18Jan

Denbury v. Texas Rice: Clarifying the Test for Common Carrier Status, Power of Eminent Domain

On Friday, January 6, 2017, the Texas Supreme Court issued its long-awaited opinion in Denbury Green Pipeline–Texas, LLC v. Texas Rice Land Partners, Ltd. (“Texas Rice II”), [1]15-0225, 2017 WL 65470 (Tex. Jan. 6, 2017). holding that:

  1. Denbury’s evidence of a post-construction transportation agreement with an unaffiliated customer was relevant to the “reasonable probability test,”
  2. rejecting a rule that the requisite intent must exist at the time the pipeline was contemplated,
  3. rejecting the appellate court’s “substantial public interest” test, and
  4. holding that Denbury had “conclusively” established its qualification as a common carrier with the power of eminent domain.

The opinion provides clarity as to the test previously set forth in Texas Rice Land Partners, Ltd. v. Denbury Green Pipeline–Texas, LLC (“Texas Rice I”), [2]363 S.W.3d 192, 202 (Tex. 2012). and the types of evidence relevant to that determination.

Background:

Denbury seeks to construct “Green Line” over TRLP land

This saga began back in 2007, when Denbury sought to survey and construct a CO2 pipeline over land owned by Texas Rice Land Partners (“TRLP”). Denbury’s subsidiary, Denbury Green, was formed to build, own, and operate a CO2 pipeline, referred to as the “Green Line,” as a common carrier.  The Green Line was to cross over rice farming land owned by TRLP in Jefferson County, Texas.  TRLP denied Denbury access to survey for the pipeline.

In response, Denbury filed a T-4 permit with the Texas Railroad Commission to obtain common carrier status and exercise eminent domain authority under Tex. Nat. Res. Code § 111.019(a) (“Common carriers have the right and power of eminent domain.”).  Denbury then filed suit against TRLP for an injunction. Meanwhile, as TRLP was challenging Denbury’s eminent domain authority, Denbury surveyed and constructed the Green Line pursuant to Tex. Prop. Code § 21.021(a), which allows a condemnor to take possession even while the property owner challenges the condemnor’s eminent domain authority.

Denbury/Texas Rice I: Texas Supreme Court established the “Reasonable Probability Test”

Prior to Texas Rice I, a Texas pipeline owner could argue that it was a common carrier with the power of eminent domain simply because it had declared itself a common carrier on an RRC form.  That changed in Texas Rice I, when the Texas Supreme Court held that the Texas Constitution requires objective evidence that the pipeline will probably serve the public, rather than the builder’s exclusive use.

Texas Rice I set forth a more stringent test for determining whether a pipeline company qualifies as a common carrier:

for a person intending to build a CO2 pipeline to qualify as a common carrier under Section 111.002(6) [of the Natural Resources Code], 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. [3]Rice I at 202.

Under this test, a “reasonable probability” is one that is “more likely than not.”

In Texas Rice I, the Texas Supreme Court held that Denbury’s evidence of intent to negotiate with unaffiliated parties, without more, established only a “possibility,” and not a “reasonable probability,” that the pipeline would serve the public at some point after construction. Moreover, the court held that the testimony suggested that Denbury Green would transport gas only for its own operations, rather than for any unaffiliated parties. The case was remanded to the trial court for further proceedings.

Denbury/Texas Rice II

On remand to the Jefferson County District Court, Denbury presented the following post-construction contracts as evidence:

  1. A transportation agreement with the unaffiliated entity, Airgas Carbonic, Inc. that was entered into in January, 2013, after the pipeline was already constructed. Under this agreement, Denbury transported CO2 owned by Airgas Carbonic to an Airgas Carbonic manufacturing plant, which was ultimately sold to Airgas customers in the Houston area.
  2. A transportation agreement with the unaffiliated entity, Air Products and Chemicals, Inc., which was finalized sometime after the pipeline was already constructed. Air Products captures and sequesters CO2. Under this agreement, Air Products ships captured CO2 into the Green Line at the Louisiana border, and title and ownership of the CO2 transfers to Denbury Green. Denbury Green then uses the CO2 in tertiary recovery operations, and ultimately sequesters the CO2 underground.

On the basis of this evidence, the trial court granted Denbury’s motion for summary judgment, holding that Denbury Green was a common carrier with the right of eminent domain.

