OWNERSHIP QUESTIONS CAN STYMIE DEVELOPMENT OF COALBED METHANE

Jan. 1, 1990
Although the technology exists for commercial recovery of coalbed methane, production has been hindered because of the legal quandary as to ownership (see "Coalbed Gas Ownership in Pennsylvania-A Tenuous First Step with United States Steel y. Hoge," 23 Duq. L. Rev. 735, 737-38, 1978). Claims to ownership of coalbed methane can be, and have been, asserted on behalf of the coal owner or lessee, the oil and gas owner or lessee, the surface owner, or any combination thereof.
Richard A. Counts
Counts, McKinnis & Scott
Kingsport, Tenn.

Although the technology exists for commercial recovery of coalbed methane, production has been hindered because of the legal quandary as to ownership (see "Coalbed Gas Ownership in Pennsylvania-A Tenuous First Step with United States Steel y. Hoge," 23 Duq. L. Rev. 735, 737-38, 1978).

Claims to ownership of coalbed methane can be, and have been, asserted on behalf of the coal owner or lessee, the oil and gas owner or lessee, the surface owner, or any combination thereof.

Coal owners or lessees argue that because the coalbed methane is contained within the coal matrix (coalbed methane is unique in that coal serves as both the source and the reservoir rock), and because the coal owner or lessee necessarily asserts domination and control over the coal, it belongs to the coal owner or lessee.

A good argument can be made, however, on behalf of the oil and gas owner or lessee. Such owners or lessees may assert that when the oil and gas were conveyed to them, they were impliedly granted the right to produce any kind of gas from any strata including coal seams. Essentially, their view is that gas is gas, whether it be conventional, casinghead, or coalbed methane.

A third possibility is that the ownership of coalbed methane is vested in the person or entity who owns all the minerals underlying a tract of land except coal, oil, and gas. This "residue" mineral estate is usually vested in the "surface owner." If, for example, the surface owner has conveyed both the oil and gas and coal, he might argue that in conveying the oil and gas and/or coal he did not intend to also convey a right to coalbed methane to either the oil and gas or coal owner. Where courts have determined that they are able to look beyond the "four corners" of the instruments, this subjective test is referred to as the specific vs. general intent test.

The surface owner would necessarily argue that he could not have intended to convey a substance that, until very recently, was relatively valueless, i.e., he did not specifically intend to convey the coalbed methane. See also Va. Code Ann. 55154.1 (1986).

From the federal perspective, an attempt has been made to resolve the coalbed methane ownership question. On May 12, 1981, the solicitor's Office of the United States Department of the Interior issued an opinion concerning ownership of coalbed methane. The solicitor first concluded that a reservation of "coal" to the United States does not include coalbed methane. The solicitor also determined that a reservation of "gas" does include gas found in coal deposits and, therefore, is disposable as a gas under 17 of the Mineral Leasing Act. It should be noted, however, that the solicitor's opinion is not binding upon the courts and can be revoked by a subsequent solicitor who concludes differently.

STATE RULINGS

At the state level, the coalbed methane ownership question is very unsettled. Unfortunately for the coalbed methane developer, there is a conspicuous lack of judicial precedent or legislation to resolve the ownership issue.

PENNSYLVANIA

Pennsylvania is the only jurisdiction in which the court of last resort has addressed the coalbed methane ownership issue. In United States Steel Corp. y. Hoge, 503 Pa. 140, 468 A.2d 1380 (1983), the Supreme Court of Pennsylvania was called upon to decide the coalbed methane ownership issue as between two mineral estate owners, i.e., the oil and gas owner and the coal owner, who were both claiming ownership to the coalbed methane found within the "Pittsburgh" coal seam.

The Hoge court concluded that "such gas as is present in coal must necessarily belong to the owner of the coal.. . ." 468 A.2d at 1383. It should be noted, however, that even though the Hoge court arrived at this determination, it also reviewed the severance deed through which each claimant was asserting title to the coalbed methane to ascertain from the language of the instrument whether the parties thereto intended to limit the rights to coalbed methane.

The Hoge court concluded from a review of the language contained within the deed that the parties had not intended to limit the rights to coalbed methane and thus quieted title to the coalbed methane in United States Steel Corp., the coal owner. It is, therefore, arguable that even in Pennsylvania where coalbed methane has been determined to be a part of the coal estate, it would not automatically follow that a coal owner would be deemed the owner of coalbed methane in every case.

Unless a disputed instrument is phrased in the same language as the Hoge deed, it will be difficult to predict how a court, even in Pennsylvania, will resolve the issue of the parties' intent as to coalbed methane ownership.

