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Proposed Texas Pipeline Permitting Changes Unneeded, Industry Says

Texas -- a legacy oil and gas breadbasket to the United States -- has thousands of miles of pipelines running under foot and hoof statewide. The Railroad Commission of Texas (RRC) is weighing rule changes that could make it more difficult to lay more.

Comments have been taken and a public hearing is scheduled for Monday (Sept. 22) on changes that would require pipeline permit applicants to do more to make their case that they are "common carriers," an important distinction meaning that they offer transportation capacity for hire and by doing so may avail themselves of eminent domain law (see Daily GPISept. 9).

Changes could be made to the application and review process for T-4 permits, which are awarded by the RRC, the regulator of the state's pipelines. In the past, operators have generally been able to simply declare their pipelines common carriers by checking a box on their T-4 application forms.

In 2011 the Texas Supreme Court reversed a lower court decision when it found in Texas Rice Land Partners Ltd. v. Denbury Green Pipeline-Texas LLC [No. 09-0901] that a T-4 permit does not conclusively establish a pipeline's common carrier status. If a landowner challenges a pipeline's status, the burden is on the operator to prove it is a common carrier serving non-affiliated customers, the court found. In 2012 the court refused to rehear the case. Denbury has been seen by some as a call to do something about the pipeline permitting process.

Antroy Arreola, a partner with law firm Locke Lord and specialist in commercial litigation, recently published a note for clients on the changes proposed at the RRC. For one, T-4 permit holders would be required to renew their permits annually, which is not currently required.

More importantly though, the assertion that a pipeline would be a common carrier would have to be backed up in the T-4 application with "...documentation providing support for the classification and purpose sought," wrote Arreola. "Perhaps more troubling for an applicant...a sworn statement from the applicant [would be required] providing the operator's factual basis supporting the classification and purposes being sought."

The person making the statement would need to be chosen carefully by applicants because he/she could wind up on the hot seat during condemnation proceedings when right-of-way for the pipeline is being acquired. "The person appointed must not only be fully conversant with the details of the project, but also be fully prepared to testify in deposition or in any required condemnation proceeding," Arreola wrote.

The review process at the RRC would also change. Allowed time periods for commission determinations on applications would be lengthened, and the commission would either grant the permit or deny the permit as filed. This means that if the RRC denies an applicant's bid for common carrier status, it would deny the entire permit rather than issuing one for a private pipeline. "...[O]perators should take into account the possible need to submit successive applications if the commission disagrees with the applicant's characterization of the proposed pipeline project," Arreola wrote.

The RRC has received comments on the proposed rule change from more than five dozen parties. They run the gamut from landowners and property rights interests who think the changes don't go far enough, to pipeline industry representatives, who think the changes are a bad idea, and not needed.

Weighing in for the energy industry, Clayton Williams Energy Inc.'s Robert Lyon, vice president of gas gathering and marketing, wrote that the changes "...are not necessary and will cause more delay, cost and problems without any benefit."

The court's decision in Denbury should not be seen as an impetus for rule revisions because the case "...was a unique situation..." The company owned all the carbon dioxide (CO2) in the area where it proposed to provide transportation service of same and "...boasted on its website that the pipeline would effectively be a private carrier for its CO2 product," Lyon wrote. The Supreme Court's ruling "...should not have surprised anyone, and this situation is highly unlikely to occur again, especially in the oil and gas transportation business."

The courts still have the final word on property rights and public use issues, Lyon wrote, and changing the rules at the RRC won't make a difference there. "But the proposed changes will, if adopted, add needless additional layers of bureaucracy, delay and regulatory burdens to the pipeline permit process," he wrote. "This would result in a dramatic increase in the flaring of gas or shut-in wells together with a reduction in the number of wells drilled.

"The darker side of the current proposal is that without flaring, producers would not be able to drill wells unless the pipeline that would take the gas had already navigated the bureaucratic process and obtained the permit for the pipeline(s) to the wells."

In their comments, the Texas & Southwestern Cattle Raisers Association and allied associations, concurred with Lyon's view of the ultimate legal insignificance of changing the T-4 permit, but unlike Lyon, they do see a problem with the status quo.

"The fundamental shortcoming with the T-4 permit process pointed out by the Texas Supreme Court in its Denbury decision remains with this proposal," wrote the Cattle Raisers, along with the Texas Cattle Feeders Association, Forestry Association, Land and Mineral Owners Association and Texas Wildlife Association. "Put simply, while each organization signing this letter appreciates the efforts of the commission, the result of the proposed rule is still a process of 'registration, not adjudication.' There is no meaningful review of a pipeline's eminent domain authority under the proposed rule."

The associations want the revised T-4 application form to clearly state that any T-4 permit granted does not determine the applicant's authority to utilize eminent domain to acquire pipeline right-of-way. They said the addition of such language would be in line with the intent of the court in Denbury in which it held that "'...Merely registering as a common carrier does not conclusively convey the extraordinary power of eminent domain or bar landowners from contesting in court whether a planned pipeline meets statutory common-carrier requirements.'"

Some landowners and others post-Denbury have said that something needs to be done in light of the court's comments in the case. But like Lyon at Clayton Williams, the Texas Alliance of Energy Producers wrote that the proposed changes are a solution looking for a problem, and if implemented, they would jeopardize necessary pipeline development.

"Our concern at this juncture is that if something is done, as in the proposed amendments, it not yield delays in pipeline permitting that will impede the building and operation of the pipelines necessary to transport produced oil and gas in a timely and cost-effective manner."

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