The Pennsylvania Supreme Court is hearing oral arguments this week 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 Shale Daily, Sept. 28, 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. He spoke with NGI’s Shale Daily on Wednesday.
“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 said. “It would allow there to be challenges, whether sucessful 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 Tuesday’s hearing in Pittsburgh but he said a colleague told him about the proceedings. “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,” said Fine. “It sounds like the justices are keyed into the broader policy problems that could arise if they went in certain directions.”
Several news organizations covered the Tuesday hearing and reported what occurred.
Justice Michael Eakin reportedly had an exchange with the Butler’s attorney Gregory Krock of Buchanan Ingersoll & Rooney PC. “One hundred years ago, shale was a useless rock that had no economic value,” Eakin said. “If people 100 years ago thought it was a mineral, would it be considered relevant?”
Krock replied that “no expert can testify as to whether someone would know if people knew the value of shale…The very foundation of the Dunham presumption is that ordinary people don’t use the word mineral in the scientific sense.”
Justice Max Baer noted that the 1881 deed could have specifically mentioned natural gas, but it didn’t. “Why did they include oil, and why did they not include gas?” he asked. “By its nature [natural gas] is going to flow free to the ozone if it’s not encapsulated in the earth. Because you own what’s holding it there doesn’t mean you own the gas.”
Kelly & Kelly’s Laurence Kelly, who is representing the Powers estate, was quoted as saying, “if you own the duck, you own the feathers.” He later added that the dispute is “dealing with a 35-word exception in this case. We’re not taking the Dunham case head on.”
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. But last September the state Superior Court disagreed and remanded the case back to Common Pleas Court (see Shale Daily, Sept 19, 2011).
The Superior Court had argued that the appellants in the case should be given the chance to prove that the Marcellus Shale is a “mineral” and the treatment of shale gas should be the same as coal and coalbed gas, rather than the treatment afforded conventional oil and natural gas reservoirs. If this were proven, it would mean any Pennsylvania deed conveying “mineral” rights would include the shale and its gas, just as conveyance of the coal mineral includes the coalbed gas. The Butlers subsequently filed a petition to appeal to the state’s Supreme Court to overturn the ruling.
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