The Pennsylvania Supreme Court last week heard oral arguments in a controversial mineral rights case that could have enormous implications over ownership rights in the Marcellus Shale.

At the center of the case is a deed that was written in 1881 by Charles Powers, who transferred 50% of the oil and minerals rights on 244 acres in Susquehanna County to his heirs (Butler v. Charles Powers Estate, No. 27-MAP-2012). John and Mary Butler, who currently own the land in Apolacon Township, filed a lawsuit in 2010, arguing that since Powers didn’t include “natural gas” in the deed, his heirs have no right to the natural gas locked in the shale under the property.

Although it’s unclear when the six-judge panel will issue a final ruling in the case, it could have an effect on thousands of oil and gas leases that have been signed in Pennsylvania, all of which rely on the Dunham v. Kirkpatrick decision in 1882 by the Pennsylvania Supreme Court. According to the court ruling, the conveyance of mineral rights does not include either petroleum oils or natural gas unless those commodities are specifically mentioned. In other words, the legal definition of “minerals” does not include oil and gas, and further, the legal definition of petroleum oils does not include natural gas, unless it also is specifically mentioned.

Energy companies active in the Marcellus have been scrambling to determine whether their leaseholds are affected by the Butler case (see NGI, Oct. 3, 2011). At least two companies, Cabot Oil & Gas Corp. and Range Resources Corp., have said they would not be adversely impacted by the case.

“Given the arguments that have been raised and given the dialogue at the oral argument, it seems very unlikely that the court would in any wholesale way upset the Dunham rule,” said attorney David Fine of Harrisburg, PA-based firm K&L Gates LLP, who is representing oil and gas companies as amicus curiae parties.

“If the court upsets the Dunham rule — if it said, ‘we will retroactively say that the Dunham rule does not apply in shale gas areas,’ that could create chaos in the industry,” Fine told NGI. “It would allow there to be challenges, whether successful or not, to perhaps thousands of transactions that preceded on the assumption that they were governed by the Dunham rule. “I don’t think the court is going to go that way because the court has shown great sensitivity to settled expectations.”

Fine wasn’t at the hearing in Pittsburgh but based on information from the proceedings, he said, “I don’t think it’s likely the court would go there, just because of how the arguments have been laid out in front of the court, and some of the questions the justices asked…It sounds like the justices are keyed into the broader policy problems that could arise if they went in certain directions.”

In January 2010 a Court of Common Pleas judge in Susquehanna County agreed with the Butlers’ assertion that they owned the natural gas rights, citing the Dunham ruling. Last September the state Superior Court disagreed and remanded the case back to Common Pleas Court, noting that the appellants should be given a chance to prove the Marcellus was a “mineral” and shale gas should be treated as coal and coalbed methane (see NGI, Sept. 19, 2011).

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