United States: Who Owns Pennsylvania Gas?

In a recent decision, the Supreme Court of Pennsylvania affirmed 177 years of unchanging property rights and laid to rest fears that it would instead affirm a Superior Court decision calling into question title to gas throughout the Marcellus Shale region in Pennsylvania.

The case (Butler v. Powers), arose because Butler owned a tract derived through an 1881 deed containing the following reservation: “One-half of the minerals and Petroleum Oils to [Grantor] his heirs and assigns forever together with all and singular...privileges, hereditaments, and appurtenances, whatsoever...in any wise appertaining....”

Butler claimed all of the Marcellus gas because gas was not specifically reserved and, under Pennsylvania law, gas is not a mineral. Powers claimed one-half of the gas, arguing that under these specific circumstances, gas should be classified as a mineral.

The court explained that, since 1836, and continuing through a case in 1960, but relying primarily on the Dunham case (1882), Pennsylvania has held that a mineral is a metallic substance and does not include oil and gas: “If, in connection with a conveyance of land, there is a reservation or an exception of ’minerals‘ without any specific mention of natural gas or oil, a presumption, rebuttable in nature, arises that the word "minerals" was not intended by the parties to include natural gas or oil.”

Irrespective of that long-settled rule, the Superior Court reversed the trial court’s decision in favor of Butler and remanded the case to the trial court for evidentiary hearings. The Superior Court’s decision led to concerns that title to oil and gas in Pennsylvania’s portion of the Marcellus Shale may be put into question, which could have stymied additional development in the region as operators sorted out the title implications of the decision.

However, on appeal, the Supreme Court reversed the Superior Court’s decision, reinstated the trial court’s decision and reaffirmed the rule that natural gas is not included in a deed reservation or grant without either: (i) natural gas being expressly included within the reservation or grant, or (ii) clear and convincing parol evidence that the parties intended for natural gas to be included within the deed reservation or grant, despite a general reservation or grant of minerals.

So if the law has been settled since 1836, why did the Superior Court not apply the Dunham Rule? It turns out the Superior Court relied on a previous Pennsylvania Supreme Court decision (Hoge II, 1983) in which the Supreme Court reversed a similar Superior Court decision (Hoge I, 1982). In Hoge II, the Supreme Court held that "gas is a mineral, though not commonly spoken of as such…[and therefore] necessarily belongs to the owner in fee…" The Superior Court in Butler used that language as the basis for its decision.

Nevertheless, the Supreme Court in Butler was easily able to distinguish the Hoge II decision and noted that the Hoge II court did not discuss, nor did it indirectly nullify or abolish, the Dunham Rule. The context of Hoge was a dispute over who had the right to gas in the coal seam when the landowners had retained the "right to drill and operate through said coal for oil and gas without being held liable for any damages." The landowners began drilling wells through the coal seam to recover the coalbed gas. US Steel (the owner of the coal) sued, and the Pennsylvania Supreme Court issued its aforementioned holding.

Accordingly, the Butler court summarized Hoge II as holding that "when a landowner conveys property rights to another, anything contained within the severed property, including all subterranean minerals, becomes subject to the ownership of the grantee." The effect of the holding was that the coalbed gas belonged to the owner of the coal. It should be noted that the Supreme Court of the United States has also addressed the ownership of coalbed gas as it relates to reservations of “coal,” pursuant to the Coal Lands Acts of 1909 and 1910. In Amoco Prod. Co. v. Southern Ute Indian Tribe, 526 US 865 (1999), the Supreme Court found that the government’s reservation of coal did not include a reservation of the coalbed gas. Instead the coalbed gas was held to belong to the natural gas estate. Nevertheless, it can be argued that Amoco is distinguishable from Hoge II, as its application is limited to coal reservations under the statutes referenced above, and has never been applied to Pennsylvania law.

The Butler court found that the deed reservation at issue in Hoge concerned coal rights and the related right of ventilation of coalbed gas. The court noted this finding is critical for several reasons. First, the right of ventilation of gas would only apply to coalbed gas due to its extremely dangerous and volatile nature—indeed, coalbed gas was not commercially viable at the time the deed reservation in Hoge II was executed, due to its explosive characteristics.

Second, the Hoge II court inherently made a legal distinction between coalbed gas and natural gas, despite recognizing the chemical similarities between the two, by upholding the landowners’ right to drill through the coal seam to obtain natural gas—whereas in the Butler case, there was no argument that the Marcellus Shale natural gas is different from the natural gas commonly found in sand deposits.

Finally, the situs of Marcellus Shale natural gas and the methods needed and utilized to extract that gas do not support deviation from a Dunham analysis; even though fracking methods are employed to obtain both coalbed gas and Marcellus Shale natural gas, the basis of the Dunham Rule lies in the common understanding of the substance itself, not the means used to bring those substances to the surface.

Thus, the Dunham Rule survives thanks to the Butler court. The rule applies to both mineral reservations and mineral grants and, consistent with 175-plus years of precedent, gas or oil must be mentioned specifically to be included in the grant or reservation. There is an exception if you can show that the parties intended the grant or reservation to include oil or gas. For old documents, one might be able to show that a grant or reservation actually mentioned gas or oil and infer that same purpose in that document. For more recent documents, only an evidentiary trial can reach a firm conclusion. Obviously, care should be taken in drafting grants or reservations to ensure each party is getting, or retaining, what they bargained for.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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