Texans have been known to tout that "everything is bigger in Texas." When it comes to oil, the facts are supportive:
- Crude oil produced in Texas in 2015: 1.26 billion barrels, or 37 percent of U.S. production of 3.44 billion barrels.1
- In 2015, on a stand-alone basis, Texas was the 9th largest oil producer in the world, between Iran and Mexico.2
A key element in the success to date of Texas in delivering that oil (as well as refined petroleum products, natural gas liquids, and petrochemical feedstocks) to U.S. domestic and, now, world markets3 has been the availability of efficient, reliable pipelines in Texas to move those commodities from the well or plant tailgate to the market. The success of pipeline companies in ensuring that such pipelines are indeed available is evidenced by how prevalent that infrastructure is in Texas:
- Total length of pipelines subject to Texas Railroad Commission ("TRRC") regulation in 2015: 431,997 miles4 – enough to wrap around the globe over 17 times.
This extensive infrastructure required huge capital investments and was not developed overnight. It required, and continues to require, commitments by pipeline companies to build and maintain a wide range of pipelines across the state. Important underpinnings of pipeline companies' willingness to undertake and sustain such investments are that the companies have a reasonable, predictable ability to (1) secure easements and rights of way to build pipelines and (2) recoup their investments and a return through payment of transportation rates by their shippers–producers, marketers, refiners, and petrochemical manufacturers.
As to the many liquids pipelines that are subject to regulation by the TRRC, for decades the regime under which the pipeline company could secure its right of way and set its transportation rates and recoup its investment and return was well understood and stable. Eminent domain authority was available to liquids pipeline companies under the Texas Natural Resources Code.5 As to terms of service and rates, the TRRC took a laissez faire approach to liquids pipeline regulation, encouraging pipeline owners and customers to resolve any disputes consensually. This regime aligned well with the reality that, in most instances, the entities on both sides of any dispute were companies fully capable of reaching mutually acceptable, economically sensible resolutions. That this regime was effective is evidenced by the fact that, until the 2013 complaint in Eastman Chemical v. West Lake Ethylene Pipeline,6 no liquids pipeline rate dispute had gone to hearing before the TRRC.
That regime is now in the midst of dramatic change. The leading edge of this wave of change can be traced to the Texas Rice Land Partners v. Denbury case. Denbury sought to condemn an easement for a carbon dioxide pipeline from Mississippi to south Texas (to support tertiary recovery), and was resisted by a landowner. Prior to Denbury, pipeline companies routinely asserted their condemnation right by filing TRRC Form T-4, "checking the box" as a "common carrier" pipeline, and thereby being eligible to exercise condemnation power. In 2012, the Texas Supreme Court remanded, finding that this election raised a fact issue.7 Though the matter continued through the Texas courts, the essential impact was a dramatic infusion of uncertainty into the ability of pipeline companies to exercise condemnation powers to install new pipelines.
The next year, 2013, saw the advent of the previously-referenced Eastman Chemical case, which reflected a departure from the previous period of consensual dispute resolution. Though the case presented a number of issues of interest, a key question presented to the TRRC, and a matter of "first impression," was how to assess whether a liquids pipeline rate is "just and reasonable," including how to take account of market forces.
Telescoping over the twists and turns of the proceeding, in April 2016, the administrative law judge and the technical examiner issued a Remand Proposal for Decision finding that a cost-based rate, rather than a market-based rate, was appropriate and recommended alternative rate levels, all of which would represent a material reduction from the published rates. In finding a market-based rate was not appropriate, the decision evaluated competition between the specific origin and destination at issue–a "corridor" approach that has been consistently rejected by the Federal Energy Regulatory Commission in regulating interstate liquids pipelines. The decision is subject to review by the full TRRC, and did leave the door open to a wider review of the role of competition in the TRRC rate review standards.
This wave of change rolled on with developments and litigation regarding the West Texas LPG Pipeline ("WTLPG"), a large natural gas liquids pipeline connecting the Permian Basin to east Texas. In late 2013, WTLPG cancelled its existing tariffs on file with the TRRC on the premise that the TRRC lacked jurisdiction over the transportation of natural gas liquids. Complaints were filed by various shippers, and, in a December 2015 order, the TRRC found that WTLPG was obliged to file its tariff with the Commission, a ruling that is under appeal. The issue is part of a wider dispute over rate increases by the pipeline, pending before the TRRC and, again, involving issues of cost-based versus market-based rates and standards.
As these cases wind their way through the TRRC and the Texas courts, the attendant uncertainty over condemnation and rate-setting standards have introduced risks that were considered remote, if considered at all, only a few years ago and cannot help but impact the decisions of pipeline companies as they contemplate investments and acquisitions in Texas.
The opinions expressed are those of the author and do not necessarily reflect the views of the firm, or its clients. This article is for general information purposes and is not intended to be and should not be taken as legal advice.
- See http://www.eia.gov/dnav/pet/pet_crd_crpdn_adc_mbbl_a.htm.
- See http://money.cnn.com/interactive/news/economy/worlds-biggest-oil-producers/.
- See http://www.economist.com/news/finance-economics/21684531-light-sweet-compromise-puts-end-crude-market-distortions-america-lifts.
- See http://www.rrc.state.tx.us/pipeline-safety/reports/texas-pipeline-system-mileage/.
- TEX. NAT. RES. CODE, § 111.019.
- Gas Utilities Docket No. 10296, Railroad Commission of Texas.
- 7 363 S.W.3d 192 (Tex. 2012).