Pennsylvania court raises questions about Marcellus shale gas ownership

Mark Robeck
Jeff McNabb
Baker Botts
Houston

A recent decision by a Pennsylvania appellate court garnering much attention has raised questions concerning the ownership rights to natural gas in the Marcellus shale formation. On Sept. 7, 2011, the Superior Court of Pennsylvania, an intermediate court of appeals, reversed and remanded an order entered by the Court of Common Pleas of Susquehanna County. Butler vs. Charles Powers Estate, No. 1795 MDA 2010, --- A.3d ----, 2011 WL 3906897 (Pa. Super. Ct. Sept. 7, 2011). This article summarizes and analyzes the Butler court's decision.

Factual and procedural background

John E. Butler and Mary Butler are the owners in fee simple of a tract of land in Pennsylvania. The Butlers' deed to the land, recorded in 1881, contains an exception reserving "one-half the minerals and petroleum oils to...Charles Powers [and] his heirs and assigns...."

The Butlers filed a lawsuit to quiet title against the heirs of Charles Powers (the "Powers heirs") alleging that the Butlers owned the land in fee simple and also owned all minerals and petroleum oils based on adverse possession.

The Powers heirs filed a counterclaim for a declaratory judgment alleging that the reservation of rights in the deed's exception included Marcellus shale gas.

The Butlers filed a demurrer (or motion to dismiss) challenging the Powers heirs' declaratory judgment counterclaim, arguing in relevant part that the deed's reservation of "minerals and petroleum oils" did not include natural gas and therefore did not include the Marcellus shale gas.

The trial court's ruling

The Pennsylvania Court of Common Pleas granted the Butlers' demurrer and dismissed the Powers heirs' claim seeking a declaratory judgment that the deed's reservation of "minerals" included shale gas.

The trial court reasoned that "[t]he Pennsylvania Supreme Court has held in a long line of cases that gas is distinct from minerals and petroleum oil" Butler vs. Charles Powers Estate, No. 2009-1141 CP, at 5 (Pa. Ct. Common Pleas Jan. 28, 2010). The trial court explained that, under Pennsylvania law, a reservation of minerals, without any specific mention of natural gas or oil, gives rise to a rebuttable presumption that the term "minerals" was not intended to include natural gas or oil. Id.

Because the reservation in the Butlers' deed reserved "minerals and petroleum oils," but did not specifically mention natural gas, the court held that natural gas had not been reserved or excepted from the deed. Id. Therefore, the trial court dismissed the Powers heirs' claim for a declaratory judgment that the reservation included Marcellus shale gas.

The Superior Court's ruling

On appeal, the Pennsylvania Superior Court reversed the order of the trial court and remanded for further proceedings. Butler, 2011 WL 3906897, at *7-8.

The court emphasized that, when reviewing a trial court's grant of a demurrer, the court must accept as true all facts averred in the complaint and that "[w]here doubt exists as to whether a demurrer should be sustained, this doubt should be resolved in favor of overruling it." Id. at *3 (quoting Binswanger vs. Levy, 457 A.2d 103, 104 (Pa. Super. Ct. 1983)).

The court ultimately concluded that it was "unable to say with certainty that [the Powers heirs] have no cognizable claim based on the facts averred." Id. at *7.

In reaching its conclusion, the Butler court explained that when interpreting a deed, "[a] court's primary object must be to ascertain and effectuate what the parties themselves intended" and that "[t]o ascertain the intention of the parties, the language of a deed should be interpreted in the light of the subject matter, the apparent object or purpose of the parties, and the conditions existing when it was executed." Butler, 2011 WL 3906897, at *5 (quoting Consolidation Coal Co. vs. White, 875 A.2d 318, 326-27 (Pa. Super. Ct. 2005)).

The court further reasoned that Pennsylvania courts have recognized that the term "[m]ineral...may in any particular case have a different meaning, more extensive or more restricted, but such different meaning should clearly appear as intended by the parties." Id. (quoting Silver vs. Bush, 62 A. 832, 833 (1906)) (alterations in Butler).