ALABAMA

In another case, the United States District Court for the Northern District of Alabama, when confronted with the ownership issue, declined to decide the ownership question generally and limited the scope of its decision to the facts of the particular case under review. Rayburn y. USX Corp., Civil Action No. 85-G-2661-W (N.D. Ala. 1987), aff'd., 844 F. 2d 796 (11th Cir. 1988).

In an action currently pending before the Circuit Court of Mobile County, Alabama, coalbed methane ownership is being contested between the lessee of a conventional oil and gas estate and a lessee that took a lease specifically covering coalbed methane from the coal owner. Pinnacle Petroleum Company, et al., y. Jim Walter Resources Inc., et at., Civil Action No. CV-87-3012.

Although multiple parties and successor interests are involved in the case, the essential facts are that Pinnacle (one of the plaintiffs) is a successor lessee holding the rights to explore and remove oil, gas, and other minerals except coal and that Jim Walter (one of the defendants) is a successor lessee purportedly holding the right to mine 11 occluded natural gas from coal seams."

The lease from which the defendant's interest is derived was given after the lease from which the plaintiffs' interest was derived. Although all mineable coal has been removed from the area covered by the plaintiffs' oil and gas lease, the defendant has drilled two wells for the purpose of removing the coalbed methane.

The plaintiffs filed a motion for partial summary judgment on the ownership issue arguing: (1) the nature of the coalbed methane is sufficiently similar to "gas," as that term is commonly understood, that the parties to the oil and gas lease must have intended to convey the coalbed methane to the oil and gas lessee; and, (2) the defendants' interest continued only so long as there was mineable coal on the leased premises and that upon depletion of the coal, the defendants no longer hold any interest in the coalbed methane remaining in the ground.

On July 28, 1989, the court granted partial summary judgment to the defendants finding that "the Defendants (the coal owner and its coal lessee), as the owners of the coal, own and have the exclusive right to produce coalbed gas and that, therefore, the Defendants have the exclusive right to produce coalbed gas from the property made the subject of this lawsuit."

There are, however, other issues before the court that have not been adjudicated in the Pinnacle Petroleum case; therefore, the action is not ripe for appeal and it is thus uncertain whether the coalbed methane ownership issue will reach the Supreme Court of Alabama.

VIRGINIA

Legislative attempts to resolve the ownership question have also been made in several jurisdictions. Most notably, Virginia, in attempting to settle the coalbed methane ownership question, enacted Va. Code Ann. 55-154.1 (1986). This code section provides, in pertinent part, as follows:

1. 55-154.l. Mineral rights regarding migratory gases; pending litigation; power of court. - A. Except as otherwise provided by law, on or after January 1, 1978, all migratory gases, including but not limited to propane and methane, shall be conclusively presumed to be the property of the owner of the surface real property beneath which such migratory gases are or may be located (emphasis added).

The Virginia Migratory Gas statute, as it is more commonly known, purports to vest ownership of coalbed methane and other migratory gases in the surface owner on or after Jan. 1, 1978. The statute was enacted to settle the coalbed methane ownership question; unfortunately, however, the code provision has not settled the ownership issue in Virginia, but has created a cloud on title to all migratory gases including coalbed methane by effecting a conclusive ownership presumption in favor of the surface estate titleholder.

Furthermore, because all gases are by their nature "migratory," the statute has created a cloud on title to conventional gas as well.

And the statute does not address those situations where mineral severances have occurred prior to the effective date of the provision, nor does it address those cases where contract interests were in place prior to the code's enactment.

To date, no Virginia appellate court has been called upon to determine the effect of Va. Code Ann. 55-154.1 (1986).

However, it appears that because an application of the statute may result in an impermissible taking of private property without compensation or due process of law in violation of U.S. Court Amend. 5 and 14 and Va. Const. Art. 1 11 and in an unconstitutional impairment of contracts in violation of U.S. Const. Art. 1 10 and Va. Const. Art. 1 11, it may not withstand constitutional scrutiny.

COURTS TAKE THE LEAD

Although other state legislatures may attempt to resolve the ownership question by statute, it is unlikely that resolution of coalbed methane law-related issues will come initially from legislative bodies. More than likely, the ownership issue will be determined by the judiciary on a case-by-case basis.

The courts will necessarily look to the instruments through which a particular claimant is asserting ownership of the coalbed methane, as did the court in the Hoge case, to determine if coalbed methane was included in, or excluded from, the grant or reservation in the instrument, focusing primarily on the language employed, the intent of the parties, and local custom,

As with most questions that are put before the judiciary, a judicial resolution of the coalbed methane question could take many years. Furthermore, the conclusions reached by the court, even if presented with the ownership question, may be limited to only the facts before it and not provide a general statement of coalbed methane ownership law. Therefore, a potentially profitable coalbed methane project could be lost before a developer is provided with a definitive answer to the ownership question.

