Trinity East Gas Lease

Dallas City Council February 27, 2013

Purpose of Briefing
• Provide a chronology of City’s leasing of mineral rights
– Explanatory Notes (shaded slides) within the chronology

• Review identified issues:

• Appendix

– Radio Tower site (22 acres) as part of Trinity East lease – Trinity East letter (August 2008) acknowledged by City Manager – City Manager’s Authority – Surface/subsurface activities in parkland – 90-day period to conduct title work

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Overview
Dates Fall 2006 Fall 2006 – Fall 2007 Jan – Sept 2007 May/July 2007
July 20, 2007

Actions Direction to explore leasing of mineral rights Revenue Strategy- Lease Mineral Rights 07/08 Budget Process Development of lease form
Issuance of RFP

September 12, 2007 November 2007 – January 2008 February 27, 2008 August 15, 2008

Adoption of Drilling Ordinance Selection of Proposers Council authorization to execute Execution of Lease – Refinements of attachments SUP application Lease extension
Chapter 26 Hearing deferred

March 17, 2011 June 22, 2011
August 10, 2011

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Timeline
• Beginning in 2000, numerous cities/counties throughout the Metroplex (also DFW Airport) were leasing mineral rights receiving significant payments
– Barnett Shale was being drilled for natural gas – Approximately 11,000 gas wells in Dallas, Denton, and Tarrant counties currently

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Timeline
• As 2007-08 budget was being developed:
– projected costs to meet the Council’s Key Focus Area goals growing: $40M increase in Public Safety (including adding 200 officers) – other anticipated costs included:
• • • • • • Increases for Public Safety compensation and equipment Debt service increase for 2003/2006 Bond programs 2006 Bond program implementation commencing Community prosecutors Full year funding for new Animal Shelter Plus numerous program and service enhancements

– initial projected gap approximately $90M
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Timeline
• City staff was charged to aggressively develop new sources of revenue-– all ideas from council members to be evaluated – less traditional revenue sources pursued:
• • • • Pouring Rights/Beverage Service Contract Advertising Kiosks DFW tax sharing revenue Leasing of mineral rights on City property

• September 5, 2006: Eco Dev & Housing Committee discussed available property for drilling operations and attracting exploration companies to the City
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Timeline
• September 12, 2007, Council adopted (11- 1, 3 Absent) a gas drilling ordinance (amending the Development Code) that required SUPs and other controls specifically for drilling
– New ordinance included the latest in requirements and controls – Removed prohibition of drilling on parkland – Still in effect today

• From June 2007 to June 2010, Council approved five SUPs for gas drilling and production on private property (Attachment B) • September 26, 2007, Council approved (14-1) 07- 08 General Fund Budget, including projected revenues of $20M from gas drilling leases
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Timeline
• Fall 2007, in order to achieve budgeted revenues from gas leases, staff:
– identified City properties located over the Barnett Shale for possible mineral rights leasing
• Bundled into packages (Attachment C)
– Included parkland

• One package was called the Dallas North Properties which surrounded a site called the Radio Tower Tract (Attachment D)

– hired an attorney experienced in mineral rights leasing throughout the Metroplex
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Explanatory Notes
• Radio Tower Tract is a 22.4 acre tract originally donated to the City in 1963, subject to a 30-year lease and purchase option to a third party for a radio tower
– City and lessee disputed terms of agreements, – Lawsuit was filed, but settled (in 1970) by City conveying fee title to the tower lessee, subject to a reverter back to the City, if tract not used for radio tower

