Concludes that Natural Gas Produced from the Marcellus Shale Formation is not a "Mineral"
Natural gas producers and landowners alike breathed a sigh of relief on April 24, 2013 as the Pennsylvania Supreme Court (the "Supreme Court" or "Court") overturned a lower court decision that questioned whether subsurface ownership rights of natural gas in shale formations should be treated differently than ownership rights of natural gas in conventional formations. The uncertainty began in 2011, when the Pennsylvania Superior Court (the "Superior Court") suggested that the Dunham Rule—a century-old rule creating a rebuttable presumption that reservations of "minerals" in property conveyances do not include oil or natural gas—may not apply to natural gas found in the unconventional Marcellus shale play. See Butler v. Charles Powers Estate, 29 A.3d 35 (Pa. Super. 2011). However, the Supreme Court recently held that there is a presumption that property conveyances describing "minerals," without specific reference to natural gas, do not include the natural gas found in the Marcellus shale formation. Butler v. Charles Powers Estate, No. 27 MAP 2012. If the Dunham Rule ultimately were not applied to unconventional shale plays, the result could have upended thousands of Marcellus shale gas leases signed in the Commonwealth of Pennsylvania. The Supreme Court's decision resolves any uncertainty by extending the Dunham Rule to natural gas extracted from the Marcellus shale play.
The Dunham Rule
Pennsylvania allows property owners to sever ownership of the property's surface from ownership rights to the subsurface, which includes the right to extract coal, oil, natural gas, or other minerals. The Supreme Court, in Dunham & Short v. Kirkpatrick, 101 Pa. 36 (1882) and Highland v. Commonwealth, 161 A.2d 390 (Pa. 1960), held that a reservation or exception in a deed reserving "minerals," without any specific mention of natural gas or oil, creates a rebuttable presumption that the grantor did not intend that the term "minerals" include natural gas or oil. Known as the Dunham Rule, this presumption can be rebutted only by presenting clear and convincing evidence that the parties intended otherwise at the time of the conveyance. See Highland, 161 A.2d at 398-99.
The Butler Case
Butler v. Charles Powers Estate arose from a deed
recorded in October of 1881 conveying 244 acres of land in
Susquehanna County, Pennsylvania, but reserving for the grantor
Charles Powers "one half the minerals and Petroleum
Oils." In 2009, John and Mary Butler, as owners of the 244
acres and holders of the original deed, sought quiet title to all
the "minerals and petroleum oils" on the property in
order to lease those rights for Marcellus shale gas drilling.
William and Craig Pritchard, as heirs to the Estate of Charles
Powers (collectively the "Estate"), objected and claimed
the reservation of "minerals" in the 1881 deed included
Marcellus shale gas. The trial court rejected the Estate's
argument, stating that the Dunham Rule presumed the
deed's reservation would not include shale gas unless the deed
made a specific reference to a reservation of natural gas
rights.
On appeal, the Superior Court (an intermediate appellate court)
reversed and remanded with instructions for the trial court to
address several technical questions. Most importantly, the trial
court was to determine whether Marcellus shale gas is considered a
"mineral" as that term was contemplated in
Dunham and Highland and the extent to which
gas-bearing shale is similar to coal seams. The Superior Court
reasoned that the Dunham Rule was well-settled for
conventional oil and natural gas resources, but it recognized that
unconventional shale plays differed geologically from traditional
natural gas reservoirs. The court also questioned whether natural
gas-bearing shale could be analogized to coalbeds, which contain
valuable methane gas. The analogy potentially could be dispositive,
as the Supreme Court expressly recognized in U.S. Steel Corp.
v. Hoge, 468 A.2d 1380 (Pa. 1983), that the coalbed methane
contained in a coal vein belongs to the coal owner until that gas
is allowed to migrate into the surrounding subsurface. The Superior
Court accepted that these technical questions required further
fact-finding and expert opinion at the trial level and held
accordingly. The Butlers subsequently appealed the decision to the
Supreme Court for review.