The term "mineral" "may include any inorganic substance found in nature having sufficient value separated from its situs as part of the earth to be mined, quarried, or dug for its own sake or its own specific uses[;] [b]ut, though it may include all such substances, it does not necessarily do so." Id. "The cardinal test of the meaning of any word in any particular case is the intent of the parties using it." Id.

The Butler court reviewed and analyzed the leading Pennsylvania Supreme Court cases addressing the reservation of minerals, petroleum oil, and natural gas.

In Dunham vs. Kirkpatrick, 101 Pa. 36 (Pa. 1882), the court held that a reservation of "all minerals" generally does not constitute a reservation of petroleum oil.

In Silver vs. Bush, 62 A. at 833, the court held that a reservation of minerals underlying land did not include natural gas because, even though natural gas constitutes a "mineral" in the broadest sense of word, the plaintiff failed to present evidence that parties understood "minerals" to include natural gas or even that the term had acquired a usage in conveyances that would include gas.

In Highland vs. Commonwealth, 161 A.2d 390, 399 (Pa. 1960), the court held that to rebut the presumption that a reservation's use of the word "minerals" does not include petroleum oil or natural gas, "there must be clear and convincing evidence that the parties to the conveyance intended to include natural gas or oil within such word."

In addition, in Bundy vs. Meyers, 94 A.2d 724, 725-26 (Pa. 1953), the court held that a reservation of "oil" and "minerals of every kind" did not reserve rights to natural gas.

The Powers heirs argued that these cases were not controlling for a number of reasons.

First, the Butlers' deed was drafted and recorded in 1881, before the Pennsylvania Supreme Court's landmark decision in Dunham in 1882. Butler, 2011 WL 3906897, at *4. The Powers heirs contended that prior to the Dunham decision, the ordinary meaning of the term "minerals" included natural gas. Id.

Moreover, the Powers heirs argued that the Dunham and Highland cases involved "conventional gas," in which reservoirs contain "free flowing wild gas," whereas Marcellus shale gas is unconventional gas, which requires different recovery techniques from those used to recover conventional gas (i.e., recovery of unconventional gas requires hydrofracturing). Id.

The Powers heirs further argued that, although the reservation language did not specifically include natural gas, the reservation of "minerals" included the shale and that "whoever owns the shale, owns the gas." Id. To support this argument, the Powers heirs relied on U.S. Steel Corp. vs. Hoge, 468 A.2d 1380, 1382-85 (Pa. 1983), in which the Pennsylvania Supreme Court addressed the issue of ownership of and right to develop coalbed gas.

In Hoge, the coal severance deed conveyed ownership of "[a]ll the coal of the Pittsburgh or River Vein underlying all that certain tract of land...[t]ogether with all the rights and privileges necessary and useful in the mining and removing of said coal, including the right of mining without leaving any support..., the right of ventilation and drainage and of access to the mines for men and materials...." 468 A.2d at 1382. The deed reserved for the surface owners "the right to drill and operate through said coal for oil and gas." Id.

The owner of the reserved oil and gas rights began drilling wells for the purpose of recovering coalbed gas from the coal seam. Id. Upon learning of the gas lessee's intention to stimulate recovery of coalbed gas through hydrofracturing, the owner of the coal seam sued to terminate the drilling operations and determine ownership of and right to develop the coalbed gas. Id. The trial court entered a decree permitting the drilling but prohibiting the hydrofracturing, and the intermediate court of appeals affirmed. Id.

The Supreme Court agreed, holding that the reservation's language demonstrated the parties' intent to reserve only oil and gas in a strata deeper than the coal. Id. at 1384-85. In other words, the gas present in the coal belonged to the owner of the coal and the gas not contained in the coal belonged to the owner of the reserved oil and gas rights. In Butler, the Powers heirs argued that because they own the shale under the reservation of "minerals," they own the shale gas, just as the owners of the coal in Hoge owned the coalbed gas.

The Butler court ultimately decided that, "at this point in the proceedings[,]" it could not affirm the trial court's decision to dismiss the Powers heirs' claim that the reservation of "minerals and petroleum oils" included Marcellus shale gas.

