Texas Permiting Rules Post-Denbury Green

March 2015, Vol. 242, No. 3

The Texas Railroad Commission adopted new rules in December concerning pipeline permit applications involving 16 Texas Administrative Code §3.70. It has been three years since the state Supreme Court’s opinion in Denbury Green, which took a dim view of the commission’s “check the box” rules regarding Form T-4 pipeline permit application which automatically created common carrier status to the pipeline operator.

There is no doubt these new rules were created as a direct result of the court’s criticism of existing §3.70 rules. Although this has limited impact on the applicable Texas law regarding eminent domain, it does require parties seeking a permit to operate a pipeline to provide the Railroad Commission with more specific information.

It is part of the Railroad Commission’s responsibility to apply the applicable statutory provisions to the pipelines under its jurisdiction and determine if those pipelines are private pipelines, gas utilities or common carriers. The classification of a private pipeline as a common carrier is critical. If determined to be a common carrier, the operator will be granted eminent domain authority over the private property along the route, which the pipeline can take, pursuant to statutory provisions of the Texas Natural Resources Code and the Texas Utilities Code.

In the case of Denbury Green Pipeline, the company applied for a permit to operate a CO2 pipeline in Texas. The application was filed prior to the commencement of eminent domain proceedings (actually the right to conduct survey access) against Texas Rice Land Partners (Texas Rice).

Denbury Green, in preparing the required Form T-4, indicated in the requisite box with an “x” that it would be a common carrier and that the gas would be “owned by others, but transported for a fee.” After submitting all the required documentation, the Railroad Commission notified Denbury Green, by letter, that it had been granted a permit.

Landowners subsequently challenged Denbury Green’s status as a common carrier with condemnation rights by filing suit. The trial court granted summary judgment in favor of Denbury Green and the appellate court affirmed the trial court’s decision. However, the Texas Supreme Court reversed the underlying rulings in favor of Texas Rice and remanded the case back to the trial court.

The state Supreme Court had determined that in accordance with the existing statutory law, private pipeline operators are granted the power to exercise eminent domain authority when the pipeline is available for “public use.” In other words, the pipeline would have to be open for the transportation of other companies’ product.

In the case of Denbury Green, it was held that the mere granting of a permit by the Railroad Commission does not conclusively establish that a private pipeline meets the “public use” requirement of the statute. The court established the “reasonable probability” test, stating “a reasonable probability must exist that the pipeline will at some point after construction serve the public by transporting gas for one or more customers who will either retain ownership of their gas or sell it to party other than the carrier.”

Once the common carrier status of a pipeline operator is challenged by a landowner, the pipeline operator has the burden to make this showing to the court.

The Supreme Court specifically limited its holdings in Denbury Green to those persons who claim common carrier status under §111.002(6) [CO-2 pipelines only] of the Texas Natural Resources Code. Despite the fact that the court went to great pains to limit the scope and application of the Denbury Green decision to CO2 pipelines, it is apparent in most landowner actions subsequent to Denbury Green, that the landowner has tried to apply the decision to all pipelines that allege common-carrier status regardless of the product to be transported. Additionally, at least one court has expanded the application of Denbury Green beyond CO2.

Historically, the Texas Legislature has supported and encouraged the exploration and production of oil and gas within the state. As a direct result of the development of the natural resources in Texas, companies transport and market hydrocarbons and their derivatives throughout the state.

Without the existence of pipelines, natural gas and associated natural gas liquids could not be produced, and without crude oil pipelines many oil wells would not be economically produced. The Legislature has had direct involvement in the development of the hundreds of thousands of miles of petroleum pipelines that cross the state.

The enactment of the Common Carrier Act in 1917 granted the Railroad Commission authority over the oil and gas industry and required virtually all pipelines to carry the product of other producers by defining them as common carriers. This is when common carriers were granted the power of eminent domain.

The Legislature has the inherent power to regulate pipelines in Texas and may delegate eminent domain power to private companies or individuals. The delegation of a portion of that authority relating to certain pipelines is codified in Chapter 111 of the Texas Natural Resources Code.

That chapter establishes the Railroad Commission’s jurisdiction and authority over those pipelines identified in §111.002. (crude petroleum, coal in whatever form, carbon dioxide, hydrogen, or feedstock for carbon gasification or their products, including derivative products).

Furthermore, pursuant to the Texas Utilities Code, the Railroad Commission has jurisdiction and authority over natural gas pipelines. Section 111.019 of the Texas Natural Resources Code and §181.004 of the Texas Utilities Code provides the statutory right of eminent domain to qualifying companies.

The Railroad Commission’s response to Denbury Green was the adoption of the revised administrative rule §3.70, which became effective on March 1 and states the following:

(a) Each operator of a pipeline or gathering system, other than a production or flow line that does not lease a lease or an operator excluded under § 8.1(b)(4) of this title (relating to General Applicability and Standards, subject to the jurisdiction of the Commission, shall obtain a pipeline permit, renewable annually, from the Commission as provided in this rule.

(b) To obtain a new pipeline permit or to amend a permit because of a change of classification, an operator shall file an application for a pipeline permit on a form approved by the Commission, which includes or is accompanied by the following documentation and information:

1. the contact information for the individual who can respond to any questions concerning the pipeline’s construction, operation or maintenance;

2. the requested classification and purpose of the pipeline or pipeline system as a common carrier, a gas utility or a private line;

3. a sworn statement from the pipeline applicant providing the operator’s factual basis supporting the classification and purpose being sought for the pipeline, including, if applicable, an attestation to the applicant’s knowledge of the eminent domain provisions in Texas Property Code, Chapter 21, and the Texas Landowner’s Bill of Rights as published by the Office of the Attorney General of Texas; and

4. documentation to provide support for the classification and purpose being sought for the pipeline, if applicable, and any other information requested by the Commission.

As a practical matter, the revised provisions will impose additional requirements on the pipeline operator who is seeking a permit to operate in the state. However, the additional requirements are not significant and will not deter companies from seeking pipeline permits to be classified as a common carrier.

The decision of the Railroad Commission is issued within 45 days after its determination that the application is complete. If the permit is granted, the pipeline will be classified as a private pipeline, gas utility, or common carrier. Through the permitting process, the applicant will have provided any landowners with additional information needed to determine whether the landowner will challenge the pipeline operator’s status as a common carrier.

The additional information provided by the applicant may or may not dissuade potential challenges to an applicant’s common carrier status. In the process leading up to the enactment of the new rules, the Railroad Commission addressed all comments raised by industry groups, special interest groups and associations, legislators and individuals. The Railroad Commission’s implementation of the new rules remains within the scope of its statutory authority.

It must be understood that even with the new permitting rules in place, the Railroad Commission does not adjudicate the issue of whether a pipeline operator is a common carrier that may exercise eminent domain over private property. Only the courts have the authority to make that determination.

Author: Mark A. Mathews is a shareholder in Baker Donelson’s Houston office. He has over 25 years of experience in the oil and gas industry, which includes six years as a land professional with a major independent exploration and production company prior to obtaining his law degree. Matthews has extensive experience in transactional and litigation matters relating to the energy industry, both onshore and offshore. He can be reached at mamathews@bakerdonelson.com.

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