The legal hurdles the Texas midstream must jump in the next few years are nearly as high as the sector’s challenge to add billions in new infrastructure, according to a legal roundtable discussion at Hart Energy’s 3rd annual Midstream Texas conference, held May 24 in Midland, Texas.

Eminent domain may be the top issue, according to Bruce Stanfill, a partner with Akerman LLP and a litigation specialist.

“This will be a major issue for the coming years in all parts of Texas,” Stanfill said. “It applies to the new pipelines, the [border] wall, the Houston-to-Dallas bullet train and more. There will be many contests of condemnation proceedings.”

Joining Stanfill in the discussion were Christopher D. Smith, partner with newly formed Smith Jolin LLP and previously a government and regulatory specialist with Thompson & Knight LLP; and Jeffery Muñoz, a partner with Latham & Watkins LLP specializing in energy M&A transactions.

“Increasingly, landowners are using eminent domain law as a weapon,” Smith said. Proceedings can be “procedural, not substantive” as landowners seek to block a project or to extract more favorable terms.

For pipelines, common-carrier status will be another major issue, Stanfill added, pointing out that only common carriers—systems serving multiple customers on a standard-tariff basis—enjoy eminent domain privileges. “It’s not enough to just check the box. They must show objective proof that the project will serve as a common-carrier pipeline. And the burden of proof is on the pipeline; you need to think about this ahead of time.”

Muñoz agreed, noting that a new common-carrier pipeline must be “completely used for the common good” and not a private development. That will require close examination of the relationship between the developer, third parties and joint ventures, he added. “You can’t do that early enough in the process.”

The Trump administration’s changes to the regulatory environment will have a substantial impact on multiple sector legal questions, the panelists agreed. The administration’s mandate that new pipelines use only U.S.-made pipe “could be a big issue,” Muñoz said. “It looks great on paper, to help get things built, but it is somewhat troublesome for the pipeline companies.” Pipe shortages caused by high demand, or the fact that U.S. steel mills don’t manufacture some sizes and grades of pipe, will create waiver applications.

Christopher D. Smith, partner with Smith Jolin LLP. (Source: Hart Energy) “Implementation will drive this,” he added. “What kind of waivers will there be?”

“The new administration can’t do things by fiat, it will take a long time” to figure out how exceptions to the rule will be handled, said Smith.

Another major regulatory problem is the Federal Energy Regulatory Commission’s (FERC) lack of a quorum. President Trump has nominated two prospective commissioners but they must go through the Senate approval process and that could take months. “Given the political divide, it’s hard to say when they will get confirmed,” Muñoz said.

“FERC already was the most understaffed agency out there, anyway,” Muñoz added. The agency has been swamped with permit applications for gas pipelines, LNG export operations and electric transmission lines. Meanwhile, opposition to infrastructure projects from environmental activists has grown.

To add to that logjam, political and environmental opposition means “we will see more challenges to its [FERC] decisions” even after the commission again enjoys a quorum, according to Stanfill.

In discussing another regulatory roadblock, Federal Aviation Administration stipulations that sharply limit the use of drones for industrial purposes “are a personal pet peeve,” Stanfill said. “Drones are perfect for what you want to do but you can’t use them” for pipeline right-of-way patrols and site and equipment inspections.

“As an environmental lawyer, I hate to see anything that is an improvement get locked up” by arbitrary regulations, Smith said.

Environmental questions continue to create multiple stumbling blocks for midstream projects, Smith said, adding operators often need to make “triage” decisions when multiple environmental questions come up as a construction project progresses. “What’s the most important thing to look at?” he asked. It’s often possible to aggregate multiple small items into one, single issue which can speed the review process, he noted.

“The environment is a major part of every deal,” Muñoz said, and operators should not take the issue lightly when planning projects. Stanfill agreed, adding too often management takes a “just get the deal done” approach to keep a project moving. “That will bite you,” he cautioned.

The 2016 Sabine Oil & Gas bankruptcy case also created a major discussion topic for the panelists, who agreed the final impact is yet to come. Saying that legal covenants between producer and midstream operator run with the land is not automatic, Muñoz cautioned that “just like common-carrier status, saying it doesn’t make it so.” As a result, operators should “assume covenants do not run with the land and find other ways to protect yourself.”

“Draft your contracts carefully,” Stanfill added, pointing out legal requirements vary by state. “They are unique by state. Texas law is not Oklahoma law. Oklahoma law is not New Mexico law.”

The panelists said an issue worth watching is the potential legal fallout from the recent incident in Colorado where production from a nearby well leaked into a nearby house, causing an explosion and fire. What is unusual about the case, Stanfill said, is that “the house came to the pipes.” Colorado law sets standards for new pipelines built near homes and businesses. However in this case, the well and gathering lines had been in in place for many years before the housing subdivision went in—the opposite situation—and legal requirements on the housing developer are vague.

Paul Hart can be reached at pdhart@hartenergy.com.