The court stated that to decide the issue, the court would need a more sufficient understanding of whether, among other things, "(1) Marcellus shale constitutes a 'mineral'; (2) Marcellus shale gas constitutes the type of conventional natural gas contemplated in Dunham and Highland; and (3) Marcellus shale is similar to coal to the extent that whoever owns the shale, owns the shale gas." Butler, 2011 WL 3906897, at *7.

The court noted that "Pennsylvania has yet to determine whether shale is analogous to coal in this context, but at least one other jurisdiction has found similarities in this context." Butler, 2011 WL 3906897, at *8 n.2 (citing Cimarron Oil Corp. vs. Howard Energy Corp., 909 N.E. 2d 1115 (Ind. App. 2009)). Therefore, the court concluded that the parties should be given "the opportunity to obtain appropriate experts on whether Marcellus shale constitutes a type of mineral such that the gas in it falls within the deed's reservation." Id. at *7.

Analysis and conclusion

The appellate court's decision in Butler must be viewed through the lens of the procedural stage at which the court ruled. In reviewing the trial court's grant of a demurrer, the appellate court concluded that it could not say with certainty at this early stage of the proceedings that the Powers heirs have no cognizable claim, accepting as true the facts alleged in their request for a declaratory judgment. Butler, 2011 WL 3906897, at *3, 7 ("On this record, we are unable to say with certainty that Appellants have no cognizable claim based on the facts averred.").

The court suggested the possibility that shale and shale gas may be comparable to coal and coalbed gas, in which case the ruling from Hoge may apply—i.e., a reservation of a mineral that contains gas may also constitute a reservation of the gas contained in the mineral.

But the court did not take any position on either the applicability of the Hoge holding or the ultimate resolution of the question of whether the reservation of "minerals and petroleum oils" in the Butlers' deed somehow includes a reservation of natural gas. Instead, the court has merely allowed the parties to submit evidence from experts into the record.

The Butlers have filed a petition for review with the Pennsylvania Supreme Court. If the Supreme Court does not grant the petition, the case will proceed in the trial court, and the Butlers may argue on remand that the reservation of "minerals" did not include shale gas for a number of reasons.

First, the Butlers may argue that when the reservation was recorded in 1881, the term "minerals" was not understood to include shale, which was not extracted for any commercial or other purpose at the time. Therefore, no clear and convincing evidence exists to establish that the parties intended the reservation of minerals to include shale or shale gas. Indeed, for the same reason, it seems unlikely that shale would be considered a "mineral" as that term is commonly understood today.

Second, the Butlers' deed specifically reserved "petroleum oils" but not natural gas. Thus, the parties clearly demonstrated an understanding of the distinction between certain natural resources and "minerals." The fact that the deed's reservation includes petroleum oils but omits natural gas suggests that the parties intended to include oil but exclude natural gas. Under Dunham and its progeny, a reservation of oil does not constitute a reservation of natural gas; natural gas must be separately and expressly reserved.

Third, Hoge is distinguishable. The conveyance in Hoge expressly included coal in a specifically named vein, as opposed to a generic reservation of unspecified "minerals." The specificity of the coal conveyance helped to justify the Hoge court's conclusion that owner of the coal owns the coal gas.

Moreover, the conveyance of coal rights in Hoge was accompanied by the right to ventilate the coal, which supported an intent to reserve rights to gas contained within the coal. Conversely, the owners of the rights to the natural gas in Hoge had a right to drill only "through" the coal seam, not "into and through" the coal seam, suggesting that their rights did not extend to gas in the coal seam. The deed at issue in Butler contains none of these distinguishing features, but rather expressly reserves petroleum oils and minerals without any mention of natural gas.

A federal court in Pennsylvania recently addressed a surface owner's reliance on Hoge when considering whether natural gas in the Marcellus shale formation should be treated differently from natural gas in other rock formations. See Hoffman vs. Arcelormittal Pristine Resources Inc., No. 11-cv-0322, 2011 WL 1791709 (W.D. Pa. May 10, 2011). In Hoffman, the defendant acquired oil and gas rights pursuant to a 1928 deed that reserved "all gas and oil within and underlying [the] premises." Id. at *2.

