June 2023, Vol. 250, No. 6


Useful Considerations for CO2, Hydrogen Pipeline Operators

By Ian Goldberg, Partner, and Cheryl Phillips Special Counsel, Hunton Andrews Kurth LLP 

(P&GJ) — When a pipeline operator becomes a “common carrier” under Texas law, it is granted the power of eminent domain over private property for public use. Texas law provides two independent sources for common carrier status: Texas Natural Resources Code Section 111 and Texas Business Organizations Code Section 2.105. Common carrier status is critical to pipeline projects in Texas, especially when easements are difficult to obtain.  

Under the Natural Resources Code, an entity can be designated as a common carrier if it owns, operates, or manages pipelines for the transportation of carbon dioxide or hydrogen for the public for hire.1 Similarly, the Business Organizations Code provides that an entity “engaged as a common carrier, in the pipeline business for the purpose of transporting. . . carbon dioxide . . . has all the rights and powers conferred on a common carrier” by the Natural Resources Code.2 In order to obtain common carrier status under either statutory grant, the entity must furnish written acceptance of the statutory duties and obligations.  

The Railroad Commission of Texas (the “Commission”) regulates common carriers. A party seeking to become a common carrier must file with the Commission a Form T-4 (Application for Permit to Operate a Pipeline in Texas), provide the required supporting documentation, including filing a tariff, and “check the box” on Form T-4 indicating common carrier status.3  

However, the Texas Supreme Court, in a seminal line of cases analyzing common carrier status in Texas, has held that merely claiming common carrier status through the T-4 permit application process is not, in and of itself, enough for an entity to obtain eminent domain authority. Rather, “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 parties other than the carrier.”4  

Once a pipeline operator has satisfied the statutory and constitutional requirements to be classified as a common carrier under Texas law, the entity becomes subject to certain statutory duties and obligations. For instance, the Commission establishes a set of rates, which are promulgated using the tariffs filed by common carriers.  

Additionally, carriers may not discriminate between or against similarly situated shippers with respect to services rendered or rates charged in the transportation of carbon dioxide or hydrogen. The anti-discrimination requirements state that “[n]o common carrier in its operations as a common carrier may charge, demand, collect, or receive either directly or indirectly from anyone a greater or lesser compensation for a service rendered than from another for a like and contemporaneous service.”5  

If a common carrier is found to have violated the anti-discrimination standards, negatively affected shippers may be entitled to damages.  

Once an entity has qualified as a common carrier under Texas law, as described above, it has the power, as a “condemning authority,” to acquire property through condemnation, or eminent domain. While obtaining property interests through a voluntary conveyance by the property owner is undoubtedly preferable to condemnation, entities seeking to acquire interests for a pipeline project should consider following the process outlined below, so that the operator may proceed to condemnation if negotiations for a voluntary conveyance fail. 

The pipeline operator’s first step should be to obtain a title analysis and survey for all rights to be acquired – surface and/or mineral – to determine all interest holders, including owners of record title and the holders of any easements, liens, or other interests. Additionally, depending on the property and project at issue, an environmental assessment may be required or advisable in order to determine if any other federal, state or local environmental laws may impact the project.  

Given the scale, cost and complexity of developing a carbon dioxide or hydrogen pipeline, careful, early consideration of the suitability of each potential tract or segment is imperative.  

Next, prior to commencing any condemnation proceeding, the condemning authority must next adopt a resolution that: (i) describes the property interests to be condemned, and (ii) declares the public necessity for the acquisition. Under Texas law, a condemning authority must then determine the public necessity served by the proposed condemnation and show that “(1) it intends to put the property to public use (the public use requirement) and (2) the condemnation is necessary to advance or achieve that public use (the [public] necessity requirement).”6  

Once the resolution is adopted, the condemning authority may enter into negotiations, both informal and formal, with the interest owners. The first step in the negotiation process is to provide owners listed on the tax roll, as well as any interest owners identified by the title analysis, with the “Landowner’s Bill of Rights Statement” in the form promulgated by the Office of Attorney General of Texas pursuant to Texas Government Code Section 402.031.7  

The Landowner’s Bill of Rights Statement must be provided to the landowner before or at the same time as the condemning authority first represents in any manner to the landowner that it possesses eminent domain authority.8 Additionally, the condemning authority should obtain an appraisal of the interests sought by a certified appraiser, and provide the appraiser with the final title analysis, survey, and any environmental reports prior to the value determination. 

Before exercising the power of eminent domain through a condemnation proceeding, the Texas Property Code requires the operator to make a “bona fide” offer.9 In order to make a bona fide offer, the condemning authority must make an initial offer and final offer in the manner prescribed by statute.  

The initial offer must (i) be made in writing to the landowner, who is given 30 days to respond, (ii) set forth the compensation offered10, (iii) include the Landowner’s Bill of Rights Statement and a proposed deed, easement or other instrument for execution, (iv) provide the current appraisal report, as well as any appraisals performed within the last 10 years, and (v) include name and telephone number of a representative of the entity. 

If the initial offer is rejected or ignored, the condemning authority must then submit a final offer in writing to the landowner. The final offer may be submitted no earlier than 30 days after the initial offer and must provide the landowner with not less than 14 days to respond. The final offer must offer compensation for the interest equal to or greater than the amount as determined by a certified appraiser.  

If the final offer is rejected or ignored, then, after the final offer expires, the condemning authority may file a Petition and Statement in Condemnation in the District Court or County Court in which the property is located.  

The petition must include the following: (i) description of property; (ii) description of public use; (iii) name of landowner(s); (iv) statement that the condemning authority and landowner are unable to agree on compensation due; (v) statement that the condemning authority has provided the landowner with the Landowner’s Bill of Rights Statement; and (vi) statement that the condemning authority has made a bona fide offer to acquire the property from the owner voluntarily.11  

The judge of the assigned court will then appoint three disinterested owners of real property who reside in the county to schedule and conduct a Special Commissioners Hearing to make a fair determination of compensation due to the landowners. If dissatisfied with the Special Commissioners selected, each party may strike one commissioner, and the judge will appoint a replacement commissioner.  

At the hearing, evidence will be presented regarding the fair market value of the property rights being acquired, and the commissioners will then make the award. Once the award has been issued, possession of the property by the pipeline operator may be secured by depositing the amount of the award into the registry of the court, making a second deposit or posting a surety bond, and posting a cost bond.12 Although it will not affect the operator’s statutory right to possession of the property, either party may file timely objections to the award. 

The process for pipeline operators to qualify as common carriers, and thus acquire the right to exercise the power of eminent domain, requires a thorough understanding of the interplay between Texas statutory law and constitutional considerations of public use and necessity. 

Careful consideration of and adherence to statutory and regulatory requirements is essential to the successful pursuit of condemnation actions.

Authors: Ian Goldberg is a partner in Hunton Andrews Kurth LLP’s Houston office, advising clients on a broad range of energy transactions, including mergers, acquisitions and divestitures, project development, financial transactions, and out-of-court and bankruptcy court restructurings involving oil and gas assets (upstream, midstream and downstream), renewable energy projects and rare earth mineral deposits. 

Cheryl Phillips is the special counsel in Hunton Andrews Kurth LLP’s Houston office, advising clients on oil and gas transactions, including mergers, acquisitions and divestitures, farmout agreements, participation agreements, drilling contracts, and gas gathering agreements. 

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