Note: This article updates a November 2011 overview of the Texas Supreme Court’s original decision in the Denbury case.

On March 2, 2012, the Texas Supreme Court issued a new opinion[1] that has reinforced and modified its landmark 2011 Denbury decision, which has particularly significant implications for the pipeline industry in Texas. At issue is the eminent domain power of private entities. The Texas Constitution allows the legislature to grant private entities the right of eminent domain, but this power is limited by the overarching rule that there can be no taking of property for private use.

In Denbury, the Texas Supreme Court declared that a pipeline owner cannot acquire the power of eminent domain simply by registering as a common carrier. The Court held that such a rule would leave Texas landowners vulnerable to unconstitutional private takings and articulated a standard that allows landowners to challenge in court whether a proposed pipeline meets the statutory common-carrier requirements. (The Court examined three provisions of the Natural Resources Code in determining “common carrier” status: 111.02(6), 111.03(a), and 111.019.)

To qualify as a common carrier with the power of eminent domain, “the pipeline must serve the public; it cannot be built only for the builder’s exclusive use.” 363 S.W.3d at 200. Applied to Denbury, the Court found that the pipeline’s purpose would be to transport gas from one Denbury site to another, which it concluded only consisted of a purely private use. It was not sufficient that the pipeline merely be made available for public use, which the Court believed would allow companies to “game” the permitting process to allow a private carrier to wield the power of eminent domain.

The implications of the Denbury case are significant for future pipeline development in Texas. First, pipelines seeking common-carrier status are open to legal challenges from landowners who might contest that designation. Companies will have to show “reasonable” proof of a future customer to demonstrate that the pipeline will transport to or for the public for hire and is not limited in its use to the well, stations, plants, and refineries of the pipeline owner. 363 S.W.3d at 204. This potential for litigation could result in increased costs, with the burden of proof on pipeline owners.

Second, at a time when Texas’s energy industry is booming, the Denbury standard could result in slower progress in building the infrastructure to support this growth. By allowing landowner challenges to pipelines, it could be more difficult for companies to obtain necessary easements.

On the positive side, however, the Court’s modified opinion issued on March 2 clarifies certain aspects of its original opinion that provides more certainty for pipeline developers. Most significantly, companies only need to produce “reasonable proof” that there will be a future customer that will allow the pipeline to qualify for public use. Previously, there had been some concern and confusion that pipeline developers might be forced to begin construction after contracts with third parties already were in place.

The Court’s new opinion shows that a contract does not need to be in place at the time of pipeline construction. In addition, the Denbury standard could create incentives in the pipeline industry for increased cooperation in construction projects, leading to shared costs and, perhaps more importantly, very clear proof that such pipelines qualify for public use and, therefore, eminent domain for private entities.