Natural Gas Storage, Eminent Domain and Inverse Condemnation

The eminent domain attorneys at Sever Storey are actively investigating inverse condemnation cases involving natural gas storage throughout the State of Indiana. Landowners in certain parts of Indiana have significant natural gas storage rights. In some instances this storage right is currently being used by natural gas storage operators without compensation to the landowner. Federal and state law allows landowners the right to bring an inverse condemnation action against these gas storage operators. If successful the landowner can be reimbursed for all attorney fees, costs and may receive substantial compensation.

natural gas storage sites nationwide

Natural Gas Basics:
Natural gas is distributed from wells throughout the country via a system made up of approximately 1.3 million miles of pipeline. Although natural gas pipelines are in continual operation the demand for natural gas by the consumer fluctuates widely. Natural gas storage projects provide huge benefits to suppliers by allowing them to provide consistent supplies of natural gas year round. In addition, storage facilities benefit the pipelines by allowing continuous transportation of natural gas year round which increases the mechanical efficiency of the pipelines and thereby reduces costs. Finally, natural gas operators can use storage to generate substantial profits by storing gas during period of low demand and price and selling during high demand and higher prices.

Indiana has approximately 28 to 30 active natural gas storage facilities located in 16 different rock units within the State.

Eminent Domain and the Natural Gas Act:
To facilitate the construction of natural gas storage projects, gas companies are allowed to use the federal power of eminent domain in order to secure property rights under the Natural Gas Act. When a gas company uses the power of eminent domain to secure a gas storage right they must pay just compensation for that right. In these situations the biggest question for landowners is to how to properly value the property right taken. Another way to consider the problem is; how does a landowner determine the value of the right to store natural gas in a geological formation 3,000 feet below the surface of one’s property.

Value of the Storage Right
Natural underground storage rights can have a significant value. There are several methods that could be used to prove compensation for landowners. For example, you could consider the present fair market value of the storage easement based upon a capitalization of the retail income to be reasonably derived for the right to store the gas.
It is important to note that when using any method that your expert find a true market. Natural gas operators will argue that the storage right is worth only $50.00 an acre “because that is what they have always paid.” In providing just compensation eminent domain requires that a market is used whereby a willing buyer and willing seller agree to a price without undue influence. In essence the market is established by arm’s length transactions. Where a natural gas provider uses examples of previous sales under the threat of eminent domain a true market does not exist. When a market has only one buyer and when that buyer could force a sale using the power of eminent domain that transaction is de facto not a market transaction. Otherwise the storage operator would have the power of eminent domain and the power to determine the amount of just compensation.

Theories that Work!

At Sever Storey we have developed several theories using true market transactions that result in significant per acre compensation for landowners. The correct approach for each landowner may vary given their circumstances. Using these theories we believe that a strong argument can be made for just compensation that far exceeds that which is traditionally offered by gas storage companies.

If you believe that your underground natural storage rights are being used without your permission and without compensation please call the eminent domain landowner attorneys of Sever Storey at 888-318-3761 for a free consultation.

Natural Gas Storage Basics

There are less than 500 underground storage sites located in 27 states and provinces across the United States and Canada. Natural gas is stored in underground reservoirs primarily to ensure the capability of the gas industry to meet seasonal fluctuations in demand. Underground storage supplements the industry’s production and delivery systems, allowing supply reliability during periods of heavy gas demand by residential, commercial and industrial customers. Storage is also used occasionally as a conservation measure to prevent flaring and other waste when production rates exceed marketability. With the tremendous uptick in natural gas extraction across the United States storage has become a prominent issue.

The storage of natural gas requires specific subsurface physical conditions. The three principal types of underground storage sites used in the United States today are 1) depleted or partially depleted reservoirs in oil and/or gas fields; 2) aquifers; and 3) salt cavern formations. Each type has its own physical characteristics (porosity, permeability, retention capability) and economics (site preparation costs, deliverability rates, cycling capability), which govern its suitability to particular applications.

well site

The most important characteristic of an underground storage reservoir is its capability to hold natural gas for future delivery. The measure of this is called working gas capacity. Working gas capacity is defined as “the amount of natural gas inventory that can be withdrawn to serve customer needs”.