• From the time of the settlement to 2007, the property was not owned by the City
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Explanatory Notes
• In April 2007, reverter was triggered and the tract was conveyed back to the City by quit claim deed • In May and June 2007, staff compiled lists of cityowned property to be included in the Gas Lease RFP, • Included was a general area referred to as the Dallas North Properties which included:
– approximately 2,100 acres, – parkland and non-parkland (Attachment D)
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Explanatory Notes
• Because there is typically a lag in updating real estate data bases and inventory lists, the Radio Tower tract was not on the City inventory list nor on the accompanying map generated at the time by City’s mapping staff for the Gas Lease RFP • But for the lag in a data base update, this property would have been included in the RFP property list and agenda information sheet attachment
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Timeline
• July 2007 issued a Gas Lease RFP
• Included was the form lease containing all terms required by the City • Final acreage was to be finalized after title research
– Final Title search is a cumbersome, difficult and expensive process – Industry standard process is that Lessees will not complete this process until they have a deal

• Feb 6, 2008, Council was briefed on the results of the Gas Lease RFP
– Staff recommended/stated several times the intent not to drill in parkland, but mention steps required, if Council wished to do so

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Timeline
• Feb 27, 2008, Council discussed and authorized (12- 2, 1 Absent) execution of 36-month leases with • All material lease provisions were agreed upon and did not change before/at execution • At this point, the title research was initiated to confirm: • Because the Trinity East leases included parkland, City Council was required by state law (Chapter 26) to hold a public hearing regarding subsurface mineral rights on the parkland.
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– XTO Energy for Hensley Field and nearby properties – Trinity East for Dallas North/Trinity River properties

– property descriptions and ownership – ownership of mineral rights

Timeline
• On June 25, 2008 City Council :
– unanimously (14-0, 1 Absent) supported authorizing the Chapter 26 public hearing – was informed by staff that:
• Trinity East had completed their title work and identified a site (Radio Tower Tract) owned by the City, omitted from the Dallas North Property List group (for which the Council had authorized execution of the lease) • surface use “would not in any way impact the park system or the park use” (Parks Director) • If application was made to drill on this site or other parkland, staff stated another Chapter 26 hearing by City Council would be required (Attachment E) • Audio clip and transcript provided (Attachment F)
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Explanatory Notes
• City properties within the Barnett Shale (including Dallas North Properties) were attached to the Gas Lease RFP with the caveats:
– Property was identified as needing ownership verification – City made no warranty of title or boundaries, – proposers had responsibility to confirm title, etc.

• February 27, 2008 council agenda item to authorize execution of contracts, which contained the same property lists as in Gas Lease RFP, was still not updated to include the Radio Tower tract, which had now reverted to the City • City gave Trinity East a 90-day period to conduct its title work, locking in the mineral rights price, in return for a $1.75M deposit that would be forfeited if Trinity East did not complete the lease other than due to title defects

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Explanatory Notes
• As required, Trinity East completed its comprehensive title work by June 2008 and notified the City of its ownership of the Radio Tower tract, which was located within the Dallas North Properties • After the Radio Tower tract (22 acres) was confirmed to be owned by the City, the tract was included in the lease as part of the Dallas North Properties
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Explanatory Notes
• City Attorney’s Office has concluded the City Manager was authorized to finalize and execute the lease:
– RFP described property inventory list as subject to deed and title work – City Council authorized lease of Dallas North Properties – After City Council authorization, requisite comprehensive title work was conducted – Radio Tower Site (22 acre) is within Dallas North Properties – On June 25, 2008, City Council and staff discussed identification and inclusion of the Radio Tower tract

• Therefore, City Manager had authorization to execute the lease August 15, 2008
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Timeline
• On August 15, 2008 leases were executed with Trinity East Energy for approximately 3,500 acres of city-owned minerals
– A total of $19 million was received – 25% royalty in any gas commercially developed – 5% override interest in any gas from others’ mineral rights collected via City drill sites – City only listed four tracts, approximately 250 out of 3,500 acres, where surface use might be possible – Concurrently, CMO signed the Trinity East letter memorializing staff’s assurances of assistance in moving the process forward
• Three tracts are included as “Proposed Drill Sites” • One tract was included as “Drill Site”

