifically granting authority to occupy or use land, or taking away all but a token interest in private property, a regulatory taking action will most likely not succeed in Texas.

Co-author Chance Decker

Private property rights advocates scored a big victory in a Texas condemnation case in the ongoing battle between pipelines and landowners over the power of eminent domain. (See our last post for a decision with the opposite result). 

An appeals court in Crosstex NGL Pipeline, LP v. Reins Road Farms, Ltd. denied “common carrier” status for Crosstex, who wanted an injunction to prevent the landowner from interfering with Crosstex’s efforts to survey his property for a gas liquids pipeline.

The court found Crosstex was not a “common carrier” with eminent domain power under either the Texas Natural Resources Code or the Texas Business Organizations Code. Crosstex’s pipeline would transport “natural gas liquids” not “crude petroleum” as that term is defined by the Natural Resources Code, and there was evidence the pipeline “will not actually be used by the public,” a prerequisite to common carrier status under the Business Organizations Code.

The Natural Resources Code confers common carrier status on any person who “owns, operates, or manages a pipeline or any part of a pipeline in the State of Texas for the transportation of crude petroleum to or for the public for hire, or engages in the business of transporting crude petroleum by pipeline[.]” The court did not consider “natural gas liquids” to be “crude petroleum” under the statute.

The finding on the public use question is important to landowners opposing condemnation. Crosstex’s public use T-4 permit from the Railroad Commission did not automatically confer common carrier status. A landowner is still entitled to dispute a pipeline/condemnor’s common carrier status despite the issuance of a RRC T-4 permit. This is consistent with the Texas Supreme Court’s 2012 decision in Tex. Rice Land Partners, Ltd. v. Denbury Green Pipeline-Tex., LLC.

Prior to Denbury, about all the pipeline had to do for common carrier status was fill in a box in its RRC permit application. It’s not that easy anymore.

There are several ways the songsmith could view this case, in the unlikely event that condemnation law is his muse.  One is from this particular pipeline’s perspective. (Landowners who weren’t as lucky as here should like the reference to the six-gun). Another is through the eyes of the landowner.  That’s a stretch here. Nobody accuses the landowner in our case of being in such a tough spot.

Co-author Chance Decker

Two recent cases from the same Texas court reflect the ongoing uncertainty over the threat to private property rights posed by the Keystone XL and other pipelines. Is there a theme, a common thread, running through law on this subject? Not in Texas. Today we discuss one of these decisions, Next time we review the other.

In Re Texas Riceland Partners, Ltd., confirmed TransCanada Corp’s common carrier status and affirmed its right to immediate possession of landowners’ property in Jefferson County for the Keystone XL pipeline. A consortium of rice farmers alleged TransCanada could not use the power of eminent domain to take over private property because it was not a “common carrier” under the Texas Natural Resources Code. The Code grants common carriers the power of eminent domain, and defines a “common carrier” as someone who “owns, operates, or manages a pipeline or any part of a pipeline in the State of Texas for the transportation of crude petroleum to or for the public for hire, or engages in the business of transporting crude petroleum by pipeline.”

The trial court denied the farmers’ challenge to TransCanada’s common carrier status and upheld the condemnation. The court of appeal upheld TransCanada’s right to possession of the condemned property during the farmers’ appeal. The farmers relied upon the 2012 Texas Supreme Court decision Texas Rice Land Partners, Ltd. v. Denbury Green Pipeline-Texas, LLC that a pipeline owner’s power to condemn must be fully resolved through the judicial process before the pipeline can take possession of private property. The flaw in that challenge was that in Denbury, the court denied common carrier status.

The court found ample evidence — including affidavits from TransCanada employees about the Keystone XL Pipeline’s ownership and planned operations—to find TransCanada a common carrier.

The takeaways: 

  • The pipeline/condemnor need not wait until the end of the seemingly interminable appeal process to take the land and construct its pipeline.
  • Some cases raising “big” policy issues are decided by a mundane examination of the statutes creating the rules, not flowery speeches by one side or the other.

