United States: Pennsylvania Supreme Court Clarifies Shale Gas Leasehold Rights

Shale Gas & Oil Development

In a 6-0 decision which has been much anticipated by both natural gas producers and landowners, the Pennsylvania Supreme Court finally cleared up confusion about who owns the mineral rights to shale gas in Butler v. Powers Estate, No. 27 MAP 2012, 2013 Pa. LEXIS 789 (Pa. Apr. 24, 2013) ("Butler"). The bottom line is that in Pennsylvania, "minerals" in a deed reservation does not include shale gas, and unless the reservation shows specific intent to reserve the right to the shale gas, a general reservation for "minerals" does not do the trick. The Butler court upheld the age-old "Dunham Rule," a principle of Pennsylvania real property law dating from 1882, which holds that there is a rebuttable presumption that a reservation in a conveyance for "minerals" without any specific mention of natural gas or oil does not include natural gas or oil. See Dunham & Shortt v. Kirkpatrick,101 Pa. 36 (1882). 

Background

Appellants, Jon and Mary Josephine Butler (the "Butlers"), own 244 acres of property located in Susquehanna County, Pennsylvania. The deed by which the Butlers acquired their property contained a reservation of "one-half the minerals and Petroleum Oils to said Charles Powers his heirs and assigns forever." The reservation dated back to 1881, when a predecessor in title to the Butlers acquired the property from Charles Powers.

In 2009, the Butlers filed a complaint against the Estate of Charles Powers (the "Powers Estate") to quiet title on the property, which included the natural gas from the Marcellus shale located beneath the property, on the basis that natural gas was not expressly identified in the 1881 deed reservation. The trial court agreed, explaining that in accordance with the Dunham Rule, a rebuttable presumption exists that natural gas or oil is not included in a reservation of "minerals" unless natural gas or oil is specifically identified in the reservation. Butler, 2013 Pa. LEXIS at *5 (citing Highland v. Commonwealth, 161 A.2d 390 (Pa. 1960); Dunham, 101 Pa. at 44).

On appeal, the Pennsylvania Superior Court reversed and remanded the trial court's decision, ordering an evidentiary hearing as to whether Marcellus shale is the type of mineral such that the natural gas within it would be included in the deed reservation. The Superior Court, although acknowledging Dunham and its progeny, relied instead on a 1983 Pennsylvania Supreme Court decision in which the Court held that a party which owns the rights to mine and remove coal within a coal seam also owns the coalbed gas within that seam.United States Steel Corporation v. Hoge, 468 A.2d 1380 (Pa. 1983) ("Hoge II"). The Court inHoge II viewed coalbed gas as a dangerous waste product of coal mining that is distinct from commercially exploitable gas and explained that it "strains credulity" to think that the grantor of a reservation intended to reserve theright to extract a valueless and dangerous waste product. Therefore, the Superior Court inButler ruled that the trial court erred by not first conducting an evidentiary hearing to determine whether Marcellus shale natural gas is the type of commercially valuable natural gas contemplated under theDunham Rule, or whether it is similar to coalbed gas such thatHoge II applies to the Butlers' deed reservation. The Butlers appealed the Superior Court's decision to the Pennsylvania Supreme Court. 

Dunham Case

The Dunham Rule has been a rule of Pennsylvania property law for over 130 years. The Rule creates a rebuttable presumption that a deed reservation for "minerals" does not include natural gas or oil absent clear and convincing parol evidence that the parties to the original deed intended to include natural gas or oil in the reservation.

In Dunham, the Court examined a deed containing a reservation of timber and "all minerals" in order to determine whether the phrase "all minerals" included oil. The Court, following a prior opinion in which the Court determined that "minerals" are commonly understood to be of a metallic nature, held that the common understanding of the word "minerals" should be used; therefore, absent specific mention of oil, or clear and convincing evidence of the intent of the parties to include oil in the deed reservation, oil is not included in a reservation of "minerals" because oil is not commonly understood to be of a metallic nature.Dunham, 101 Pa. at 37; Gibson v. Tyson, 5 Watts 34 (Pa. 1836). In 1906, the Court expanded the application of the Dunham Rule to natural gas in Silver v. Bush, 62 A. 832, 833-34 (Pa. 1906).

In 1960, the Court reiterated the applicability of the Dunham Rule in a situation where a reservation of "minerals" does not expressly identify oil or natural gas in the reservation. Highland v. Commonwealth, 161 A.2d 390, 398-99 (Pa. 1960). The Court based its affirmation of the Dunham Rule on the "long-standing jurisprudence" of Pennsylvania property law: "A rule of property law long acquiesced in should not be overthrown except for compelling reasons of public property or the imperative demands of justice." Id. at 399 n.5. 

