Monday, May 20, 2013

Who Owns Rights to Marcellus Shale Gas? Mineral Estate Owner or Oil and Gas Estate Owner?

Butler v. Charles Powers Estate, et. al, 2013 Pa. LEXIS 789 (2013)

Frank Kosir, Jr., Esquire
fk@muslaw.com
This matter addressed the issue of whether title to Marcellus shale gas vests in the owner of the mineral estate or the owner of the oil and gas estate.  John E. Butler and Mary Josephine Butler (the “Butlers”) are the owners of a two hundred and forty (240) acre tract of land (the “Property”) situated in Apolacon Township, Susquehanna County, Pennsylvania.  In the early 1900s, the Property was conveyed by Charles Powers to one of the Butlers’ predecessors in interest, the deed of conveyance including a clause reserving, inter alia, “one half the minerals and Petroleum Oils to said Charles Powers his heirs and assigns forever.”  In 2009, the Butlers commenced an action against the Estate of Charles Powers (the “Estate”) and all heirs and assigns thereof, seeking to quiet title to all “minerals and petroleum oils” under the Property based upon their alleged adverse possession thereof.  In response, William H. Pritchard and Craig L. Pritchard (the “Pritchards,”) heirs to the Estate, filed an Answer and a Motion for Declaratory Judgment, contesting the Butlers’ adverse possession claims, and asserting that the reservation clause included Marcellus shale gas.  The Butlers demurred to the declaratory judgment claims asserting inter alia that, as natural gas was not included in the reservation clause, the Pritchards lacked standing.  The trial court, relying upon the long-standing rules of law set forth in the Pennsylvania Supreme Court’s decisions in Dunham and Shortt v. Kirkpatrick, 101 Pa. 36, 1882 Pa. LEXIS 216 (1882) and Highland v. Commonwealth, 400 Pa. 261, 161 A.2d 390 (1960) (holding that, where an exception or reservation in a deed simply reserves “minerals,” and makes no specific reference to oil or natural gas, a rebuttable presumption is created that the grantor did not intend for the reserved “minerals” to include oil or natural gas.”) concluded that natural gas is not classified as a “mineral” under Pennsylvania law, and dismissed the Pritchards’ claims.


Following the trial court’s determinations, the Pritchards filed an appeal to the Pennsylvania Superior Court asserting inter alia that the trial court had erred in relying upon Dunham and Highland, for several reasons.  First, prior to Dunham, the rule in Pennsylvania had been that any conveyance of “minerals” included natural gas and that, as the deed at issue in Dunham had been executed with that understanding, Dunham was erroneously decided.  Also, both Dunham and Highland involved disputes regarding the ownership of conventional gas, whereas the matter at hand deals with the ownership of Marcellus shale gas, an unconventional gas.  Finally, the Pritchards also asserted that the trial court’s decision was inconsistent with U.S. Steel Corporation v. Hoge, 503 Pa. 140, 468 A.2d 1380 (1983) (holding that title to natural gas found in coal is in the owner of the coal seam, while title to migratory coal bed gas is in the owner of the property to which the gas migrates) contending that, as the natural gas found in Marcellus shale can only be extracted by hydrofracturing, it is not a migratory gas, and title to the Marcellus shale gas is in the owner of the shale.


On appeal, our Superior Court reversed, (2011 Pa. Super. LEXIS 2710 (2011)), and remanded the matter to the trial court for additional proceedings.  In issuing its opinion, the court affirmed Dunham and Highland concluding that, as the reservation clause specifically reserved an interest in “petroleum oil” but failed to specifically reserve any interest in “natural gas,” no natural gas interest had been reserved.  Furthermore, as the record established that none of Charles Powers’ heirs had made any effort to claim any rights in the natural gas, it was evident that Charles Powers had not intended to reserve any interest in the natural gas.  However, the court concluded that the Pritchards’ claims could not be dismissed under Dunham and Highland without additional information regarding whether, inter alia, (1) Marcellus shale constitutes a “mineral” under Pennsylvania law, (2) the rule regarding ownership of coal gas established in Hoge also applies to Marcellus shale gas, and (3) Marcellus shale gas is a conventional gas, the ownership of which is governed by Dunham and Highland.  As the record did not adequately address these issues, the trial court needed to conduct a hearing on the issue of whether Marcellus shale gas was included in the reservation.

On appeal, our Supreme Court reversed.  In issuing its ruling, the court examined the numerous appellate court cases interpreting the Dunham Rule dating back more than one hundred and thirty years, and found no reason to strike or modify the Dunham Rule.  Rather, the court found that the Dunham Rule has been consistently applied and has always stood for the proposition that, absent the inclusion of the terms “oil” or “natural gas,” a reservation of “minerals” in a deed did not reserve oil or gas rights.  Since the reservation in the deed in question did not include the term “natural gas,” the Dunham Rule placed the burden upon the Pritchards to establish, by clear and convincing parol evidence, that the Grantor had intended to reserve natural gas rights, and the Pritchards had failed to provide any such evidence.  Furthermore, numerous prior Pennsylvania appellate court cases have held that minerals must be metallic in nature and, since neither oil or gas are metallic, they could not be classified as minerals.   Finally, the court differentiated its decision in Hoge II noting inter alia that, as the gas at issue therein was coalbed methane gas, a dangerous byproduct of coal production that is actually derived from the mineral and requires proper ventilation, the Dunham Rule was not applied as ownership of the gas had to vest in the owner of the coal in order to assure the safe extraction of the coal.    For these reasons, as there was no evidence to support a conclusion that the Pritchard’s predecessor in interest had intended to reserve any oil or gas rights, no hearing was required on the issue of whether Marcellus shale gas was included in the reservation, and the Superior Court had erred in ordering such a hearing.

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