The good news: Texas is in the midst of a shale drilling boom. The bad news: Exploration, production and midstream companies are encountering resistance from locals, landowners and ranchers who wish to take a tougher role in negotiating rights-of-way contracts, and who are unhappy with housing shortages, torn-up roads and the imminent threat of eminent domain.

Near the Eagle Ford shale play on the outskirts of San Antonio, locals complain that roads, schools, electric utilities and even ambulance services are overwhelmed. Hundreds, if not thousands, of rig workers and their families are moving into the six-county area of the shale, and will be followed by truck drivers, restaurant workers and more. While jobs are still plentiful, some job hopefuls will be turned away unless they can commit to long commutes to work, as property values in nearby areas have increased about 118%.

Yet in general, oil, gas and pipeline companies that are prepared for challenges and tough negotiators when seeking access to public and privately owned property are better prepared to find solutions to appease locals and negotiate compromises when they know what to expect.

For example, landowners near Beaumont who wish for more power when negotiating rights-of-way contracts are cheering a recent Texas Supreme Court opinion which examined the requirements for pipelines seeking to qualify as a common carrier with the power of eminent domain.

Eminent domain

The lawsuit arose out of a plan by Denbury Green Pipeline Texas LLC to build a pipeline in Texas to carry carbon dioxide from its storage facility in Mississippi to its enhanced-recovery oil wells in Texas. Denbury's proposed pipeline crossed two properties owned by Texas Rice Land Partners Ltd., and Texas Rice refused to allow Denbury to enter its properties to conduct surveys for the pipeline.

Denbury filed suit, and obtained summary judgment declaring that it was a common carrier with the power of eminent domain, and enjoined Texas Rice from interfering with Denbury's right of access to the properties. In response, Texas Rice appealed the trial court's judgment that Denbury was a common carrier with the power of eminent domain.

The Beaumont Court of Appeals affirmed, concluding that Denbury had applied for and received a permit to operate the pipeline as a common carrier from the Texas Railroad Commission, that Denbury had otherwise complied with the common carrier requirements of the Texas Natural Resources Code and qualified as a common carrier with the power of eminent domain.

But the Texas Supreme Court disagreed, reversing the Court of Appeals ruling and remanding the case to the district court for further proceedings. The Texas Supreme Court's holding was based on two principal conclusions.

First, the court held that the Commission's grant of a T-4 Permit for a common carrier pipeline, while establishing a prima facie presumption of common carrier status, does not conclusively establish that the pipeline is, in fact, a common carrier. Instead, the Texas Supreme Court characterized the Commission's permit grant as a clerical act that did not endeavor to determine whether the pipeline would operate as a common carrier, and that this clerical act did not preclude landowners from challenging the common carrier designation.

Second, the Texas Supreme Court examined Texas Natural Resources Code that defines a common carrier as including "any person who owns, operates, or manages . . . pipelines for the transportation of carbon dioxide . . . to or for the public for hire." The court concluded that pursuant to this statute, a "pipeline owner is not a common carrier if the pipeline's only end user is the owner itself or an affiliate."

Cowboys get ready for the bucking bronco event at the Houston Livestock and Rodeo event, where a King Ranch seminar on negotiating land-use rights with oil and gas companies took place.

According to the court, a carbon dioxide pipeline wishing to qualify as a common carrier must show a "reasonable probability...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," which is not the case with Denbury, whose pipeline was intended for its own use.

The court examined affidavits and deposition testimony that indicated Denbury was negotiating with other parties to transport carbon dioxide and that there was a possibility of transporting other people's carbon dioxide in the future, but concluded that this testimony did not identify any unaffiliated entities or possible customers that might use the pipeline, so the testimony was not sufficient to qualify as a common carrier or utility.

In closing, the court stated the following rule: "If a landowner challenges an entity's common-carrier designation, the company must present reasonable proof of a future customer, thus demonstrating that the pipeline will indeed transport to or for the public for hire, and is not limited in [its] use to the wells, stations, plants and refineries of the owner."

The case sets a precedent for denial of eminent domain rights to pipeline operators wishing to move their own products from one area to another without the likelihood of offering its transportation services to other customers.

Negotiating for more

Elsewhere, in March, Billy Murphy Jr., vice president and general manager of King Ranch, held a seminar focused on negotiating land contracts for ranchers and landowners at the annual Houston Livestock Show and Rodeo.

With some 825,000 acres in Texas and another 90,000 acres in Florida, King Ranch is one of the world's largest ranches. The ranch was founded in 1853 by Captain Richard King and Gideon K. Lewis and includes portions of six Texas counties, including most of Kleberg County and much of Kenedy County, with portions extending into Brooks, Jim Wells, Nueces and Willacy counties in south Texas between Corpus Christi and Brownsville. The ranch was designated a National Historic Landmark in 1961, and is still owned by direct descendents of Captain King. ExxonMobil Corp. produces oil and gas from King Ranch property.

"In all negotiations, it's a good idea to get your own attorney, but there are things you should think about first, so you get your attorney the right information," said Murphy, who noted that much of the land-rights principals apply, whether the landowners are working with oil and gas companies, pipeline operators, seismic companies, billboard companies or power and telephone providers, among others.

For example, surface rights and minerals rights are separate, and should always be valued separately on a stand-alone basis, even if both are owned by a single party. Surface owners should be concerned with protecting existing value and creating new value, such as negotiating for a new road or water well.

New value can also be created by getting the right to bid on work needed by the company, such as delivering sand or gravel to the site or maintaining roads and fences, as the company will often farm out those jobs that are required by the right-of-way agreement to third-parties, Murphy said.

Bob Gistri, with ExxonbMobil Corp., tries out a military motorcycle during Armed Forces Appreciation Day at the Houston Livestock and Rodeo show. ExxonMobil drills on King Ranch, which gave a seminar about negotiating rights-of-way during the event.

Also, landowners should designate specific-use roads on its property, said Murphy. "King ranch has three types of roads—ranch roads, oil roads, and shared roads. Set speed limits on your roads. You don't want a superhighway serving drill rigs for 50 wells. And negotiate the cost for watering the roads during droughts or the dust will cover the land."

Murphy explained that King Ranch has a good relationship with ExxonMobil Corp., so it schedules road maintenance during lulls in drilling activity.

Other negotiations can involve setting time limits on roads, so traffic is kept to a minimum at night. Ranchers will set limits during hunting season as well, while still providing access in the case of an accident or other emergency.

"Your contract should include provisions for equipment removal at the end of the wells' life, such as when production is reduced to a single barrel per month. Texas law does not require such removals, so you have to specify that. If a company runs out of money, or the well runs dry, you could be stuck with that," he said.

Finally, ranchers and landowners should set distance limits. "A standard access limit from an existing residence is typically 500 feet, but that is much too close," said Murphy. "Make noise and distance limitations."

With pipeline companies, King Ranch does not agree to easements in perpetuity. Murphy advises landowners to ask for a term surface-use agreement, such as 20 years with two five-year renewables. Also, it renegotiates for multiple pipelines on a single right-of-way.

"It's my property," said Murphy. "And every bit of it is worth something."

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