In addition to working (top storage), underground storage reservoirs also contain base (cushion) gas and, in the case of partially depleted oil or gas filed reservoirs, native gas. Native gas is the gas that remains after economic production ceases and before conversion to use as a storage site. Upon development of a storage site, additional gas is injected and combined with any existing native gas in order to develop and maintain adequate storage reservoir pressure to meet required service. The resulting (permanent) inventory is referred to as the Base or Cushion Load. During heavy demand periods, some base gas may be withdrawn temporarily and delivered as working gas, but over the long term, base levels must be maintained to ensure operational capability.

Natural gas was first successfully stored underground, in 1915, in Welland County, Ontario, Canada. Several wells in a partially depleted gas field were reconditioned. Subsequently, gas was injected into the reservoir and withdrawn the following winter. In the United States, in 1916, Iroquois Gas Company placed the Zoar field, south of Buffalo, New York, into operation as a storage site. In 1919, the Central Kentucky Natural Gas Company re-pressurized the depleted Menifee gas field in Kentucky. By 1930, nine storage pools in six different states were in operation with a total capacity of approximately 18 BCF. Before 1950, essentially all gas storage was in partially or fully depleted gas reservoirs.

Most existing gas storage in the United States is held in depleted and partially depleted gas or oil fields located close to consumption (population) centers. Conversion of a field from production to storage duty takes advantage of existing wells, gathering systems, and pipeline connections. The geology and producing characteristics of a depleted field are also well known. However, choices of storage field location and performance are limited by the inventory of depleted fields in any region.

In some areas, most notably the Midwestern United States, natural aquifers have been converted to gas storage reservoirs. An aquifer is suitable for gas storage if the water-bearing sedimentary rock formation is overlaid with an impermeable cap rock. While the geology of aquifers is similar to depleted production fields, their use in gas storage usually requires base (cushion) gas and greater monitoring of withdrawal and injection performance. Deliverability rates may be enhanced by the presence of an active water drive.

Salt caverns, the third type of storage, provide very high withdrawal and injection rates compared with their working gas capacity. Base gas requirements are relatively low. The large majority of salt cavern storage facilities have been developed in salt dome formations located in the Gulf Coast States. Salt caverns leached from bedded salt formations in the Northeastern, Midwestern, and Western States are also being developed to take advantage of the high volume and flexible operations possible with a cavern facility. Cavern construction is more costly than depleted field conversions when measured on the basis of dollars per thousand cubic feet of working gas, but the ability to perform several withdrawal and injection cycles each year reduces the per-unit cost of each thousand cubic feet of gas injected and withdrawn.

The subject property is a partially depleted gas reservoir. This type of storage field is used when gas can be injected into reservoirs with suitable pore space, permeability, and retention characteristics. All oil and gas reservoirs share similar characteristics in that they are composed of rock with enough porosity so that hydrocarbons can accumulate in the pores in the rock, and they have a less permeable layer of rock above the hydrocarbon-bearing stratum. The hydrocarbon accumulation in the porous rock is pressurized. When a well hole penetrates the impermeable cap layer of rock, the hydrocarbon under pressure is exposed to the much lower atmospheric pressure, and gas can flow into and out of the well.

Depleted or partially depleted oil and gas reservoirs are the most commonly used underground storage sites because of their availability, relative to the other types of storage. Daily deliverability rates from depleted fields vary widely because of differences in the surface facilities (such as compressors), base gas levels, and the fluid flow characteristics of each reservoir. Retention capability, which is the degree to which stored gas is held within the reservoir area, however, is highest of the three principal types of underground storage. Depleted field storage is also the least expensive to develop, operate and maintain.

In order to use an abandoned gas reservoir for storage, one or more of the wells used for extraction are typically used to inject gas. As with extraction, the more porous the rock, the greater the rate of injection can be. As pressure builds up in the reservoir, the rate of injection slows down (pushing the gas in against higher pressure requires more force). Similarly, when the reservoir is at peak pressure, the rate of extraction is greater than at minimum pressure.