The Supreme Court's Decision
The Supreme Court reaffirmed the Dunham Rule and
declined to analogize natural gas from shale formations to coalbed
methane, instead holding that shale formations and the oil and gas
extracted from those formations are not "minerals" and
that the Dunham Rule applied equally to natural gas from
both conventional formations and the Marcellus shale play.
The Butlers argued for the strict application of the
Dunham Rule to unconventional shale gas, claiming this
outcome was supported by the public policy of providing certainty
to both the shale industry and landowners who have relied on the
century-old presumption. In response, the Estate argued that the
parties signed the 1881 deed before the Dunham decision,
that Marcellus shale gas was likely considered a
"mineral" at the time, and that gas-bearing shale
formations are analogous to coal veins.
The Court first discussed the history of Dunham and the
rule's eventual progeny. The Court highlighted Gibson v.
Tyson, 5 Watts 34 (Pa. 1836) and Schuylkill Navigation Co.
v. Moore, 2 Whart. 477 (Pa. 1837) as predecessors to the
Dunham decision. The Dunham court relied on these
cases for two overarching principles: (i) that deeds should not be
construed by scientific determinations, but merely as they would be
understood by ordinary people at the time; and (ii) anything
non-metallic in nature would not be considered a mineral by common
persons for private deed purposes. Gibson, 5 Watts at
41-42; Moore, 2 Whart. at 493. The Court then traced
Dunham's subsequent progeny, while emphasizing the
underlying principle that oil and natural gas are not
"minerals" as a common layperson would understand the
word in drafting a deed. Based on the 131-year history of the
Dunham Rule as the settled law in Pennsylvania—177
years when crediting its origins to the Gibson
decision—the Court roundly reaffirmed the Dunham
Rule as "the bedrock for innumerable private, real property
transactions for nearly two centuries."
Applying the Dunham Rule to the case at bar, the Court
held that Marcellus shale gas would not be considered a
"mineral" by Charles Powers at the time of his 1881
conveyance and therefore his reservation of "one half the
minerals and Petroleum Oils" did not include natural gas. The
Court reasoned that the common, layperson understanding of a
mineral at the time of the lease would not include natural gas
extracted from shale because it was non-metallic in nature. The
Superior Court therefore erred by seeking expert testimony on the
scientific nature of Marcellus shale gas because scientific opinion
is irrelevant to the layperson-centric Dunham analysis.
Further, the Court explained that the mere fact that the 1881
conveyance predated the Dunham decision was irrelevant to
the analysis because Gibson had already established that
non-metallic substances were not considered "minerals" in
deeds as early as 1836.
The Court then rejected the potential analogy between natural gas
from shale and coalbed methane by distinguishing its Hoge
precedent from the Dunham line of cases. First, the Court
noted that the Hoge decision did not discuss
Dunham in any detail. The Court then focused on the unique
nature of coalbed methane, emphasizing that it was traditionally
viewed as a dangerous substance that was legally ventilated by the
coal vein owner and generally not recognized as a commercially
viable substance at the time the Hoge deed was executed.
Despite the chemical similarity between traditionally produced
natural gas and coalbed methane, the Court noted that the
Hoge court inherently made a legal distinction between
coalbed methane and other natural gas by allowing the surface
owners to drill through the coal vein to reach natural gas
deposits below, but did not allow the surface owner to drill
into the coal vein to extract the coalbed methane
contained therein. Finally, although the extraction of both coalbed
methane and Marcellus shale gas involve hydraulic fracturing, the
Court emphasized that the Dunham analysis concerns the
nature of the substance being claimed as a "mineral," not
the situs of the substance or its method of extraction.
Therefore, for purposes of the Dunham Rule, the Court
placed natural gas contained in the Marcellus shale on the same
legal footing as natural gas contained in conventional sandstone
formations.
Conclusion
The Superior Court's unexpected decision in 2011 left shale
exploration and production companies and related businesses
questioning the legal validity of thousands of leaseholds that were
drafted and signed under the assumption that the Dunham
Rule would apply to shale-based oil and natural gas rights. With
its decision, the Supreme Court ensures that
Dunham—a product of Pennsylvania's first
petroleum revolution more than 130 years ago—will continue to
shape the Commonwealth's shale-based energy renaissance into
the future.
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