• On August 20, 2008, Council held a Chapter 26 hearing and approved (10-1, 4 Absent) non-park use of the subsurface of parkland included in the leases
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Explanatory Notes
• Trinity East understood, in order to drill on any city-owned property, it would need to obtain several different approvals
– Chapter 26 hearing and Council approval, if site is on parkland – Amendment to the City’s floodplain ordinance or fill permit, if site is in floodplain – SUP as to any surface drilling activity – Drilling permit for any drilling activity – Appropriate approvals from other agencies like – TCEQ, Railroad Commission, etc.
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Explanatory Notes
• Before Trinity East would sign the lease and make its initial $19 million payment, it sought assurance that the City staff would assist it in obtaining necessary approvals • Requests for assurance of assistance are often sought by outside parties in development deals

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Explanatory Notes
• When the City Council has determined that a project is in the City’s best interest, staff has developed a standard response to these requests for assurance
– Will use its reasonable efforts to place before the Council those matters requiring City Council approval – Include explicit statement that this does not constitute a binding agreement

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Explanatory Notes
• Using these principles/guidelines, staff negotiated the content of Trinity East’s proposed letter and the City Manager signed it, acknowledging and agreeing to staff’s assistance (Attachment G)

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Timeline
• In 2010 and 2011, Trinity East asked for an extension to the lease • Trinity East agreed to reduce the city-owned acreage leased, but wanted the radio tower tract to remain in this reduced acreage • Radio tower tract was included in the 2011 briefings to City Council regarding the possible extension and in the map attached to the 2011 City Council agenda item
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Timeline
• On June 16, 2011, the Park Board recommended authorizing a Chapter 26 hearing to consider surface gas drilling and production use at the radio tower and the gun club sites • On June 22, 2011, City Council authorized (13-1, 1 Vacant) amended lease
– 30 month extension – Reduced mineral acreage, but reiterates that Radio Tower tract is included – Added provisions to clarify that Trinity East must

• Request Chapter 26 hearing, if it seeks to drill in parkland • Address floodplain issues if it seeks to drill in floodplain • Obtain SUPs if it intends to drill
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Summary Review of Issues
• 22 acre Radio Tower tract
– Not included because of lag in property status update – Noted to City Council at June 25, 2008 meeting – City Manager had the authority to execute the lease once title work was completed – No guarantees made – Common practice in development deals – City Manager has the authority to sign non-binding letters

• August 2008, Trinity East letter acknowledged by City Manager

• Surface/subsurface drilling activities in parkland

– Subsurface approved August 20, 2008 after Chapter 26 hearing process, subsequent to lease signing – Surface – On June 25,2008 staff discussed with Council need for Chapter 26 hearing if parkland was requested as a drilling site – Staff negotiated an “earnest” money deposit from Trinity East while it conducted its comprehensive title work – City Council authorization not limited to a 90-day period
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• 90-day period to conduct title work

Appendix

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Attachment A

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Attachment B
• From June 2007 to June 2010, Council approved five SUPs for gas drilling and production on private property

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Approved SUP’s: June 2007 – June 2010
SUP 1673 Approved - June 13, 2007

Mountain Creek Lake
form

SUP 1674 Approved - June 13, 2007

SUP 1791 Approved - October 28, 2009

SUP 1672 Approved – June 13, 2007

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Approved SUP’s: June 2007 – June 2010
SUP 1806 Approved – June 9, 2010

North Lake – Cypress Waters

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Attachment C

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Attachment D

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Attachment E

Chapter 26
• Texas Parks and Wildlife Code Section 26.001 provides that a municipality may not approve any project that requires the use any public land designated and used prior thereto as a park, recreation area, scientific area, wildlife refuge, or historic site, unless the municipality, acting through its duly authorized governing body, determines that:
– (1) there is no feasible and prudent alternative to the use or taking of such land; and – (2) the project includes all reasonable planning to minimize harm to the land, as a park, recreation area, scientific area, wildlife refuge, or historic site, resulting from the use.
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Chapter 26
• The section provides that
– the findings are to be made after notice and a public hearing, commonly referred to as a Chapter 26 hearing and – its provisions do not constitute a mandatory prohibition against the proposed use if the findings are made to justify it

