N. Natural Gas Co. v. L.D. Drilling, Inc.

• Decision Date: 17 October 2012
• Docket Number: 11–3026.,Nos. 11–3024,s. 11–3024
• Citation: 697 F.3d 1259
• Court: U.S. Court of Appeals — Tenth Circuit
• Parties: NORTHERN NATURAL GAS COMPANY, Plaintiff–Counter–Defendant–Appellee, v. L.D. DRILLING, INC.; Bill R. Milton; Carl Dudrey; HJB, Inc.; Ivan W. Milton; Kim B. Shoemaker; L.D. Davis; Larry E. Keenan; Lisa M. Milton; Nancy H. Shoemaker; Paul J. Beaver; Tammy Milton; Timothy R. Keenan; Whitetail Energy, Inc., Defendants–Counter–Claimants–Appellants, and Steven Eugene Young, Counter–Claimant–Appellant. Allam Exploration, LLC.; Apollo Energies, Inc.; Robert P. Bayer, II; Dale L. Smith and Mae D. Smith, Revocable Trust dated 12/05/2007; Eric D. Stinton, Trust dated 1/25/2007; Dale L. Smith, Mae D. Smith, Eric D. Stinton, Trustees; John P. Hastings; Lies Exploration, LLC; David Munro; Nash Oil & Gas, Inc.; Brenda M. Riffey; Larry D. Riffey; Val Energy, Inc; Vision Investments, LLC; Vosburgh Exploration, LLC; Steven Eugene Young, Defendants–Counter–Claimants. Northern Natural Gas Company, Plaintiff–Counter–Defendant–Appellee, v. Nash Oil & Gas, Inc., Defendant–Counter–Claimant–Appellant, and Allam Exploration, LLC.; Apollo Energies, Inc.; Robert P. Bayer, II; Paul J. Beaver; Dale L. Smith and Mae D. Smith, Revocable Trust dated 12/05/2007; Eric D. Stinton Trust dated 1/25/2007; Dale L. Smith, Mae D. Smith, Eric D. Stinton, Trustees; HJB, Inc.; John P. Hastings; Larry E. Keenan; Timothy R. Keenan; L.D. Drilling, Inc.; Lies Exploration, LLC; Bill R. Milton; Ivan W. Milton; Lisa M. Milton; Tammy Milton; David Munro; Brenda M. Riffey; Larry D. Riffey; Kim B. Shoemaker; Nancy H. Shoemaker; Val Energy, Inc.; Vision Investments, LLC; Vosburgh Exploration, LLC; Whitetail Energy, Inc., Defendants–Counter–Claimants. Steven Eugene Young, Counter–Claimant.

697 F.3d 1259

NORTHERN NATURAL GAS COMPANY, Plaintiff–Counter–Defendant–Appellee,

v.L.D. DRILLING, INC.; Bill R. Milton; Carl Dudrey; HJB, Inc.; Ivan W. Milton; Kim B. Shoemaker; L.D. Davis; Larry E. Keenan; Lisa M. Milton; Nancy H. Shoemaker; Paul J. Beaver; Tammy Milton; Timothy R. Keenan; Whitetail Energy, Inc., Defendants–Counter–Claimants–Appellants,andSteven Eugene Young, Counter–Claimant–Appellant.

Allam Exploration, LLC.; Apollo Energies, Inc.; Robert P. Bayer, II; Dale L. Smith and Mae D. Smith, Revocable Trust dated 12/05/2007; Eric D. Stinton, Trust dated 1/25/2007; Dale L. Smith, Mae D. Smith, Eric D. Stinton, Trustees; John P. Hastings; Lies Exploration, LLC; David Munro; Nash Oil & Gas, Inc.; Brenda M. Riffey; Larry D. Riffey; Val Energy, Inc; Vision Investments, LLC; Vosburgh Exploration, LLC; Steven Eugene Young, Defendants–Counter–Claimants.

