Some may be surprised to learn that the storage and production of natural gas do not always complement one another. A conflict can occur when one gas company stores its gas by injecting it back into the ground, typically into a depleted gas field. So long as gas pressure can be maintained underground, the depleted field provides a natural reservoir for storing gas. If areas of low pressure are created near the storage area, the stored gas tends to migrate toward these areas. The drilling for and extraction of natural gas can create such low pressure zones. Effectively, production activities near an underground storage area suck the gas away from where it is being stored.
Yesterday, the U.S. Court of Appeals for the Tenth Circuit held that production activities that draw off stored gas in this manner likely constitute a nuisance under Kansas law. The case, Northern Natural Gas Co. v. L.D. Drilling, Inc., No. 11-3024 (Oct. 17, 2012), involves the storage and production of gas in south central Kansas. In the late 1970s, Northern Natural Gas (“Northern”) started injecting its gas into a depleted gas field. Northern subsequently discovered that an aquifer along the storage field’s northern boundary caused decreases in underground pressure along northern portion of the field. These decreases in pressure did not cause any problems until several companies started withdrawing natural gas and water just north of Northern’s storage field. Northern brought a lawsuit against these gas producers, alleging that the defendants’ operations created “pressure sinks” that drew Northern’s gas out of storage. Finding that these circumstances likely constituted a nuisance, the district court granted a preliminary injunction prohibiting the defendants’ gas production operations.
The Tenth Circuit’s opinion upholding this preliminary injunction keyed in on two aspects of the case that may make gas producers take pause. First, the court found that the producers’ intent to interfere with Northern’s use of its gas field could be established by a prior proceeding before the Federal Energy Regulatory Commission (“FERC”). During this FERC proceeding, Northern presented evidence that the producers’ wells were siphoning gas from its storage field. According to the court, this evidence could have put the producers on notice that their operations would interfere with Northern’s use of its storage field. As a consequence, the producers’ intention to interfere with Northern’s use of its property could be inferred from the producers’ continued extraction of gas after learning that this activity would siphon off Northern’s gas.
Second, the Tenth Circuit rejected the defendants’ argument that Kansas’ licensing of their drilling operations immunized them from a nuisance claim. The producers argued that permits authorizing their drilling activities issued by the Kansas Corporation Commission precluded a court from finding that their operations unreasonably interfered with Northern’s gas storage. The court made short work of this argument, noting that lawfully carrying on a use of one’s property does not necessarily make this use reasonable in a nuisance action.
As natural gas production expands in the United States, more conflicts could arise between gas companies seeking to make use of limited space and resources. As this Tenth Circuit case demonstrates, these disputes will draw in federal and state regulators, as well as the courts. The regulators will no doubt look at these problems more carefully. For the time being, however, some gas companies may follow Northern’s example and seek relief using the law of nuisance.