COURT RULES COALBED METHANE IS PART OF THE COAL RESOURCE

A.D. Koen
Gulf Coast News Editor

A Montana district court ruling that coalbed methane is part of the coal estate could affect other disputes over rights to U.S. coalbed methane.

A Carbon County, Mont., district court in mid-December 1992 declared Florentine Exploration & Production Inc., Billings, Mont., trespassed when it drilled its 7-19-8-21 Aetna methane well into a coal seam owned by Union Reserve Coal Co. Inc. The judge said Florentine trespassed because it had not obtained the right to drill and produce coalbed methane when it signed an oil, gas, and methane lease with Carbon County in August 1990.

The court held that Carbon County could not convey methane rights through the lease with Florentine because "coal seam methane is part of the coal and of the coal estate." The county conveyed coal rights more than a decade earlier under a lease with a Union Reserve partnership.

The court ordered Florentine to remove the Aetna well casing by mid-March. But it awarded Union Reserve only $1 damages because the company had no plans to immediately mine coal in the vicinity of the well and its estimated damages were too speculative.

IMPORTANCE OF THE CASE

Although limited to a single well, the Montana court's decision is extremely damaging to Florentine, a small company that had invested about $1.2 million acquiring the lease and beginning development. Florentine owner Jack Padon Jr. plans to appeal the decision to the Montana Supreme Court.

The effect of the Montana ruling could become more widespread if the idea that coalbed methane is part of the coal estate weighs heavily in other methane ownership disputes.

Lawyers for the Southern Ute Indian tribe plan to introduce the decision during arguments in a class action suit the tribe filed at yearend 1991 in a federal district court in Colorado. In that case, the Southern Utes claim ownership of methane produced from Cretaceous Fruitland coal seams under reservation land on which private, non-Indian entities own oil and gas rights.

An estimated 385 San Juan basin coalbed methane wells are affected by the case.

Lawyers familiar with the Montana and Southern Ute cases disagree on the applicability of the former to the latter. But some say the Montana decision holds implications not only for wells involved in the Southern Ute case but also for thousands of other coalbed methane wells on federal or Indian land west of the Mississippi River.

EXTENT OF SIMILARITY

Amoco Production Co., defendant class representative in the Southern Ute case, said the Colorado federal court likely will take note of but not be bound by the Montana decision because the facts and legal issues of the two cases differ sharply.

Amoco pointed out that the Montana case, as well as previous methane ownership disputes resolved in eastern states, hinged on the intent of conveyance documents between two private parties. Such is not the case in the Southern Ute suit.

"The Southern Ute case deals specifically with federal statutes detailing the way the federal government granted land and made conveyances and reservations of coal and other mineral rights," said an Amoco spokesman in Denver. "Where the government reserved the coal under federal conveyances, we think it's clear it was just coal."

But Tom Shipps, a principal in Maynes, Bradford, Shipps & Sheftel, Durango, Colo., the Southern Ute tribe's general legal counsel, said the two cases have a greater number of parallels than distinguishing features.

Given the facts in the Montana case, Shipps said, the state district court could have taken a much more narrow approach to render its decision. Instead, it determined as a matter of property law that coalbed methane is part of the coal estate.

The Montana judge's order gave little mention to specific provisions in the Florentine-Carbon County lease because terms of that agreement were not at issue. The court cited intents of conveyance documents pertaining to previous cases in Alabama and Pennsylvania, all of which found ownership of coal formations includes methane.

But the Montana court noted that in U.S. Steel Corp. vs. Hoge, the Pennsylvania Supreme Court said gas is a mineral and while in place is part of the property in which it is contained. The court also said the gas necessarily belongs to the owner in fee so long as it remains part of the property. And that ownership will be lost only upon grant or upon the gas leaving the property through migration.

The Montana court gave little weight to opinions in 1981 and 1990 by the Interior Department solicitor that oil and gas lessors on federal or Indian land also own rights to coalbed methane. Those opinions were based mostly on the meanings of the same federal statutes involved in the Southern Ute case.

Shipps said the court concluded the solicitor's opinions had no bearing on the property law issue before it.

BREADTH OF OPINION

Shipps said the federal judge presiding over the Southern Ute case will be made aware of the Montana decision. But federal courts are not bound legally to follow state trial court decisions, so the effect of the decision is unclear.

However, one observer not involved in the suit, Patty Patten, a lawyer in Tulsa for Oxy U.S.A. Inc.., said the breadth of the Montana court's opinion could hold implications for the Southern Ute case and other methane ownership disputes as well.

"Until the Montana lawsuit, methane ownership cases had been very narrowly construed," Patten said. "The courts looked more at the documents themselves."

In previous cases, she said, courts tried to determine the intent of parties to agreements conveying the resources. Judgments were based mainly on the courts' perceptions of the mineral rights as specified by each document.

Because the earlier decisions "were very deed specific," later disputes could not rely on the judgments as precedents unless the involved parties had conveyance documents that read exactly like those of the precedent cases.

"In the Montana case," Patten said, "the court says methane gas is part of the coal estate, not that it examined the Carbon County deeds and carefully considered the intent of the grantor. The Montana court looked at it more from a geological standpoint and said, 'Methane is not natural gas. Methane is coal.'"

CLAIMS IN JEOPARDY

Amoco contends the Montana decision cannot be construed to mean methane is part of the coal estate in every instance.

In the Southern Ute case, the tribe lays claim to methane underlying land that is within the reservation but which was granted to settlers under the federal Homestead Acts of 1909 and 1910, more than 2 decades before the Southern Ute reservation was formed. Along with land, homesteaders were granted ownership of all minerals except coal.

The Southern Ute reservation was formed in 1938 encompassing the homesteaded land within its boundary, and the tribe was reserved rights to coal underlying homesteaded land and to all minerals within the reservation but outside the homesteaded tracts.

Because they believed methane, although lying in coalbeds, was part of the oil and gas estate, companies planning to develop methane reserves on the Southern Ute reservation signed leases with owners of the oil and gas estate with settlers or their successors on homestead acreage and with the tribe on reservation acreage surrounding the homesteads.

"We didn't feel there was a need to obtain any leases from the coal owner-the tribe-because it didn't own the oil and gas, including the coalbed methane," Amoco said.

Though solicitor opinions are non-binding, Patten said, operators generally have relied on them when accumulating leaseholds for virtually every methane gas well drilled on federal or Indian land west of the Mississippi River. "If the solicitor's opinions are overturned, developers' claims to the methane are jeopardized," she said. "If the companies have guessed wrong, it means millions of dollars of risk exposure."