By Travis Booher

“Money isn’t everything, Jett.” Leslie Benedict. 

“Not when you’ve got it.” Jett Rink

The ageless struggle between the oil man and the rancher continues. The Texas Supreme Court declined to review LaSalle Pipeline, LP v. Donnell Lands, L.P., (the link is the court of appeals opinion) a pipeline condemnation suit involving land in McMullen County. South Texas landowners deem the decision historic; pipeline operators are shaking their heads in disbelief.

LaSalle filed an eminent domain action to acquire temporary workspace easements and a permanent right-of-way over two tracts owned by Donnell: an 8,034 acre tract and a 46 acre tract. A 15.95 acre permanent easement would come out of the big tract, and a .97 acre easement from the small tract. After Donnell objected to a Special Commissioners’ award in the amount of $226,055, a jury awarded them $658,689: $19,206 for temporary workspace, $34,533 for permanent easements, and $604,950 for diminution in value to the remainder of the tracts. To no one’s surprise, LaSalle appealed.

On appeal, both parties questioned the validity of the other’s expert at trial. Ironically, both sides used the “comparable sales” method, although (not surprisingly) the experts came up with very different results.

Donnell’s expert reviewed sales data from McMullen and Webb counties, and opined that 4100 of the 8,034 acres was damaged 10% by the pipeline, while the small tract was damaged 25%. James Donnell agreed with his expert’s opinion (Are you surprised?), and estimated his damage would be somewhere around $900,000. Mr. Donnell also noted the easements would be a “black mark” on his deed for eternity.

LaSalle’s expert, on the other hand, testified that a pipeline would not diminish the market value of the remainder of the tracts, and relied on approximately 15 transactions in McMullen County (including several of the comparable sales used by Donnell). The expert also noted that differing land values did not simply result from the fact that some lands have pipelines and others do not. The expert also testified that he spoke with either a buyer or a seller in the McMullen County transactions, and the existence or absence of a pipeline had no bearing on the sales price.

It is worth noting that the court recognized that expert testimony is at best “something of a speculation”. Thus, it is up to the trier of fact – the jury – to determine the market value.  

To the delight of landowners, the court of appeals agreed with Donnell and the evidence it presented. However, the Court did agree to reduce the temporary workspace damages by $12,804, thereby giving LaSalle a hollow victory.

The precedential value of the decision has yet to be determined, but landowners are surely empowered by it, and pipeline operators must be cautious of it. Eagle Ford production must be moved by trucks and pipelines. How a buyer and seller may view a pipeline, however, will ultimately be up the buyer, the seller and the free market. Some landowners may view a pipeline right-of-way as a “black mark”, while others may view it as a good sendera to kill their next buck.

Ponder this one: Will those “black mark” landowners think the same about well locations when their royalty money starts flowing like the Frio River in a spring flood?

In a vindication of landowners’ rights, the Texas Supreme Court prohibited a pipeline owner from using eminent domain to take private property.   In Texas Rice Land Partners, Ltd. v. Denbury Green Pipeline-Texas, LLC, the court said that a pipeline must show that it satisfies the requirements for common-carrier status before it will be allowed to use eminent domain.  (Note, this is a new opinion in the case, superceding the opinion delivered on August 26, 2011).

The court said that the Constitution’s protection of  private property rights requires more of a party seeking eminent domain power than ”checking the right boxes in one-page Railroad Commission form” through a process in which the landowners who will be affected have no participation.  The court rejected the proposition that all the pipeline had to prove was that the pipeline would be available for public use.  There must be a “reasonable probability” that the pipeline will at some point serve the public by transporting gas for one or more customers who will either retain ownership of their gas or sell it to parties other than the carrier.

This case highlights the difference between Texas and other producing states.  See, for example, a Louisiana case allowing the use of “expropriation” as they call it there, if there is “any allocation to a use resulting in advantages to the public at large”.

This case has implications in many situations.  One that comes to mind is the producer who uses a wholly-owned pipeline subsidiary to move production across the lessor’s property, calling it a common carrier and invoking the right of eminent domain to overcome surface use restrictions in the lease.