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Attachment F
• Audio and Transcript
– June 25, 2008

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Attachment G

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Attachment H
Timeline
September 5, 2006 Economic Development & Housing Committee briefing

“Gas Exploration in the City of Dallas,” discusses available property for drilling operations and attracting exploration companies to the City of Dallas. Slide 27, “the following city-owned properties have been identified as potential sites for gas exploration.” Seven properties are listed. Slide 32, “What’s next. . . .Code amendment to permit gas exploration on parkland and/or in other zoning districts, RFP for gas exploration on City-owned property.”
April 2007 The 22.4 acre property known as the Radio Tower site was in transition. The property was donated to the park department in 1963; however, the property was encumbered with a 30year lease and purchase option that later became the subject of a lawsuit. In the lawsuit settlement, the city conveyed the property (subject to a reverter) for use as a radio tower. The title reverted to the City of Dallas in April 2007.

May-June 2007

Staff began compiling lists of city-owned property within the Barnett Shale for the Natural Gas Exploration Request for Proposals. The lists of city-owned properties were categorized in three areas, one of which is the Dallas North Properties. The 22.4 acre Radio Tower tract, within the other Dallas North Properties, did not appear on this list because of the lag time in getting the 22.4 acres into the city’s system after it reverted back to the city.

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Timeline
June 11, 2007 Transportation and Environment Committee briefing

“Proposed Gas Drilling and Production Regulations” Briefing outline: (1) need for code amendment (Chapter 51A); (2) background on natural gas production in the Barnett Shale; (3) natural gas drilling and production phases; (4) major issues to be addressed; and (5) update on status of code amendment.
July 20, 2007 City issued RFP for gas drilling and production. No city-owned surface drill sites were specifically part of this RFP, but the RFP does not say no surface drilling rights.

August 27, 2007

Council Briefing “Proposed Gas Drilling and Production Regulations/Request for Proposals” Briefing outlines: (1) need for code amendment (Chapter 51A); (2) background on natural gas production in the Barnett Shale; (3) natural gas drilling and production phases; (4) major issues to be addressed; and (5) update on status of code amendment.

September 5-13, 2007

Surface sites identified by staff for amended RFP, including LB Houston Golf Course (1700 Royal Lane).

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Timeline
September 12, 2007 Council approved amendments to Dallas Development Code regarding gas drilling regulations. Gas drilling regulations do not prohibit gas drilling and production use on parkland, but require an SUP. See also, Dallas Development Code Section 51A4.203(3.2)(E)(v), “All structures and equipment, including tanks . . . must be spaced at least . . . 100 feet from any . . . recreational use (except when the operation site is in a public park). . . .”

FOR: Medrano, Neumann, Caraway, Hill, Salazar, Davis, Atkins, Kadane, Allen, Natinsky, Rasansky; AGAINST: Hunt; ABSENT: Leppert, Garcia, Koop October 1, 2007 RFP amended to include locations for surface drilling sites on city-owned property to benefit the lease play. RFP Exhibit G included future Elm Fork Soccer Complex and other parkland as potential sites. RFP for Gas Well Drilling and Production Leases Addendum No. 8 - Exhibit G – Property Available for Potential Surface Use. Parkland was removed from the Exhibit with the following explanation, “With respect to surface rights, we note that properties that have been designated and used as a park, recreation area, scientific area, or historic site may be unavailable for surface use under applicable state and federal laws.”

October 10, 2007

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Timeline
November 9, 2007 Trinity East responded to RFP. Special instructions in the RFP stated, “It shall be the responsibility of the Respondent to determine the actual net mineral acres to be leased. For purposes of this Proposal and unless otherwise established by a credible authority on such matters acceptable to the City of Dallas, the net mineral acres shall be assumed to be the acreage listed in the description of the property listed above.”

