CNX Gas Corp. obtained a favorable lower court ruling this week in a case concerning whether rival producer GeoMet Inc. has the right to construct natural gas pipelines and transport gas across a disputed 32-acre leasehold in southwest Virginia.

CNX and GeoMet separately explore and develop coalbed methane (CBM) property in and around southwestern Virginia in the Appalachian Basin. Until April, Cardinal States Gathering System, an affiliate of CNX, had a gathering agreement to redeliver GeoMet's production into the Columbia Gas Transportation interstate pipeline system.

GeoMet, which produces 60% of its total gas production from the Pond Creek Field in Buchanan County, VA, began to build a 12-mile gas pipeline and transport interconnect from the field to the Jewel Ridge Pipeline, which is operated by East Tennessee Natural Gas, a subsidiary of Spectra Energy. GeoMet set up two transportation service agreements with East Tennessee to provide for a total of 25,000 MMBtu/d of firm transportation capacity.

In January, CNX filed a lawsuit seeking a temporary injunction to halt construction of the pipeline, claiming it held the exclusive right to construct pipelines and transport gas across the leased premises, and it said GeoMet did not have the right to construct pipes or transport gas there. After the complaint was filed, the Circuit Court of Tazewell County, VA, issued a temporary injunction halting the pipe's construction.

On appeal, the Virginia Supreme Court in February lifted the temporary injunction, and GeoMet was allowed to complete construction of the pipe. The court also ruled that CNX could continue to pursue damages or a partition of the property in dispute.

GeoMet in February countersued CNX affiliate CNX Gas Co. LLC and Island Creek Coal Co. in the Circuit Court of Tazewell County, VA. GeoMet is seeking $561 million for compensatory and consequential damages arising from "alleged violations of the Virginia Antitrust Act, tortious interference with contractual relations with third parties, and statutory and common law conspiracy." GeoMet is seeking to have the damages awarded tripled under Virginia statutes, which permit the court to award treble damages.

According to GeoMet, CNX allegedly used anticompetitive efforts "to dominate and maintain its control over the market for the production and transportation of coalbed methane gas" from the Oakwood Field in Buchanan County, VA. GeoMet said CNX also allegedly conspired and acted in concert with Island Creek and others to control the market. The lawsuit alleged CNX intentionally interfered with GeoMet's existing and prospective third-party business relationships "in efforts to harm GeoMet and improve CNX's position and corporate and financial interests."

This week, the Circuit Court for Buchanan County, VA, entered its formal order on the summary judgment motion in the case and ordered, among other things, that under the terms of a CBM lease that CNX has in southwest Virginia, CNX has the exclusive right to construct pipelines and transport gas across the leased premises and that GeoMet does not have the right to construct pipelines or transport gas on the property.

GeoMet, which completed the disputed pipe construction in April, was ordered by the circuit court to remove the pipeline it built on the property, and to "immediately halt the transportation of coalseam or other gas on, over, under or through the property leased to CNX Gas..."

However, the circuit court suspended the enforcement of its order pending GeoMet's appeal to the Virginia Supreme Court. Pending the outcome of the appeal, GeoMet was ordered to deposit into trust all net proceeds from the sale of any gas flowing across the leased property.

"The court simply upheld the property rights that we negotiated and bargained for with the lessor," said CNX General Counsel Stephen W. Johnson. "We obviously think it is the correct ruling."

GeoMet said it "will continue to vigorously pursue its rights in any continuation of this litigation by CNX and the company will continue to vigorously prosecute the antitrust action it filed against CNX and others..."

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