Issues on Appeal

On appeal, the Butlers argued that, in accordance with the Dunham Rule, a deed reservation must be construed consistent with the common understanding of a layperson at the time the deed was executed. The Butlers argued that the common understanding of "minerals" at the time of the 1881 deed reservation was that minerals had a "metallic character." Therefore, because natural gas does not have a "metallic character," it must be presumed that there was no intent by the parties in 1881 for natural gas to be included in the deed reservation. The Butlers also argued that the Superior Court erred in remanding the case to the trial court for an evidentiary hearing because scientific evidence as to whether Marcellus shale is or is not now considered a mineral has no bearing on the Powers Estate's burden of proving, by clear and convincing evidence, that a layperson in 1881 would have considered the Marcellus shale and the natural gas contained within it to be a mineral.

In response, the Powers Estate argued the case could be decided on the plain language of the deed reservation because natural gas is an appurtenance of oil and is included in the plain language of the 1881 deed reservation. The Powers Estate questioned whether theDunham Rule even applied to this matter because Dunham was not decided until one year after the 1881 reservation was executed. The Powers Estate also questioned the continued viability of theDunham Rule in the face of various Pennsylvania statutes, Hoge II, and decisions from other jurisdictions, all of which state generally that natural gas is a mineral. 

The Court's Opinion

The Court ruled 6-0 for the Butlers on all issues. The Court recognized that scientifically and commercially, the term "minerals," as used today, includes natural gas, but in the nineteenth century, the term "minerals" included only materials of a "metallic nature"—which is the basis to the Dunham Rule. The Court, however, seemed resigned to having to employ the nineteenth century way of looking at the question and to leaving theDunham Rule intact. Justice Saylor, in concurring, even noted that the "nineteenth century rationale for the Dunham Rule [is] cryptic, conclusory, and highly debatable."

The only issue arguably left open is the interesting one of whether the term "Petroleum Oils" includes shale gas. Regretfully for the Powers Estate, it did not raise this issue below and the Court held the issue waived. The Court gave a clear signal on this, though, in a footnote in which it observed that the Court has always "treated oil and natural gas as separate substances for purposes of private deeds" and "[i]f oil and gas were intended to be included in the 'minerals' reserved, then why was the oil expressly reserved?"Butler, 2013 Pa. LEXIS at *14 (citing Bundy v. Myers, 94 A.2d 724, 726 (Pa. 1953)).

The Court distinguished Hoge II on the basis that Hoge II made no reference to theDunham Rule. In addition, the Court found no merit to applying the ruling of Hoge II in this matter, explaining that unlike the coal and coalbed gas that was the subject of the Hoge II opinion, there is no merit to the argument that natural gas is a mineral merely because it is contained in the Marcellus shale.

The Court strongly affirmed the continued viability and control of the Dunham Rule as the law of Pennsylvania. The Court also strongly affirmed the applicability of the Dunham Rule to the Butlers' 1881 deed reservation. The Court explained that the Dunham Rule and its progeny have never been explicitly questioned, and that there is no compelling reason to overturn the Rule. Butler, 2013 Pa. LEXIS at *33-34 (citing Highland, 161 A.2d at 388 n.5). The Court acknowledged that various Pennsylvania statutes have categorized natural gas as a mineral, but explained that the issue before the Court is one of common law and not statutory law, and that under Pennsylvania common law there is a "rebuttable presumption in the context of a private deed conveyance that the term 'mineral' does not include oil or gas." Butler, 2013 Pa. LEXIS at *28-29 (citing Huntley & Huntley, Inc. v Borough of Oakmont, 964 A.2d 855, 858 (Pa. 2009)).

Finally, and most importantly, the Court clearly stated that the "rule in Pennsylvania is that natural gas and oil simply are not minerals because they are not of a metallic nature, as the common person would understand minerals." As a result, the Court expressly held that "Marcellus shale natural gas cannot, consistent with the Dunham Rule, be considered a mineral for private deed purposes." 

Conclusion

Butler finally brings to an end the confusion and uncertainty created by the Superior Court in connection with rights to Marcellus shale natural gas. It is now clear to royalty payers and lease-holders who the parties are which own the rights to the natural gas and are entitled to payments under a natural gas lease. It remains the law in Pennsylvania, as it has been since early in the 1800s, that a reservation of "minerals" contained in a deed does not include natural gas absent clear and convincing evidence that natural gas was intended to be included in that reservation.

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Authors
Michael L. Krancer
Heather L. Demirjian
Margaret A. Hill
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