Northern Natural Gas Company, Plaintiff–Counter–Defendant–Appellee,

v.Nash Oil & Gas, Inc., Defendant–Counter–Claimant–Appellant,andAllam Exploration, LLC.; Apollo Energies, Inc.; Robert P. Bayer, II; Paul J. Beaver; Dale L. Smith and Mae D. Smith, Revocable Trust dated 12/05/2007; Eric D. Stinton Trust dated 1/25/2007; Dale L. Smith, Mae D. Smith, Eric D. Stinton, Trustees; HJB, Inc.; John P. Hastings; Larry E. Keenan; Timothy R. Keenan; L.D. Drilling, Inc.; Lies Exploration, LLC; Bill R. Milton; Ivan W. Milton; Lisa M. Milton; Tammy Milton; David Munro; Brenda M. Riffey; Larry D. Riffey; Kim B. Shoemaker; Nancy H. Shoemaker; Val Energy, Inc.; Vision Investments, LLC; Vosburgh Exploration, LLC; Whitetail Energy, Inc., Defendants–Counter–Claimants.

Steven Eugene Young, Counter–Claimant.

Nos. 11–3024, 11–3026.

United States Court of Appeals,Tenth Circuit.

Oct. 17, 2012.

Jim H. Goering of Foulston Siefkin LLP, Wichita, KS, and Brian J. Madden, Wagstaff & Cartmell, LLP, Kansas City, MO (Adam S. Davis, Wagstaff & Cartmell, LLP, Kansas City, MO, and Timothy B. Mustaine, Foulston Siefkin LLP, Wichita, KS, with them on the briefs) for Defendants–Appellants.

Richard A. Olmstead, Kutak Rock LLP, Wichita, KS (Corey A. Neller, Mark D. Coldiron, and Paula M. Jantzen, Ryan Whaley Coldiron Shandy PLLC, Oklahoma City, OK, with him on the brief) for Plaintiff–Appellee.

Before HOLMES, EBEL, and MATHESON, Circuit Judges.

EBEL, Circuit Judge.

In these consolidated interlocutory appeals, Defendants–Appellants, natural gas producers with wells in south central Kansas, challenge a preliminary injunction enjoining them from further gas production from those wells. The district court entered the preliminary injunction after concluding there was a substantial likelihood that Plaintiff–Appellee Northern Natural Gas Co. (“Northern”) will prevail on its state-law claim alleging that Defendants' natural gas production from these wells is an actionable nuisance because it is disrupting Northern's nearby underground storage of natural gas. Having jurisdiction under 28 U.S.C. § 1292(a)(1), we AFFIRM.

I. BACKGROUND

A. Regulation of natural gas generally

Before addressing the issues presented by these appeals, we mention briefly the manner in which natural gas production and storage is regulated. Both state and federal governments regulate the natural gas industry. See Nw. Cent. Pipeline Corp. v. State Corp. Comm'n, 489 U.S. 493, 506, 109 S.Ct. 1262, 103 L.Ed.2d 509 (1989). Congress, through the Natural Gas Act of 1938 (“NGA”), 15 U.S.C. §§ 717–717z, vests the Federal Energy Regulatory Commission (“FERC”) with exclusive jurisdiction over sales of natural gas in interstate commerce for resale and transportation of natural gas, as well as over natural gas companies engaged in those activities. See15 U.S.C. § 717(b); see also Fuel Safe Washington v. FERC, 389 F.3d 1313, 1317 (10th Cir.2004). See generally Cascade Natural Gas Corp. v. FERC, 955 F.2d 1412, 1421 (10th Cir.1992) (“It is settled that if the NGA grants jurisdiction to [FERC] over a matter, ... its jurisdiction is exclusive.”). Relevant here, FERC's exclusive jurisdiction over interstate transportation of natural gas also includes jurisdiction over the storage of natural gas. See Schneidewind v. ANR Pipeline Co., 485 U.S. 293, 295 n. 1, 108 S.Ct. 1145, 99 L.Ed.2d 316 (1988) (agreeing that “[u]nderground gas storage facilities are a necessary and integral part of the operation of piping gas from the area of production to the area of consumption”) (internal quotation marks omitted).

“Prior to constructing or operating any natural gas pipeline and related facilities, a company subject to FERC's jurisdiction must obtain from FERC ‘a certificate of public convenience and necessity,’ 15 U.S.C. § 717f(c)(1)(A), indicating ... the proposed service ‘is or will be required by the present or future public convenience or necessity.’ 15 U.S.C. § 717f(e).” Fuel Safe, 389 F.3d at 1317;see also Schneidewind, 485 U.S. at 302, 108 S.Ct. 1145. Once a natural gas company obtains a certificate of public convenience and necessity, the NGA gives the company eminent domain authority to condemn property it needs to provide the necessary service. See15 U.S.C. § 717f(h).