The plaintiff surface owner sought a declaration that the reservation included only natural gas "contained within the sandstone strata underlying the subject land." Id. at *3. The plaintiff argued that, like the coalbed gas in Hoge, gas in shale formations was not economically viable in 1928, and that the drafters of the 1928 deed therefore could not have intended to reserve the gas in the Marcellus shale formation when they reserved "all gas." Id. at *5.

The Hoffman court, however, found Hoge to be factually distinguishable because that case involved a subdivided mineral estate, and the court concluded that the Hoffman deed's reservation of "all gas" clearly and unambiguously included all subsurface gas in all formations, including the Marcellus shale formation. Id. at *5-6. The court emphasized the importance of maintaining consistency and predictability in property law, stating that a ruling in the surface owners' favor "would be tantamount to an eradication of countless oil and gas estates and leases recorded in the history of [Pennsylvania], and would profoundly change the landscape of property law as it has developed over hundreds of years." Id. at * 1.

Fourth, the Pennsylvania courts should not be persuaded by the argument that shale gas should be treated like coalbed gas in Hoge simply because both are "trapped" inside the shale or coal, respectively. All subsurface natural gas is "trapped" in one kind of rock formation or another. The fact that some formations are structured more tightly and may require different extraction and recovery techniques, including hydrofacturing, does not meaningfully affect the interpretation of a deed's language reserving (or not reserving) natural gas in light of the arguments above.

The Butler court noted that "at least one other jurisdiction has found similarities between [coal gas and shale gas] in this context." Butler, 2011 WL 3906897, at *8 n.2 (citing Cimarron Oil Corp. vs. Howard Energy Corp., 909 N.E. 2d 1115 (Ind. App. 2009)).

In Cimarron Oil, the Indiana appellate court addressed a dispute between an owner of coal rights and an owner of natural gas rights and concluded that a conveyance of the ownership rights over coal included the rights to coalbed gas. 909 N.E. 2d at 1123-24. The court, in discussing expert testimony, stated that "[t]he gas in shale is generally produced in the same manner as gas in coal" and described the process through which gas in shale and coal is produced. Id. at 1119-20. The expert contrasted these types of "unconventional" natural gas with "conventional" natural gas. Id.

The Cimarron Oil court, however, did not reach any conclusions regarding shale gas. Rather, the court based its holding on its finding that the parties to the contract at issue did not intend to convey the rights of coalbed gas through a lease that granted rights to oil and gas but that did not include the right to invade the valuable coal seam. Id. at 1123-24. The court's discussion of shale gas was merely limited to recounting the expert's testimony in its discussion of the background facts of the case. Therefore, the court's analysis in Cimarron Oil should have no bearing on the outcome in Butler.

As the Cimarron Oil court recognized, the state courts have reached a wide range of differing conclusions on the question of who owns coalbed gas. Cimarron Oil, 909 N.E. 2d at 1122-23 (citing cases). But the outcome in those cases frequently turns on the specific language of the deeds and the courts' conclusions regarding the parties' intent. See id.

After the record in Butler has been further developed and at a stage of the proceedings in which the court need not accept as true all facts alleged by the Powers heirs, the Powers heirs should prevail only if they present clear and convincing evidence that the parties to the 1881 deed intended for the general term "minerals" to include specifically natural gas. Absent such clear and convincing evidence, Pennsylvania courts should be persuaded that a deed's reservation of "minerals"—without any mention of natural gas—does not include the natural gas contained within the Marcellus shale formation.

Such a conclusion will promote the consistency and predictability that has developed over a hundred years of property law and avoid the "eradication of countless oil and gas estates and leases" in Pennsylvania. Hoffman, 2011 WL 1791709, at *1. Thus, even if the Pennsylvania courts were to decide that the Butlers' 1881 deed's reservation of minerals was intended to reserve shale gas, it seems unlikely that the holding would be extended to deeds recorded post-Dunham.

Ever since the 1882 Dunham decision, parties entering into deeds or leases in Pennsylvania have entered into those arrangements with the understanding and intent that if they did not specify gas in their reservation, then they did not reserve gas. Nonetheless, how the Pennsylvania courts rule on these questions has the potential to significantly affect the rights of parties that own rights to minerals or natural gas. For that reason, the Butler litigation warrants attention, and further developments should be closely monitored.

The authors