It is thus important for a developer to approach any coalbed methane project and any associated leasing program with caution so as to minimize risk and maximize profit. Ultimately, a business risk decision based upon the advice of counsel is necessarily required.

OWNERSHIP AND LEASING

In instituting a leasing program, a developer will be faced with numerous ownership scenarios. As the name implies, coalbed methane is produced from coal primarily by operators who are historically engaged in the exploration for, and development of, oil and gas. As a result, a coalbed methane developer is likely to encounter many instances where the surface and mineral estates are separately owned.

In such a case, a developer must attempt to ascertain the status of coalbed methane ownership on the tract and then determine from whom he must obtain a coalbed methane lease.

For example, the severance deed that created the separate estates may have either conveyed or reserved "minerals." A developer should review caselaw in that jurisdiction to determine if coalbed methane would be included within the term 11 minerals." As discussed above, it is more likely than not that a developer will not find a court decision providing a conclusive answer.

A developer may also encounter those situations where he is even less sure that a particular term or terms would include coalbed methane. Would coalbed methane be included, for example-, in the following terms: (1) "coal and mining rights"; (2) "coal and other minerals"; (3) "coal and mineral rights"; (4) "oil, gas, and other minerals"; or, (5) "oil, gas, and coal."

Certainly, the successor in interest to the party severing the mineral estate, i.e., the surface estate titleholder, could argue that these terms would not include coalbed methane.

Potential development is further complicated by the fact that the multiple mineral estates may exist on a particular tract of land. In fact, it is the rule rather than the exception to find multiple mineral estates in areas where coal and oil and gas are both being developed.

Without a clear indication from the judiciary or legislature concerning ownership, arguments can be made for each of these potential claimants.

Other complications may arise if a mineral lease is currently outstanding on the property in question and it is not clear whether it covers coalbed methane. Therefore, in addition to the ownership issues, a developer should determine if the tract in question is currently covered by a mineral lease and what rights to coalbed methane, if any, were granted under the lease.

If there are no mineral leases outstanding that would include coalbed methane, a developer should then proceed with his leasing program.

The more difficult question arises when it is unclear whether an outstanding mineral lease includes coalbed methane. In this event, a developer must undertake an in-depth analysis of the land and legal issues surrounding development prior to making a determination of whether to proceed with development.

If there is no mineral lease covering the tract in question, a developer must then decide from whom he should take a coalbed methane lease in order to proceed with development of the resource. In the first instance described above where the "minerals" were either reserved or conveyed, a lease from the "minerals" owner should provide the developer with the right to explore for and develop coalbed methane.

AGREEMENTS

Leasing for coalbed methane becomes increasingly more risky as the severance instruments become more mineral specific. If a developer is not certain whether coalbed methane was included in the severance instrument, he has several alternatives available to him.

First, he can secure coalbed methane leases from all potential claimants to the coalbed methane. Even assuming that the developer will be able to negotiate an acceptable agreement concerning royalties to be paid, this option will have a significant impact on the project economics in addition to being time consuming.

In view of the impending Dec. 31, 1990, dead-line for developers to spud coalbed methane wells in order to take advantage of the Section 29 tax credit, time is of the essence in assessing the economic viability of many projects being considered today.

Once production is achieved, a developer may then file an interpleader action pursuant to a particular jurisdiction's interpleader statute naming all potential claimants as defendants.

The developer could pay all royalty payments into court pending a judicial resolution of the ownership questions. This procedure would provide a developer with protection from the court while permitting him to go forward with coalbed methane recovery. Although an interpleader action should not affect or impede coalbed methane development, a judicial proceeding of this nature could certainly result in an appeal with the possibility of a remand to the circuit court for re-trial. Once re-tried, the case may again be appealed.

POOLING AND UNITIZATION

One of the most attractive options to a developer is pooling and unitization. Depending upon the jurisdiction and the expertise of state oil and gas conservation boards, this alternative may offer several advantages to the prospective coalbed methane developer/operator to identify all the potential claimants to the coalbed methane and to pool those interests.

Pooling these interests allows the developer to commence operations prior to a final determination of title. The developer/operator can request the regulatory agency to escrow royalties until such final determination.

This process should not be an unreasonable infringement upon the due process rights of those being pooled, and it should allow the operator/developer to proceed in a timely fashion without liability as a trespasser.

