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Texas Supreme Court Decision Impacts Texas Oil and Gas Pipeline Negotiations

I spend a significant amount of time as a Texas oil and gas attorney assisting landowners with negotiation of easements and rights-of-way for oil or gas pipelines. As my client and I work through the negotiation process, it is vital to understand the various options available to the pipeline company if we are unable to reach an agreement. While we always try to reach a fair agreement, knowing what the other party can do if a deal is not reached is a key part of crafting an appropriate strategy so that you, as a landowner, can get the most value out of the agreement. Earlier this year, the Texas Supreme Court handed down a landmark decision which may affect the options available to pipeline companies when they negotiate with landowners. The case, Texas Rice Land Partners, Ltd. and Mike Latta v. Denbury Green Pipeline-Texas, addressed issues regarding when a pipeline company is a common carrier and therefore, when the eminent domain power is available to pipeline companies.

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The Texas Natural Resources Code allows “common carrier” pipelines to wield the eminent domain power only if they are going to transport gas “to or for the public for hire.” Of course, this statute reflects the constitutional requirement that property cannot be taken from an owner if it will be used merely for private purposes. In Denbury, the Texas Supreme Court provided further clarification on what a pipeline must do to qualify as a common carrier so that they can utilize the eminent domain power. In the past, it was assumed by most involved parties, including Texas oil and gas attorneys, that the issuance of a common carrier permit by the Texas Railroad Commission was sufficient to satisfy the requirement. In other words, if a pipeline company received the permit, then they could utilize the eminent domain power if they could not negotiate a right of way with the landowner. The Denbury case changes that.

In this case, Denbury Green received a T-4 permit from the Texas Railroad Commission to construct and operate a CO2 pipeline at the Texas-Louisiana boarder and extending to the Hastings Field in Brazoria and Galveston counties. As part of the permit application, the company checked a box which indicated that the pipeline would be used as a common carrier, instead of as a private line. After receiving the permit, Denbury Green visited part of the proposed location where the pipeline would be put. However, the owners of the land in question, Texas Rice Land Partners, refused to give the company access. Denbury Green and the Texas Rice Land Partners had previously negotiated on the company’s use of the land, but they had not reached agreement. Denbury Green sued to have access to the site to survey in preparation for condemning the pipeline easement.

The case eventually made its way up to the Texas Supreme Court. Denbury Green argued that it should be deemed a common carrier with the power of eminent domain because the permit issued by the Railroad Commissions deemed it as such. However, the Supreme Court rejected that argument. They noted that “the T-4 permit alone did not conclusively establish Denbury Green’s status as a common carrier and confer the power of eminent domain.” Instead, the Court stated that whether or not a pipeline company is deemed a common-carrier is a judicial question. The Railroad Commission’s granting of a permit is an administrative tool based upon the self-reporting of the company involved. Such a process is not subject to the adversarial testing present in the judiciary to determine if the company will actually use the pipeline for public purposes.

The Court reiterated that the extraordinary power of eminent domain cannot be taken lightly. It explained that landowners cannot be subject to a forcible taking of their private land “with such nonchalance via an irrefutable presumption created by checking a certain box on a one-page government form. Our Constitution demands far more.” The Court went on to declare that a pipeline company must do more to conclusively establish itself as a common carrier. Not only is the permit insufficient, but merely making the pipeline available for public use is also insufficient. In many cases, a pipeline will never actually serve a purpose for anyone other than the company building it. Therefore, mere claims that it could be used by others cannot be a loophole to get around the constitutional requirement that eminent domain power not be available for mere private purposes.

This decision may have significant effects on all future negotiations where a common carrier permit is involved or the use of eminent domain power is threatened. While the permit’s indication of common-carrier status will remain prima facie valid, a landowner may now challenge that status. At that point, the burden shifts to the pipeline company to prove that there is a reasonable probability that the pipeline will actually serve the public and not that it may serve the public “in theory.” Many more pipeline companies will need to negotiate with landowners much more, shall we say, earnestly, now that their ability to forcibly take an easement or right-of-way via eminent domain may be limited.

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