Beaumont Court of Appeals Sides with Landowners

The Beaumont Court of Appeals disregarded Denbury’s post-construction contracts, and reversed the trial court, essentially holding that a pipeline company must prove that it had the requisite intent at the time the pipeline was contemplated. Some have called this a “subjective test.” The Beaumont Court of Appeals also held that a reasonably probable future use of the pipeline must serve a “substantial public interest.”

The Texas Supreme Court reversed the Beaumont Court of Appeals and reinstated the trial court’s judgment in favor of Denbury Green. The Court’s opinion clarified several facets of the rule previously set forth in Texas Rice I.

Texas Supreme Court Clarifies Test, Sides with Denbury

Holding: Post-construction contracts are relevant

The Texas Supreme Court noted that the “reasonable probability test” is an objective test, meaning that the pipeline is not required to prove the requisite intent existed before construction.

The court further explained that evidence of post-construction contracts with unaffiliated entities, showing that non-pipeline-owned gas is being transported for the benefit of the unaffiliated entity, can be relevant under the reasonable probability test. For example, the Court explained that such contracts can be relevant to a showing that:

  1. There was a reasonable probability that, at some point after construction, the pipeline would serve the public; and
  2. There are specific, identified, potential customers that own CO2 near the pipeline’s route.

The Court further explained that, without any other relevant evidence, post-construction contracts with unaffiliated entities would normally establish only a pre-construction possibility of future public use. However, when combined with other evidence, they could allow a reasonable observer to determine that there was a reasonable probability that the pipeline would benefit the public.  For example, the Court noted the following potentially relevant additional evidence:

  1. the regulatory atmosphere;
  2. proximity of the pipeline to potential customers;
  3. actual post-construction use by unaffiliated entities.

Holding: Rejected the “substantial public interest test”

The Texas Supreme Court also rejected the “substantial public interest” test set forth by the Beaumont Court of Appeals.  Instead, the Texas Supreme Court held that for the pipeline to serve the public, it did not need to be direct, tangible, or substantial, and did not focus on “existential arguments related to the power and importance of the individual.”  Instead, “evidence establishing a reasonable probability that the pipeline will, at some point after construction, serve even one customer unaffiliated with the pipeline owner is substantial enough to satisfy the public use under the Texas Rice I test.” (emphasis supplied)

Holding: Denbury’s evidence was “conclusive”

The Texas Supreme Court applied this test to Denbury’s evidence and noted, among other things, the following:

  1. Under the AirGas contract, AirGas retained title to the CO2, and ultimately sold the CO2 to its customers in the area, which showed that “no longer could a reasonable fact-finder determine that a genuine issue exists” as to whether the pipeline would, “at some point after construction,” transport CO2 owned by a customer who retained ownership of the gas.
  2. The AirGas and Air Products contracts were evidence of the proximity of the pipeline to customers;
  3. The post-construction contracts showed that, not only was the pipeline “more likely than not” that it would “someday” be used for public use, but the pipeline is already used for public use “”
  4. These contracts support Denbury’s contention that the route was designed in part to facilitate transfer of gas owned by third parties.

The Texas Supreme Court noted that, when the evidence was considered together, Denbury Green “conclusively established that there was a reasonable probability that, at some point after construction, the Green Line would serve the public.”

The Texas Supreme Court further noted that the Air Products contract, standing alone, would not satisfy the “reasonable probability” test, because the CO2 transferred to Denbury Green at the end of its transport.  This would be insufficient on its own because it would not evidence that Denbury would be transporting the gas to the public.

Mixed Industry Reactions

Reactions from various lawyers and industry and landowner groups have widely varied. Some have claimed that this case makes it far easier to condemn property and represent a windfall for pipeline companies at the expense of private property rights. Other commentators have been of the opinion that this case merely provides clarity to the applicable tests, and that it is still significantly more difficult for a pipeline to condemn property than it was prior to Texas Rice I.

 

Austin Brister
Austin assists clients in all aspects of mergers, acquisitions and divestitures of energy properties, from the first letter of intent through negotiations, closing and post-closing matters. He has assisted clients in a variety of deals including farmouts, purchase and sale transactions, joint exploration and development agreements, participation agreements, and more routine operational transactions such as joint operating agreements and master services agreements.
Austin Brister

Footnotes   [ + ]

© Copyright 2014, Austin W. Brister. All Rights Reserved. DISCLAIMER: The information in this article is for general information purposes only. This article should not be substituted for legal advice and should not be taken as legal advice for any individual case or situation. This information is not intended to create, and receipt or reading this article does not constitute, an attorney-client relationship. You are encouraged to contact an attorney for legal advice concerning the information provided in this article.
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