Utilization of forced pooling and unitization to facilitate coalbed methane development offers the least risk and greatest flexibility to the potential developer. A review of the oil and gas conservation rules and regulations in each jurisdiction would be necessary to determine if this is a viable option.

OWNERSHIP

As a last resort, the developer is often forced into making a business risk decision regarding ownership. This course of action clearly could result in a costly court baffle and a potential holding by a court that the developer has committed a willful trespass. Unfortunately, this scenario is even less tenable than what it may seem at first glance. Therefore, a simple determination that, in a particular situation, the coal, oil and gas, or surface owner is vested with ownership to the coalbed methane will not be sufficient. Ownership and the right of access must be assessed on a tract-by-tract basis.

Despite the coalbed methane ownership quandary, coalbed methane development has increased dramatically over the past few years. The majority of development of coalbed methane to date has occurred in the San Juan and Black Warrior basins. Continued interest in development and production of this resource is attributable, in part, to the presence of coal in 37 different states, and 16 basins, throughout the United States.

BLACK WARRIOR, SAN JUAN BASINS

There are several reasons for the significant production from the Black Warrior and San juan basins. First, although there continues to be great concern among developers over ownership issues in the Black Warrior basin and San Juan basin, development has not been stifled to the degree that has occurred in the Appalachian basin because Black Warrior and San Juan basins' recovery operations have traditionally taken place on large blocks of acreage, including federal, Indian, and private lands.

These types of acreage positions encourage agreements between potential claimants and eliminate, for the most part, the ownership and lease acquisition problems normally encountered with fractionalized ownership on smaller tracts. Also, there are significant efforts being made in the Black Warrior basin to develop the coalbed methane concurrently with longwall mining operations.

With regard to the San Juan basin, there appears to be at least a partial resolution of the coalbed methane ownership issues. This is attributable to the May 12, 1981, Solicitor's Opinion. Although the Solicitor's Opinion is nonbinding, it certainly offers some degree of comfort to a coalbed methane developer in those areas of the San Juan basin where a developer intends to recover coalbed methane in federal coal deposits.

Although significant land and legal issues face the San Juan basin and Black Warrior basin coalbed methane developer, these basins provide a better climate within which to conduct operations. As large blocks of acreage are developed, developers will be forced to turn to smaller tracts which will potentially involve more fractionalized interests and, consequently, more potential claimants. Therefore, well-planned land and legal strategies for dealing with the myriad of complex ownership and access problems are still imperative.

NORTHERN, CENTRAL APPALACHIAN BASINS

Development in the Northern and Central Appalachian basins has not kept pace with either the San Juan or Black-Warrior basins despite the fact that the Central and Northern Appalachian basins are estimated to contain more than 66 tcf of coalbed methane.'

Unresolved questions of ownership and competing estates along with other complex land situations have hindered commercial coalbed methane development.

As discussed above, multiple mineral estates often exist on the same parcel of land in the Central and Northern Appalachian basins, thus making ownership and lease acquisition questions more difficult to resolve. In addition, it is likely for a coalbed methane developer to encounter those situations where, for example, the coal owner and oil and gas owners are attempting to develop their respective estates to the exclusion of the other.

In these situations, it is particularly incumbent upon the owner of the various estates to negotiate a multiple-use agreement that allows each owner/lessee to develop its estate while exercising "due regard" for the competing estate(s). These ownership and competing estates questions must be resolved by negotiation and agreement on a project-specific basis.

LEGAL CHALLENGE

From a land and legal perspective, development of coalbed methane, with its complex ownership questions and related multiple use and access issues, may be the most significant challenge to the mineral lawyer in the latter half of this century. New strategies and methodologies will be needed to keep pace with the rapid growth of the coalbed methane industry.

Agreements which have historically been used in the oil and gas industry have only limited application to coalbed methane operations; therefore, coalbed methane-specific agreements should be designed and implemented on a project-specific basis. For example, use of a "standard" form "Producers 88" is totally inconsistent with the exploration for, and development of, coalbed methane and gob gas. (Gob gas is that gas recovered from the destressed zone associated with any full-seam extraction of coal that extends above and below the mined-out coal seam.)

Multiple-use agreements, coalbed methane-specific joint operating agreements, pooling and unitization agreements with comprehensive escrow arrangements, and project-specific gob and coalbed methane leases are essential to the continued exploration for and development of this resource.

REFERENCE

  1. Von Schonfeldt, H., "Joint Development in the Appalachian basin," Coalbed Methane Special Institute, Eastern Mineral Law Foundation, November 1988.

Copyright 1990 Oil & Gas Journal. All Rights Reserved.