1. Obtaining and Expanding Pipeline Capacity in the Shale Oil and Gas Revolution The Denbury Decision – Its Impact on Pipeline Construction and How the Legislature and Railroad Commission Will Respond January 16, 2013 Benjamin Rhem Jackson Walker L.L.P. brhem@jw.com 512.236.2012

2. Discussion Outline The Denbury Decision Impact on Pipeline Construction Railroad Commission’s Response Legislature’s Response

3. The Denbury Decision The Facts: –Denbury was planning the route for a CO2 pipeline from Mississippi to East Texas for enhanced oil recovery –Denbury was attempting to access the property of Texas Rice for survey purposes –Landowners denied access –Denbury sued Texas Rice for an injunction to allow it access to the property

4. The Denbury Decision The Facts: –On MSJ, trial court found that Denbury was a “common carrier” and has eminent domain authority under Nat. Res. Code § 111.019 –Trial court’s determination was based, in large part, on the Commission’s approval of the T-4 permit application –Decision affirmed by the appellate court, relying on the fact that the pipeline “will be available for public use”

5. The Denbury Decision The 9th Court of Appeals’ decision was appealed to the Supreme Court The Issue: –Whether Denbury had established its common carrier status as a matter of law because it had filed an application for a T-4 Permit with the Texas Railroad Commission, which the Commission had approved.

7. The Denbury Decision The Holding: –merely filing the paperwork and offering to make the pipeline available for public use does not make the pipeline a “common carrier” with the power of eminent domain. –“for a person intending to build a CO2 pipeline to qualify as a common carrier … 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 …”

8. The Denbury Decision A New Standard: –A T-4 permit alone does not establish common-carrier status –Must demonstrate a “reasonable probability” that the pipeline will serve the public The Court did not hold that Denbury was not a common-carrier – only that Denbury was not entitled to a summary judgment on whether it was a common carrier under the Court’s new test

9. The Denbury Decision Concerns –Narrowly tailored decision as written Common-carriers Intending to build CO2 pipelines –But how long until the Denbury approach is applied to other types of pipelines?

10. The Denbury Decision Concerns (cont.) –Litigation at every step – county-by-county Consistency –456 District courts and 222 county courts at law –678 potential venues Timeliness –Individual trials will greatly increase the time necessary to develop needed infrastructure –Regulatory uncertainty in Texas will cause investment dollars to go elsewhere

11. Response to Denbury Twofold process –Create more robust review at the Commission? Agency rulemaking –Limit the approval or denial of T-4 permit to be solely within the jurisdiction of the Railroad Commission? Amendment to Nat. Res. Code

12. The “New” T-4 Permit Process Create a more robust T-4 application process? –Evidentiary hearing process within the Commission –Findings of fact and conclusions of law –Goal is to keep the permitting process within the Commission’s domain

13. The “New” T-4 Permit Process What would a hearing at the Commission decide? –Whether third party shippers would want to use the pipeline –Whether a public statement (i.e., tariff or advertisement) that pipeline is available has been made –Whether a “public use” has been established –Does the pipeline meet the legislative test to be a “common carrier”

14. Legislature’s Response Amend Nat. Res. Code –Insulate the T-4 permitting process –Approval or denial of T-4 permit would be solely within the jurisdiction of the Railroad Commission –Creates a process with one hearing, as opposed to allowing multiple hearings within each county –Appeals of a T-4 permit decision would go to Travis County District Court → Third Court of Appeals → Supreme Court

15. Ways to Influence the Outcome Engage the Commission –Follow the rulemaking –Submit comments –Don’t just say what you don’t like, but offer constructive solutions Contact trade associations and legislators –House Committee on Land and Resource Management has held several hearings on the issue and needs to hear from you

16. QUESTIONS? brhem@jw.com