February 6, 2008

Council briefing, “Gas Drilling and Production Leases” Slide 6, “The RFP included city-owned properties located on the western edge of the city and within the Barnett Shale area of play. Several key locations include . . . LB Houston Golf Course. By using horizontal drilling, drill sites can be located at the edge of these properties to provide minimum impact.” Slide 24, “There will be no drilling allowed on the surface of city parkland. The Texas Parks & Wildlife Code would require a finding that there is no feasible and prudent alternative to using the park surface as a drill site.” Slide 26, “Only 5 sites of city property are available for potential on-site drilling. There will be no drilling on city parkland. . . . All drill sites will still have to undergo the SUP process . . . and must comply with all other laws. . . .” Slide 35, Recommendation, “Council approval of lease for gas well drilling and production in the City of Dallas with XTO Energy, Inc. and Trinity East.

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Timeline
February 27, 2008 Council authorized City Manager to execute two 36-month lease agreements with one 36-month renewal option, as well as initial options to lease, with Trinity East.

FOR: Leppert, Garcia, Caraway, Medrano, Neumann, Hill, Salazar, Atkins, Kadane, Allen, Koop, Natinsky; AGAINST: Hunt, Davis; ABSENT: Rasansky Trinity East and City Manager executed two “Leasing Agreements” (the “initial options”) for the Dallas North and Trinity River Properties respectively, giving Trinity East the option to secure oil and gas leases subject to a title review, objection, cure, and price adjustment process. Said process was to be completed within a calculated period if Trinity East was to have its benefits as a matter of right.

March 6, 2008

Administrative revision to Resolution No. 08-0720. The revision is an amendment made from the floor by Councilmember Natinsky on February 27, 2008, to revise Sections 1 and 2 of the resolution.

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Timeline
June 5, 2008 Park Board presentation on Gas Drilling and Production Leases.

Slide 24, “There will be no drilling allowed on the surface of City of Dallas parkland. The Texas Parks & Wildlife Code would require a finding that there is no feasible and prudent alternative to using the park surface as a drill site.” Slide 26, “Only 5 sites of city property are available for potential on-site drilling. There will be no drilling on city parkland. . . . All drill sites will still have to undergo the SUP process . . . and must comply with all other laws. . . .” Slide 36, “next steps, lease executed with Trinity East . . . public hearing for parkland.”
The Park Board then recommended that a “Chapter 26” Council public hearing be authorized to consider allowing the non-park subsurface gas drilling and production use on certain parkland.

In one of the Park Board resolution whereas clauses it states, “the City of Dallas will prohibit surface level drilling and mineral production on all parkland and any subsurface mineral extraction will take place at an off-site location as to not reduce or distract from any of the recreation uses or experiences of parks in question. . . .” June 6-26, 2008 Trinity East began raising an issue about the lack of drill sites associated with the Trinity East properties. City staff and Trinity East met and Trinity East brought up the Radio Tower tract. Staff checked with the Park Department Director to see if the Radio Tower tract could be part of the transaction. On June 26, Trinity East sent a formal written proposal that included the Radio tower tract.

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Timeline
June 25, 2008 Council authorized a Chapter 26 public hearing to be held on August 20, 2008 to receive comments on the use of subsurface parkland for natural gas drilling and production. The agenda materials state, “The City of Dallas is prohibiting surface level drilling and mineral production on parkland as part of the gas leases. The City of Dallas has taken great efforts to ensure none of the surface level recreational uses will be disturbed. All natural gas drilling and production will take place at an off-site location through methods such as directional drilling. Accordingly, no park assets or recreational activities will be impacted.”

Discussions occurred between Council and staff regarding the need for future public hearings for a surface gas drilling and production use on parkland. The Park Department Director also confirmed that there was one property being considered for surface drilling, the Radio Tower site, that would not affect adjacent parkland. FOR: Leppert, Garcia, Caraway, Medrano, Neumann, Hill, Salazar, Atkins, Kadane, Allen, Koop, Natinsky, Rasansky, Hunt; ABSENT: Davis August 15, 2008 Leases with Trinity East were executed, which permit exploring, drilling, and producing oil and gas, laying pipelines, and building roads to produce oil and gas on specific land identified in Exhibit A of the lease. Exhibit A of the Group 1 lease identifies three “proposed drill site locations” and one “drill site location.” The proposed drill site locations are parkland and in the flood plain. These parkland sites were identified as proposed drill site locations because a Chapter 26 Council public hearing is required; a code amendment to allow the gas drilling and production use in the flood plain or a fill permit is required; and an SUP is required.

