Consider farm specifics in pipeline contracts

Ohio natural gas exploration and production has surged in the last few years as energy companies explore and produce within the Utica and Marcellus Shale natural gas formations. Once acquired, that natural gas must be transported from the site of production to a refinery, and also to its end destination via pipelines.

Among the most recent of these proposed projects is the Bluegrass Pipeline that will transport natural gas liquids through southern Ohio on its way to the Gulf Coast. The proposed “Bluegrass Pipeline” will be designed to initially transport up to 200,000 barrels per day (and eventually 400,000 barrels per day) of mixed natural gas liquids.

This project (and other pipeline projects) will actively be seeking land easements for the pipeline in the next few months. Like any other type of contractual arrangement for land use of a farm, there should be careful consideration about the details of a pipeline easement. And, some of those details have changed fairly recently.

“The rules have changed. SB 315 passed just last year and there were provisions that changed the approval process for pipelines in Ohio. Right now I am doing more pipeline easement issue meetings than oil and gas leasing meetings,” said Dale Arnold, director of Energy Services for the Ohio Farm Bureau Federation. “The pipelines are now operating in a much more expedited process.”

Arnold said there are three classifications of pipelines: interstate, intrastate or local oil and gas collection systems.
“Each has their own rules and regulations to follow. The major utilities are also replacing utility pipeline systems,” Arnold said. “There are upwards of 14,000 to 15,000 miles of pipeline construction and refitting planned in the next decade or so. It is a much more expedited process.”

With this in mind, Arnold said the first thing landowners need to consider with a proposed pipeline on their property are its type and purpose as well as its diameter and pressure. If it is an interstate pipeline, it is governed by the Federal Energy Regulatory Commission (FERC). The Public Utilities Commission of Ohio and Ohio Power Siting Board govern intrastate pipelines. Collection lines are governed by the Ohio Division of Natural Resources – Oil and Gas.

“If they are intrastate pipelines that are sponsored by energy service providers and not a government entity, eminent domain provisions do not apply. That means farmers have the responsibility to negotiate effective easements across their property,” he said. “Anything and everything is negotiable. There is no threat because eminent domain is not a possibility.”

The details of the land in question and the farm situation need to be considered.

“If a farmer is in a cash grains system with corn, wheat, beans, or hay or is using the ground as pasture, the ability to use this ground once the project is done does not change,” Arnold said. “For forestry, Christmas trees, nursery stock or anything where you are removing a root ball, your ability to use that right of way for that type of production will be changed and you have to negotiate a settlement that reflects that change. These are not as lucrative as oil and gas easements, but you still need to think about the future. Is the use of the land going to change?”

Even in a cash gain or pasture situation, the land will be out of production during the construction process and that, along with other possible challenges in the future, needs to be considered.

“You’re allowed to ask for this production cycle and two production cycles after that because your land use is going to change. In cash grain, for example, compaction could be a key problem. Farmers should know by the soil type on their ground what their production amounts are, so when the land comes back into production and you see a marked difference, you have the ability to do other remediation,” Arnold said. “If you had to sell that strip of ground, how much would you ask for it? Think about the fair market value of that property. That is where you start. Talk to the county auditor and local real estate agents to get an idea of the value of that property. Is that going to enhance the value of the ground going forward or do the opposite? That ground is now in agriculture, but could the use of that ground change in the next 20 or 30 years? Could it become residential or commercial? If you are having construction, you may lose the use of that field for one or two growing seasons? If you had to rent land to make up for those losses, how much would it cost? If you have animals, how much would it cost in fuel and labor to temporarily move them to other pastures? How much would you have to spend in hay to make up for lost pasture? You have to think about how much you could lose in timber harvest, tree production or other uses of the next 20 or 30 years. Put all of this on a spreadsheet. The company is going to offer you a lump settlement. That is an initial offer and you have the right to do a counter offer. If it is much higher, that is fine, but the first question they will ask you is where did you come up with those figures.”

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