As pipeline companies scramble to provide infrastructure to support the energy boom, they are having to pay more for the right to build oil and gas pipelines across private property.
A natural gas pipeline company argued earlier this year that it should pay about $80,000 for the right to lay pipe across a mile of vacant land south of Fort Worth. The landowner countered, and a Johnson County jury agreed, that the price should be higher.
A lot higher. In March, the jury awarded about $1.6 million, plus interest, to the landowner, more than 20 times the amount that Midland-based Peregrine Pipeline Co. had offered.
The award, which Peregrine has said it will appeal, is the latest in a series of recent jury verdicts in eminent domain cases that experts say reflect an upward trend in the cost of building oil and gas pipelines in Texas.
Oil and natural gas production has surged in Texas in recent years, spurred largely by hydraulic fracturing, or fracking, which has helped producers tap reserves once thought to be unreachable. Now, as pipeline companies scramble to provide infrastructure to support the energy boom, they are having to pay more for the right to build pipelines to transport the fuel across private property.
“I think the whole country’s going to be watching these cases, because we’re kind of leading the way in these issues,” said Matthew Festa, a professor of land use at the South Texas College of Law.
In 2010, a jury awarded about $650,000 to a family in McMullen County in South Texas, and last year a jury entered a verdict of almost $800,000 to a Denton County family. Both awards, which were upheld on appeal, were more than 10 times the amount offered by the pipeline companies that wanted to build pipelines across their property.
A pipeline operator that wants to run new pipe through private land must pay for the right, known as an easement, to use the necessary strip of property. If the company and the landowner can’t agree on a price, the company can begin a process called condemnation to obtain the easement through the power of eminent domain. In that case, a special commission determines an award based on the value of the land subject to the easement and the decline in value to the remainder of the property. If either side objects to the award, it can bring the case to court.
Most of the time, the parties negotiate a deal without resorting to condemnation, said Thure Cannon, president of the Texas Pipeline Association. But pipeline operators are paying more to settle the cases that do go to condemnation proceedings, in part because of the recent high jury verdicts, according to lawyers who specialize in such cases. And those settlements affect the price of easements that are negotiated before the eminent domain phase.
“I think you are seeing awards along those lines,” said Zach Brady, a lawyer who represents landowners in eminent domain proceedings, referring to the McMullen County case. “And you’re also quite frankly seeing negotiations that are tracking very close to those amounts as well.”
The dispute in easement cases typically centers around the pipeline’s effect on the value of the entire property — the difference between how much the land would sell for before and after the pipe is installed. In the case last March, for instance, Peregrine argued that its easement wouldn’t affect the property value at all — an argument that the jury rejected in awarding $1.3 million for remainder damage.
“It’s not so easy to value an easement for a pipeline that only requires the landowner to allow access over that easement,” Festa said. “You can’t just pull the tax records up and see what the property has been assessed at. You’re relying on the expert’s judgment to make a prediction.”
According to landowner lawyers, the recent high jury awards and the rise in settlement values reflect increases in land value driven by population growth.
“As our urban population grows, we have more urban people with the desire and the means to use land for recreational purposes,” Brady said. “As the highest and best use of that land has changed from strictly agricultural to recreational, the impact of these sorts of improvements – power lines and top lines – on the value of the whole property becomes greater. And so there is a greater loss.”
Luke Ellis, who represented the Johnson County landowner in its case against Peregrine, said, “I think that juries are becoming much more sensitive to the potential negative impacts that pipeline easements can cause to property.”
James Freeman, a lawyer for pipeline operators, agreed that the price of easements is increasing, but offered a different explanation.
“I don’t think a pipeline interferes with the highest and best use of a recreational property,” he said. “A pipeline buried 48 inches below the surface of the dirt isn’t going to affect that.”
Freeman argued that pipeline operators, wary of litigation costs and crushing jury verdicts, will pay heavily to avoid going to court. Meanwhile, the proliferation of infrastructure projects during Texas’ energy boom has made landowners increasingly aware of the potential for high payouts, leading to a cycle of escalating costs.
“Once you pay a landowner a certain amount, it gets out pretty darn quick,” he said. “There was no need for pipelines in South Texas five years ago. Now, everyone wants more money for the next project that comes along.” High jury verdicts contribute to the trend, Freeman added.
Festa, the law professor, said the fight over easements is part of a broader conflict caused by the energy boom.
“I think that this type of issue presents a really significant clash between two cherished Texas values,” he said. “One is oil and gas production, but the other is property rights. I think it’s starting to create a sense in the public that while in Texas we may be all in favor of pipelines generally, maybe there ought to be a few more things taken into account when it comes time to compensate an owner who has to give up some of their property rights for these pipelines.”
By y Gilad Edelman June 18, 2014 6 AM from The Texas Tribune