Pennsylvania court could provide certainty around natural gas rights
The Pennsylvania Supreme Court’s decision to hear an appeal of a dispute over Marcellus Shale natural gas rights may clarify the status of thousands of drilling leases in the state.
Two Pennsylvania landowners, John and Mary Butler, are challenging an intermediate appeals court ruling that called for scientific opinion on whether Marcellus Shale gas, which is released by the process known as hydraulic fracturing, should be considered a mineral under an 1882 decision of the state’s high court. In the trial court, the landowners won their claim to the natural gas rights.
“It is essential to have established law and expectations with regard to oil and gas conveyancing,” the Marcellus Shale Coalition, which represents the gas industry, said in a statement on Thursday.
“As there already is established and long-standing Pennsylvania legal precedent on this subject, the timely reaf- firming of that precedent will provide important and necessary certainty.”
Since 2009, Pennsylvania’s high court has taken at least four significant cases that deal with the state’s portion of the Marcellus shale, a dense rock formation that stretches from Newyorktowestvirginia.the Butler case could mark the first time in more than five decades that the court will address a 130- year-old rule governing land transfers, which serves as a foundation for many Marcellus Shale leases.
Oral argument before the court is probably months away, Greg Krock, an attorney for the Butlers, said in a phone interview. The court denied a request from the Pennsylvania Independent Oil & Gas Association to file papers in support of the appeal. Written arguments in the case are due by May 15, according to court records.
“The case introduces a tremendous amount of uncertainty into mineral rights in Pennsylvania,” said Michael Joy, an attorney with Reed Smith LLP in Pittsburgh who also holds a doctorate in geology. “A whole host of companies had to re-evaluate their lease portfolios, to try and understand what they had,” he said.
The case arose from a dispute between the Butlers and the heirs of an 1881 deed governing 244 acres in Susquehanna County.
The deed, drawn by one Charles Powers, transferred to his heirs the oil and mineral
The case introduces a tremendous amount of uncertainty into mineral rights in Pennsylvania
MICHAEL JOY, ATTORNEY
rights for the land, which can be separated from surface rights under Pennsylvania law.
At issue is whether Pennsylvania’s long-standing “Dunham Rule” applies to natural gas from the Marcellus Shale. The rule, stemming from a case before the state Supreme Court in 1882, provides that when a deed transfers ownership in minerals, it must refer specifically to oil and gas to transfer rights to those products, said David Fine, a Harrisburg, Penn.- based attorney at K&L Gates LLP. In this instance, the Powers deed mentions petroleum oils and minerals. There is no mention of gas, court documents say.
The Butlers sued in 2010 to claim the gas under their land. They argued that Powers’s failure to include the word “gas” in separating subsurface rights on his former property gives them the right to tap it.
The Powers heirs, in an argument with wider implications for gas leases in the state, claimed that since Marcellus gas is trapped in rock and doesn’t flow freely to the surface, as gas did from oil wells in the 1880s, it should be considered a mineral and part of the rights explicitly transferred in the deed, according to court records. They own the gas trapped in the shale the same way they would own the gas trapped in a coal seam, they said.
Powers’s heirs are seeking rights to half the gas.
After the trial judge ruled for the Butlers, an appeals court judge decided in September that state law isn’t clear with respect to shale gas and ordered the trial court to solicit expert opinions on the issue.
Laurence Kelly, an attorney for the Powers heirs, declined to comment on the Supreme Court’s decision to take the case.
The Butler case won’t affect mineral leasing in other states because the rules on ownership are unique to each state, Joy said in an interview.
Pennsylvania has attracted some of the biggest oil-andgas operators in the country, including Chesapeake Energy Corp. and Range Resources Corp. Chesapeake has leased 1.78 million acres in the Marcellus Shale, an area larger than Delaware, according to data compiled by Bloomberg.
“Given the way the court has phrased the issue in the order granting review, it’s not even entirely clear that it will squarely address the rule,” Fine said, referring to the state high court.
“If the Supreme Court were to revisit the Dunham Rule and modify it in any meaningful way, it would have the potential to cause significant chaos in the oil and gas industry in Pennsylvania,” Fine said.