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Northern Natural Kansas Condemnation to Cost Company $7.3M

More than three years after Northern Natural Gas Co. was allowed to condemn more than 9,000 acres in south-central Kansas to contain gas migrating from an underground storage facility, the company got the bill for its action: about $7.3 million. That is far less than what landowners and oil/gas producers were seeking.

In an 85-page report a court-appointed, three-member panel of experts laid out its analysis of nearly 20 days of testimony from a wide variety of expert witnesses attempting to put a price tag on acreage, natural gas and wells that Northern Natural received in the 2011 condemnation. The property-taking was done to contain natural gas that had been migrating from Northern's Cunningham Storage Field in Pratt, Reno and Kingman counties (see Daily GPI, March 15, 2012; March 18, 2011; Jan. 7, 2011; July 26, 2010; June 4, 2010).

Some parties in the matter chose to settle with Northern and accept its offer without going to trial. They got a better deal than the panel recommended, Northern said.

"Based on the recommendations of the condemnation panel, the landowners in the extension area who accepted Northern's good faith offer for the value of their storage rights fared far better than the landowners who opted to go to trial," Northern spokesman Michael Loeffler said in an email. "In fact, the landowners who went to trial will receive about half of Northern's good faith offer for their storage rights."

The U.S. District Court in Kansas, which heard the case, determined that the date of the property taking for purposes of valuation was March 30, 2012.

Landowners were seeking $2,000 per acre for lost storage rights while Northern's position was that the rights were worth $50/acre. The panel recommended an award of $125/acre.

As for eight gas wells on the land, Northern valued them at $5,000, and producers said they were worth $400,000 each. The panel sided with Northern at $5,000/well.

The most contentious issue was valuation of natural gas under the condemned acreage. The producers wanted almost $100 million for the gas. Northern contended that 4.55 Bcf of gas migrated to the extension area and that about 3 Bcf was economically recoverable. The producers said the gas-in-place was 16 Bcf and was worth more than $97 million. The panel adopted the analysis of Northern's experts, including the estimate of 3 Bcf of recoverable gas, to determine a value of $5.95 million.

"The panel completely rejected the producers' ridiculous and greedy demand for a $100 million payment for storage gas that the producers intended to pull from Northern's storage field over the next 20 years," Loeffler said. "Northern is disappointed an award has been made for storage gas, requiring Northern to pay for the gas that it injected into its storage field and was drawn by the producers to their wells."

Loeffler said the company was "heartened" that the panel after weighing the producer and landowner evidence found it to be, in the panel's words, "riddled with flaws" and "not reliable" among other deficiencies.

In its report, the panel seemed to despair at the complexity of the case. "...[T]he parties in this case have molded their respective theories and models," the panel wrote. "We have little doubt that all of them are wrong, just as any theory that attempts to describe the intricate details of thousands upon thousands of acres of land located thousands of feet below the surface of the earth, based on a few dozen penetration points that are themselves less than one foot in diameter, will invariably be wrong in the sense of technical precision...[O]ur role in this regard was to determine which of the theories was the most accurate based on how well it explained and comported with all the available evidence."

Objections to the report must be filed by the parties by Sept. 16. Loeffler said Northern will be seeking damages from the producers to compensate for their "unlawful interference with the Cunningham Storage Field."

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