February 13, 2014

Fort Worth’s Trinity East Energy sues Dallas over denied drilling permits

The company says it spent $30 million preparing to drill in west Dallas, including a $19 million signing bonus paid to the city.

Fort Worth-based Trinity East Energy sued the city of Dallas on Tuesday, claiming officials assured the company it would be able to drill on 3,650 acres of city-owned land and then denied its permits.

According to the suit, filed in Dallas County court, the company “ultimately invested more than $30 million in an attempt to extract natural gas conveyed to the company through its lease purchases,” including a $19 million signing bonus it paid the city. It says the Dallas City Council in August 2013 denied three Trinity East permit applications to drill on the property in west Dallas.

Trinity East’s leases were set to expire on Friday.

“We had a deal with the city of Dallas, and they went back on it,” Trinity East President Steve Fort said Thursday.

“They asked us to come to them and buy these leases,” Forte said in an interview. “These sites were the subject of very intense negotiations, and we made it clear we would not go forward without assurances” the company would be allowed to drill, he said. “Now they’re trying to back out of the deal.”

In a prepared statement, the city said the lawsuit lacks merit and it will defend its regulatory powers. It said drilling permits were granted to other companies, but noted that no wells were ever drilled as natural gas prices fell and more was learned about the formation.

Of the three Trinity East permits requested, “two of the sites were located in a city park and in the floodplain, and the third site was close to the city’s new soccer complex,” the city’s statement said. “Trinity East never pursued any other zoning permits to drill within the leased property, nor did it apply for any zoning permits to drill near the leased property so that it could use horizontal drilling techniques to try to obtain oil and gas.”

But Fort said the city’s argument is “irrelevant.”

“We think this is one of the last undeveloped sweet spots in the Barnett Shale” he said, and the company’s leases would have supported 60 wells that could have produced hundreds of millions of dollars in revenues.

The Barnett Shale natural gas field extends under all or part of more than 20 North Texas counties, but only reaches into western Dallas County. Production in Dallas County has been slight — a fraction of 1 percent of total Barnett Shale output in 2013, according to Texas Railroad Commission data.

Cities responded to the wave of drilling with various ordinances and zoning rules, many of which were contentious. Keystone Exploration, which shares some ownership with Trinity East, in 2011 sued the city of Flower Mound for refusing to grant it a variance from the city’s drilling ordinance, considered the most stringent in the area at that time. Another Fort Worth-based producer, Titan Operating, also sued Flower Mound that year, a case that was dismissed.

In 2008, Chesapeake Energy sued Grand Prairie over the location of a natural gas compressor. And in 2004, Devon Energy sued the city of Reno, in northern Parker County, over its refusal to allow drilling. That case was later settled out of court.

The city of Fort Worth was sued over a drilling permit in 2007, but by a resident who contested allowing drilling near a popular trail along the Trinity River. The case was dismissed the following year.

Dallas dispute dates to 2007

According to Trinity East’s lawsuit, in 2007 the city solicited bids to drill on city-owned property. The next year, the Dallas City Council authorized then-City Manager Mary Suhm “to negotiate and execute an oil and gas lease with Trinity,” and on Aug. 15, 2008, Suhm “signed two lease agreements” that included a proposed drill site.

“After spending a substantial amount of time and money on engineering, surveying and planning,” Trinity said, it filed three special-use permit applications in 2011. Later that year, the city agreed to extend the lease terms to Feb. 15, 2014.

The permits were denied by the City Planning Commission in 2012 and 2013, the lawsuit says, and on Aug. 28 a vote by Dallas City Council failed to gain a three-fourths majority needed for approval.

“The city’s refusal to allow Trinity to perform under the Lease Agreements is a breach of contract and has deprived Trinity of its constitutionally protected property rights,” the suit states. Claiming fraud and misrepresentation, the suit seeks unspecified damages, attorney’s fees and interest.

On Dec. 11, the Dallas City Council amended its natural gas drilling ordinance to require that drilling rigs and compressor stations be at least 1,500 feet from residences, businesses, churches and other protected locations. That’s five times the previous, 300-foot setback, and compares to 600-foot setbacks in Fort Worth and Arlington, although operators may seek exceptions.

Fort Worth-based XTO Energy, now a subsidiary of Irving-based Exxon Mobil, also signed two leases with the city of Dallas in 2008, paying $14 million in signing bonuses. About a year ago, it said it would stop pursuing permits to drill, citing “continued uncertainty surrounding local regulations governing gas well drilling.”

One XTO lease expired in January 2013, and the other in August.

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