The NGA expressly leaves to states the regulation of retail sales, as well as purely intrastate wholesales and transportation of natural gas. See id.§ 717(b), (c); see also Gen. Motors Corp. v. Tracy, 519 U.S. 278, 292–93, 117 S.Ct. 811, 136 L.Ed.2d 761 (1997); Fuel Safe, 389 F.3d at 1317. In addition, the NGA reserves to states “the power to regulate the physical production and gathering of natural gas in the interests of conservation or of any other consideration of legitimate local concern.” Interstate Natural Gas Co. v. Fed. Power Comm'n, 331 U.S. 682, 690, 67 S.Ct. 1482, 91 L.Ed. 1742 (1947); see also Panhandle E. Pipeline Co. v. Oklahoma, 83 F.3d 1219, 1225–26 (10th Cir.1996). For NGA purposes, production and gathering of natural gas “are terms narrowly confined to the physical acts of drawing the gas from the earth and preparing it for the first stages of distribution.” N. Natural Gas Co. v. State Corp. Comm'n, 372 U.S. 84, 90, 83 S.Ct. 646, 9 L.Ed.2d 601 (1963); see also Panhandle E. Pipeline, 83 F.3d at 1225–26. Kansas regulates natural gas production through the Kansas Corporation Commission (“KCC”). See Zinke & Trumbo, Ltd. v. State Corp. Comm'n, 242 Kan. 470, 749 P.2d 21, 24 (1988).

B. Factual background

Turning to the facts at issue in these appeals, the district court, following an evidentiary hearing, made the following factual findings, which the parties do not challenge on appeal: In 1932, natural gas was discovered in south central Kansas, in what is now known as Cunningham Field (the “Field”). Natural gas was extracted there, from the Viola geological formation, beginning in 1934; the Field's reserves were depleted by 1977. Northern then decided to use the Field as an underground storage facility. In order to do so, Northern obtained certificates of public convenience and necessity from both the KCC and the Federal Power Commission, FERC's predecessor. These certifications permit Northern to store natural gas in over 26,000 acres located in both the Viola and Simpson geological strata.

After obtaining these certificates of public convenience and necessity, Northern, in 1979, began injecting natural gas into the Field for storage. After a several-year “fill-up” period during which Northern re-pressurized the Field, the Field remained “essentially stable” from 1985 through 1995. (Aplt.App. at 1926.) Cunningham Field is the largest of fifteen underground natural gas storage fields in Kansas, and one of the largest twenty-five such fields in the United States.

Northern thought that Cunningham Field would be a good underground natural gas storage facility because Northern believed there were several faults surrounding the Field that would seal the stored gas inside the Field. But as it turned out, the fault at the northern end of the field did not fully seal in the natural gas. Instead, an aquifer, acting with the fault, had originally formed the northern boundary of the Field.

[D]uring primary production of the field the aquifer acted as a limited water drive, pushing native gas out of pore spaces and allowing water to move in, with a corresponding reduction in pressure of the aquifer north of the fault. Later, during the Cunningham storage field “fill up” period, storage gas injected by Northern was pushed past the northern fault and into the aquifer, thereby increasing pressure in the aquifer north of the field. The field stabilized in 1985 and remained stable for about ten years thereafter.

( Id. at 1930.) Beginning in approximately 1994, however, other natural gas producers began extracting gas and large amounts of water just north of the Field, causing “pressure sinks” that destabilized the Field and resulted in the migration of Northern's storage gas northward beyond the Field's boundary. ( Id.)

In 2005, FERC permitted Northern to drill two withdrawal wells near the Field's northern boundary, in an effort to recapture the stored natural gas that was migrating northward, and further permitted Northern to drill two observation wells at the Field's northern boundary in order to determine whether Northern's recapture efforts were successful. The withdrawal wells, however, were unable to stop the northward migration of Northern's storage gas.

In 2007, Northern requested that FERC permit Northern to expand the Field's northern “buffer zone” by 4,800 acres. ( Id. at 1927.) FERC agreed to expand the buffer zone, but only by 1,760 acres because Northern had failed to prove its storage gas had migrated further than that. FERC did not authorize Northern to inject or store any natural gas in this buffer zone.

C. This litigation

Northern initiated this lawsuit in December 2008, suing three natural gas producers, L.D. Drilling, Inc. (“L.D. Drilling”), Nash Oil & Gas, Inc. (“Nash”), and Val Energy, Inc. (“Val Energy”), which together have approximately twenty-five wells,...