21 February 2013

Possible Complications as PA Supreme Court Deliberates Mineral Rights

by Zack Bombatch, Staff Writer

          In October 2012, the Pennsylvania Supreme Court heard oral arguments for Butler v. Powers Estate, a case that may impact mineral rights in Pennsylvania and has the potential to create a significant disturbance in the already chaotic energy industry. 
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            In an 1881 deed, Charles Powers transferred a 244-acre farm in Susquehanna County to Patrick Fitzmartin.  The deed contained a reservation for half of the property’s “minerals” and “petroleum oils” which Mr. Powers assigned to his heirs.  In 2009, the Butlers (heirs to Fitzmartin) brought an action against the Powers (heirs to Charles Powers) to quiet title to the natural gas within Marcellus shale underneath the farm.  The Powers conversely sought declaratory judgment stating that they owned the natural gas because of the reservation of “minerals” in the 1881 deed.  The issue before the Court is whether the deed reserved rights to the natural gas from the Marcellus shale through the reservation of “minerals.”  
            Traditionally, Pennsylvania courts interpret deeds and any reservations by examining the parties’ intent.  This interpretation has been guided by an 1882 case where the Pennsylvania Supreme Court established the Dunham Rule.  The rule prohibits the inclusion of natural gas in mineral rights, and it requires that a separate conveyance or reservation be made for natural gas and oil.  The rule has been applied to natural gas trapped within coal seams, even when the gas’ existence is unbeknownst to landowners or grantees. However, the presumption of the Dunham Rule may be overcome if a party may demonstrate “clear and convincing evidence” that the oil and natural gas in question was intended to be included within a “mineral” reservation. 
            The Butlers argue that the reservation of “minerals” and “petroleum oils,” under the Dunham Rule, does not include natural gas trapped within Marcellus shale.  However, the Powers argue that the Dunham Rule applies only to “wild gas” and that gas trapped in very small quantities throughout the Marcellus shale is “unconventional gas.”  The Powers attempt to analogize “unconventional gas” to coalbed methane.  Occasionally, thin pools of methane are trapped within a seams of coal.  The traditional rule for coalbed methane grants ownership of the methane to whoever owns the coalbed. 
            Until contemporary times, Marcellus shale was considered a useless geological formation.  It seems unlikely that the parties in 1881 could have determined a need for the reservation of a seemingly useless material. 
            Further, mineral rights generally concern geological formations that may be mined and sold, such as gold or coal.  Marcellus shale is a solid rock with little to no value beyond the natural gas trapped within it.  Moreover, it is difficult to make a determination of “wild gas” versus “unconventional gas” because both forms of gas are trapped beneath the surface of the Earth by some sort of solid geological formation.  An application of the Dunham Rule over two purported types of gases may lead to difficulties in determining if gas is “unconventional” enough to escape the Dunham presumption.
            The energy industry and associated law firms are paying close attention to the Court’s ruling because the decision could impact thousands of deeds and leases that permit natural gas production operations. 
            The case presents significant practical concerns that will impact the effectiveness of leases signed within the previous decades and current natural gas drilling operations. 
            If the Court chooses to strictly apply the Dunham Rule, the energy industry and attorneys involved in property law will be negatively impacted because of the uncertainty such a holding would create. A strict application of the Rule would send attorneys and landowners scrambling to review the specificity of deeds, reservations, and leases from previous decades. 
            This uncertainty will no doubt lead to economic disruption and decline.  This economic decline would certainly impact the energy industry in the short-term, but may also affect the longevity of energy companies and lease brokers if they are forced to re-enter and redesign leases with landowners where they have current or eminent drilling operations. 
            It is hoped that the looming decision of the Court is released soon, and its release is definitely worth watching.