Chapter 10 Recent Midstream Issues of Interest

JurisdictionUnited States

Chapter 10 Recent Midstream Issues of Interest

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Tom Zabel
Zabel Freeman
Houston, TX

TOM ZABEL has over three decades of experience trying cases before state and federal courts, administrative agencies and arbitration panels, and handling numerous appeals; including handling appeals before almost every Texas Court of Appeals, the Texas Supreme Court, federal courts in Texas, Oklahoma, Louisiana, Ohio, Michigan, West Virginia and Pennsylvania, and the Third and Fifth Circuit Courts of Appeals. Tom's practice has focused, and continues to focus, primarily on cases involving oil, gas, and other minerals, land and environmental matters, oil and gas and real estate litigation, contractual disputes, products liability issues, fiduciary litigation, condemnation proceedings, energy transactions and litigation, environmental and contamination litigation, and ad valorem and other tax litigation involving oil, gas, and other minerals, pipelines, offshore vessels and midstream and downstream facilities. Tom's clients include major and independent oil and gas companies, service companies, pipeline companies and individuals. Tom has held an AV peer review rating as reported by Martindale Hubbell for over 20 years, and has been selected as a Texas Super Lawyer in Energy & Natural Resources by Texas Monthly magazine every year since 2003, as one of the Texas Super Lawyer Top 100 Attorneys in Houston, and by H-Magazine as a Top Energy Attorney in Houston. Tom is a petroleum engineer and worked for the Railroad Commission of Texas as a petroleum engineer prior to and during law school. Tom has been board certified by the Texas Board of Legal Specialization in Oil, Gas & Mineral Law since 1991. Tom has authored several publications and has been a speaker at numerous continuing legal education seminars.

I. INTRODUCTION

Midstream gas plants and the pipelines connected to them are critical links in facilitating the production, treatment, processing, and marketing of natural gas and the valuable liquids entrained therein. This paper addresses two significant Texas judicial eminent domain decisions that affect midstream processing facilities. This paper first addresses the Texas Supreme Court's Hlavinka decision, which concerned whether eminent domain authority in Texas extends to products processed or refined from oil or natural gas and the proper valuation methodology to be used to value easements acquired through eminent domain proceedings and the earlier Avinger decision concerning proper valuation of an easement on which an existing processing plant was located. Lastly, the paper will briefly address current planned new pipelines to meet and the needs of connectivity of future projected production in the Permian Basin to marketing outlets in the Gulf Coast area and other markets.

Despite the fact that Texas is the largest oil and gas producing state, and enacted its first pipeline legislation in 1899, it was not until the recent Hlavinka decision that the Texas Supreme Court addressed whether transporters of substances refined or processed from oil and gas (as opposed to crude oil and natural gas) had the right of eminent domain. Hlavinka v. HSC Pipeline P'ship, LLC, 650 S.W.3d 483, 498 (Tex. 2022). Two different statutes granting the power of eminent domain to certain common-carrier pipelines were at issue in the case —(1) section 2.105 of the Texas Business Organizations Code, which grants common-carrier status to pipelines transporting, among other things, oil products and liquefied minerals, and (2) section 111.002(1) of the Texas Natural Resources Code, which grants common-carrier status to pipelines transporting crude petroleum.

II. THE HLAVINKA DECISION

A. Backgound Facts

In the Hlavinka case, HSC Pipeline Partnership, LLC owned common-carrier pipeline systems in Texas for the transportation of oil products and/or liquefied minerals obtained from crude petroleum and/or natural gas liquids. HSC constructed

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a new common-carrier pipeline that transported polymer grade propylene ("PGP")1 owned by others. HSC charged a fee for transporting the PGP owned by others.

The Railroad Commission of Texas ("RRC") issued a permit for the Pipeline, and regulated it as a common carrier of products. PGP liquefies under moderate pressure, and was transported in the Pipeline in its liquid form. The Pipeline originated from an interconnection at Texas City, Texas, and extended approximately forty-four miles to a plant in Brazoria County, which Braskem America, Inc. ("Braskem") owned and operated, and which was unaffiliated with HSC and any entities affiliated with HSC. The Pipeline traversed a portion of large tracts of land encompassing approximately 13,000 acres owned by a group of family members and companies collectively referred to as the Hlavinkas.