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Timeline
August 15, 2008 continued Letter from Trinity East to the City of Dallas and countersigned by City Manager regarding Trinity East’s purchase of an oil and gas lease (Group 1) stating, “City staff has advised us that although they can make no guarantees, they are reasonably confident that Trinity East can be granted the right to use. . . the Radio Tower Tract as a drill site location. . . .The City staff will use its reasonable efforts to assist Trinity East in placing before the Dallas Council those permits and other matters requiring Council approval. . . .We understand that this letter is not a binding agreement, but is merely a good faith representation of our discussions.”

August 20, 2008

Council held a “Chapter 26” public hearing and authorized the non-park subsurface gas drilling and production use subject to the terms and conditions in the contract authorized by the Council on February 27, 2008.
The agenda materials state, “the City of Dallas is prohibiting surface level drilling and mineral production on parkland as part of the gas leases.” In the whereas clause of the resolution, it states, “the City of Dallas has taken great efforts to ensure none of the surface level recreational uses will be disturbed, and any subsurface mineral extraction will take place at an off-site location as to not reduce or detract from any of the recreation uses or experiences of the parks. . . .”

FOR: Leppert, Garcia, Medrano, Neumann, Hill, Atkins, Kadane, Allen, Koop, Natinsky; AGAINST: Hunt; ABSENT: Caraway, Salazar, Davis, Rasansky

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Timeline
February 10, 2011 Letter to Trinity East regarding request for extension of the oil and gas leases listing the processes and requirements with which Trinity East must comply or complete before it may drill on the proposed drill site locations, including a Chapter 26 hearing, amendments to the flood plain regulations or a fill permit, and SUPs.

March 17, 2011

Trinity East filed two SUP applications for surface gas drilling and production at the LB Houston Sports Complex (the radio tower and the gun club proposed drill sites) Council briefing – Update on a number of environmental and regulatory aspects of gas drilling and provide information on concerns raised by citizens. Slide 23 identifies 3 proposed drill sites and 1 drill site, but does not indication locations. Closed session – gas drilling updates.

April 20, 2011

June 15, 2011

Closed session - Legal issues involving the oil and gas leases between City of Dallas and Trinity East, LLC. The Park Board recommended that a “Chapter 26” Council public hearing be authorized to consider allowing a non-park surface gas drilling and production use at the LB Houston Sports Complex (the radio tower and the gun club proposed drill sites)

June 16, 2011

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Timeline
June 22, 2011 Council authorized an amendment to the Trinity East oil and gas leases executed on August 15, 2008. The amended leases extended the primary term by 30 months and added provisions stating Trinity East understands that (1) the proposed drill sites are located on parkland, and Council must authorize the non-park gas drilling and production use; (2) the proposed drill sites are in the flood plain, and gas drilling is not a permitted use in the flood plain without a code amendment or a Council-authorized fill permit; (3) an SUP is required; (4) a gas well permit is required before the land may be used for gas drilling and production; and (5) that the city’s police powers cannot be contracted away. All other terms of the lease not expressly amended continued in full force and effect. FOR: Caraway, Medrano, Jasso, Neumann, Hill, Salazar, Davis, Atkins, Kadane, Allen, Koop, Natinsky, Margolin; AGAINST: Hunt; 1 VACANCY
July 1, 2011 August 10, 2011 ACM signed amendment to oil and gas leases. Council deferred authorizing the public hearing to consider the non-park surface gas drilling and production use on the two sites at the LB Houston Sports Complex until 30 days after the gas drilling and production ordinance is amended.

Closed session occurred.

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