Steptoe & Johnson PLLC: Natural Gas Storage Field Boundary Extension vs. Production Interests

Steptoe & Johnson PLLC: Natural Gas Storage Field Boundary Extension vs. Production Interests

Do you produce gas or oil near a gas storage field? Do you intend to do so? Do you have an operating agreement with the storage field operator? What if storage field gas migrates into your production field or strata? What happens if your production operations threaten the integrity of the storage field?

On August 29, 2012, the Federal Energy Regulatory Commission ("FERC") approved an interstate natural gas pipeline company's application to expand the existing boundary and buffer zone of one of its eight natural gas storage fields due to nearby oil production that began to create a pressure sink pulling natural gas from the natural gas storage field. To protect the integrity of the natural gas storage field, FERC approved the company's request to expand the storage field's boundary and buffer zone through the acquisition of 160 acres adjacent to the storage field, and mineral rights in 80 of those acres to serve as a buffer zone. While these acquisitions may be consensual, the company would be permitted to condemn these interests, if necessary, pursuant to this federal authorization.

Operating agreements were in place between oil production operators and the natural gas storage field company requiring that any gas produced be re-injected back into the storage field reservoir. After a study, the storage field operator concluded that oil production in active natural gas storage field areas is creating a gas containment problem beyond its storage field's existing boundaries. While the oil production operations had not previously caused problems for the natural gas storage field, the study concluded that current oil production operations on nearby properties were causing a pressure sink that pulls gas from the active storage portion of the field. As evidence of gas migration from the storage field to production areas, a geochemical analysis of storage gas from within the existing storage field boundary and from a well within the proposed area of expansion indicated that the characteristics of the methane from the well were consistent with the values present in gas from the storage field.

On this basis, the company filed with FERC, the regulator with jurisdiction over the company and its natural gas storage field, to expand the storage field's certificated boundary and buffer zone. Under the federal Natural Gas Act ("NGA"), such applications, if approved by FERC, enable the storage field operator to make use of federal eminent domain power under the NGA, if necessary, to acquire the necessary property interests to expand the boundary and buffer zone.

FERC approved the company's application to expand the boundary and buffer zone. In its order, FERC confirmed that this expansion met the standard by being in the public convenience and necessity because the public benefits outweighed the potential adverse consequences. FERC held that the expansion of storage field boundaries will protect and maintain the integrity, performance, and reliability of the natural gas storage field, and will mitigate the effects of third-party oil production. FERC requires that the expansion be completed within two years.

Click here to see a copy of FERC's Order (Southern Star Central Gas Pipeline, Inc., 140 FERC ¶ 62,155 (2012)).

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