HSC entered into a long-term Transportation Services Agreement ("TSA") with Braskem for the transportation of PGP through the Pipeline from the Pipeline's origin to Braskem's plant. Braskem purchased the PGP from an affiliate of HSC that processed the PGP from refinery grade propylene ("RGP") obtained from crude oil2 and from propane obtained from NGLs or RGP upstream of the Pipeline.3 Braskem obtained its title to the PGP before it entered the Pipeline and retained title to it at all times while in the Pipeline, and received its PGP at its plant. The Pipeline was also available to ship any other customer's PGP to any points along the line, and to any other points to which the Pipeline may become connected.

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HSC filed a tariff with the RRC describing in detail the rules and regulations by which HSC would provide intrastate transportation services to whoever desired to transport PGP through the Pipeline. HSC claimed the right and power to condemn and appropriate easements and other property as necessary for the Pipeline as a common carrier under TEX. NAT. RES. CODE § 111.002(1) and TEX. BUS. ORGS. CODE § 2.105.

HSC sought to acquire a 30'-wide permanent right-of-way and easement and temporary workspace easement (collectively, "the Easement") from the Hlavinkas. Unable to reach an agreement for the Easement, HSC filed condemnation proceedings, involving properties that the Hlavinkas and their companies owned. The Hlavinkas filed a plea to the jurisdiction challenging HSC's eminent domain power.

HSC moved for partial summary judgment on its right to condemn the Easement, asserting the same arguments relating to TEX. NAT. RES. CODE § 111.002(1) and TEX. BUS. ORGS. CODE § 2.105 in response to the Hlavinkas' jurisdictional plea. The trial court granted HSC's summary judgment motion and denied the Hlavinkas' plea to the jurisdiction, finding that PGP fell within the definition of crude petroleum as that term is used in Chapter 111 of the Texas Natural Resources Code and within the definition of oil product and liquified mineral as used in section 2.105 of the Texas Business Organizations Code.

HSC moved to exclude the landowner's testimony related to damages and valuation of the Easement, based on his use of improper methodologies (i.e., the pipeline corridor theory which seeks to value condemned easements based on what other companies have paid for easements in the past), and failure to use the before-and-after methodology that has long been held to be the chosen methodology used in condemnation proceedings in Texas. Under HSC's appraiser's before-and-after methodology, the value of the Easement was approximately $24,000, and under the Hlavinkas' per-rod pipeline corridor theory the value of the Easement was over $3 million. The trial granted HSC's motion to exclude the landowner's testimony, and ordered that he was "excluded from testifying that Defendants are entitled to compensation based on a per rod methodology," and "about the alleged comparable pipeline easement sales he relies on in support of his analysis."

B. Appeal to the Houston Court of Appeals

The court of appeals affirmed the judgment in favor of HSC in part, reversed it in part, and remanded the case. The court of appeals determined that there was a

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fact issue on public use (i.e., that HSC did not conclusively establish a reasonable probability that the pipeline was for a public use, as discussed in more detail below), and that the trial court improperly excluded the landowner's valuation testimony. Hlavinka v. HSC Pipeline P'ship, LLC, 605 S.W.3d 819 (Tex. App.—Houston [1st Dist.] 2020), rev'd, 650 S.W.3d 483 (Tex. 2022).

As to whether PGP fell within the definition of crude petroleum, oil product, or liquified mineral, the court of appeals found that PGP fell within the definition of oil product—it did not reach the issue of whether it also fell within the definition of crude petroleum or liquified mineral. Id. at 830. Because court did not decide whether PGP was crude petroleum, it did not address common-carrier status under Chapter 111 of the Texas Natural Resources Code, and instead addressed it only under section 2.105 of the Texas Business Organizations Code. Relying on earlier cases out of the First and Fourteenth Court of Appeals,4 the court determined that section 2.105 was an independent grant of eminent domain authority separate from that in the Texas Natural Resources Code, and provided eminent domain authority to transporters of substances covered by that section, including oil products. Id. at 829. The court, however, concluded that although HSC possessed the power of eminent domain, it had failed to conclusively prove that the Pipeline was for a public use, finding that HSC's proof of one unaffiliated shipper was not enough:

While [the TSA] may be some evidence of future public use, HSC's TSA with Braskem refers to a product whose title is transferred from a manufacturer to a customer/end user before it enters a pipeline managed by the same manufacturer to be shipped to the same customer/end user, and that is not conclusive evidence of public use. . . . Furthermore, while the
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