Pennsylvania Dormant Oil and Gas Act

Pennsylvania Dormant Oil and Gas Act

A. Pennsylvania Dormant Oil and Gas Act Purposes and Standing
 
On July 11, 2006, the Pennsylvania legislature enacted the Dormant Oil and Gas Act, 58 P.S. § 701.1 et seq. The purpose of the Act is to permit the development of oil and gas reserves when all owners of oil or gas interests cannot be located or identified. The Act provides for the creation of a trust for the benefit of certain owners of interests in oil and gas, authorizes a trustee to enter into leases of interests in oil and gas under terms and conditions authorized by the court of common pleas, provides for the administration of the trust and for payment of moneys to the trustee, and imposes penalties for nonpayment. As stated in § 701.2, the purpose of the Act is “to facilitate the development of subsurface properties by reducing the problems caused by fragmented and unknown or unlocatable ownership of oil and gas interests and to protect the interests of unknown or unlocatable owners of oil and gas. It is not the purpose of this act to vest the surface owner with title to oil and gas interests that have been severed from the surface estate.” Although § 701.4 of the Act creates a trust mechanism to allow for royalties to be paid to a trustee, the Act limits standing to those who already have an interest in fee, by lease, as royalty, or by “ownership of correlative rights in an oil and gas reservoir.”
 
No cases interpreting the Act or its terms have been reported. While Pennsylvania courts have yet to address standing under the Act, it is unlikely that any judge would interpret the Act to allow a “grab” of oil or gas rights by a party who has no ownership rights in the estate sought. This is particularly so as the legislature expressly disavowed any intent to vest rights in the surface owner, and reason would dictate that the legislature would not have intended to prevent a surface owner from obtaining rights but to allow others to do so.
 
As to the breadth of the phrase “ownership of correlative rights in an oil and gas reservoir,” as intended by the framers of this legislation, the Act itself does not provide a definition. The only Pennsylvania authority that appears to define correlative rights is the Oil and Gas Conservation Law, which in 58 P.S. § 402(2) sets forth the following definition:
 
“CORRELATIVE RIGHTS” means the rights of each owner of oil and gas interests in a common pool or source of supply of oil or gas, to have a fair and reasonable opportunity to obtain and produce his just and equitable share of the oil and gas in such pool or sources of supply, without being required to drill unnecessary wells or incur other unnecessary expense to recover or receive such oil or gas or its equivalent.
 
The definition set forth in The Modern Dictionary for the Legal Profession, Third Edition, echoes this definition:
 
Right of property owners to extract their fair share of oil or gas from a common reservoir beneath their property. A fair share of oil or gas is the amount of recoverable oil or gas determined to be lying directly under the property owner’s land. Although the exact amount of oil or gas underlying a tract cannot be calculated, geographic data may be used to determine the amount within a fair degree of certainty.
 
Likewise, Kuntz, Law of Oil and Gas § 4.3 explains the concept of correlative rights in depth:
 
[A]lthough the term ‘’correlative rights’’ may be used loosely as a general reference to a great body of rights and duties arising between and among owners of mineral interests, it certainly does not conceal some mysterious and bewildering concept. It is a simple doctrine that owners of rights in a common source of supply may not inflict loss upon one another by conduct which is considered to be socially undesirable. The owners in the common source of supply operate in a special community and the social acceptability of conduct within such community must be determined, not only by applying the standards applicable to conduct generally, but by also considering the utility of the conduct in the light of its peculiar consequence to others operating in the same community. The term ‘’correlative rights’’ has been defined as follows:
 
‘’’Correlative rights’ is a convenient term for indicating that each owner of land in a common source of supply of oil and gas has legal privileges as against other owners of land therein to take oil and gas therefrom by lawful operations conducted on his own land, limited, however, by duties to other owners not to injure the source of supply and by duties not to take an undue proportion of the oil and gas.’’
 
A general recognition of correlative rights and the remedies available to protect those rights is also contained in the following statement:
 
‘’We think that a correct interpretation of the jurisprudence hereinabove cited is that a landowner is not entitled to recover damages from the owner or lessee of adjoining lands on the ground that oil and gas have been drained from beneath his property by wells located on the adjacent tract, unless it is established that the oil or gas withdrawn from the common reservoir has been wasted, that the waste was caused by the negligence of defendant or by his willful intent to injure plaintiff, and that the quantity of oil and gas withdrawn from beneath plaintiff’s property can be measured or that the damages sustained by plaintiff can be ascertained with some degree of certainty.’’
 
Thus, although “correlative rights” is not defined by the Act, in its traditional sense, the phrase relates to situations in which a pool of gas or oil extends to other properties adjacent to the property at issue, and it dictates that the rights of owners of the larger pool are to be respected and addresses the issues of waste, spoilage, and fair opportunity. Consequently, the Act can be said to confer standing to those owners of oil or gas rights who are interested in pursuing development of their own rights, which development will impact the ownership rights of another adjacent oil or gas owner, who cannot be identified or located.
 
            The Act may also be interpreted to confer standing on owners of rights in the corresponding hydrocarbon (e.g., oil v. gas), if the development of one mineral right will necessarily impact the other right. However, the legislative history of the Dormant Oil and Gas Act summarizes the Act and indicates its intent as follows:
 
Authorizes any person who owns a property interest in oil and gas underlying a tract of land to petition the court of common pleas to establish a trust for the benefit of all unlocatable owners of the same estate.
 
 Requires the petitioner to show the court that a diligent effort has been made to locate all owners, that the effort was unsuccessful and that the appointment of a trustee will be in the best interest of all owners of the oil and gas estate.
 
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Oil and gas property interests are governed by property and contract law. Without proper leases from all owners, oil and gas producers can become liable to missing or unknown owners for their share of the value of oil and gas produced from the land, not just for the royalty value. For this reason, producers will not develop oil and gas resources if they are unable to acquire legal title to the entire estate. This legislation establishes new law to deal with the problem of unlocatable owners of oil and gas interests.
 
Moreover, the purpose of the Act is delineated in 58 P.S. § 701.2:
 
The purpose of this act is to facilitate the development of subsurface properties by reducing the problems caused by fragmented and unknown or unlocatable ownership of oil and gas interests and to protect the interests of unknown or unlocatable owners of oil and gas.
 
The language of both the Act itself and the legislative history obfuscates the intent by the consistent use of the conjunction “and” rather than “or” and the use of “the estate” in the singular when referring to oil and gas rights. While the Act may be vague in establishing standing to petition pursuant to the Act, the legislation clearly uses “ownership” and fragmentation as its polestar. By its use of the term “same estate,” the legislative history would appear to indicate that one who owns a particular interest, e.g., oil, can petition the court of common pleas to establish a trust for the benefit of unlocatable owners of the same estate, e.g., oil. A fair reading of the Act is that one can only petition to establish a trust for missing co-owners so that the present co-owner can proceed with exploitation of his rights.
 
However, instances may occur in which the development of oil rights may impact the owner of gas rights. Traditional notions of standing require that only one aggrieved can bring a suit for relief. Accordingly, if the development of one estate might impact the owner of the other, it may be argued that development of the “correlative rights” in the other estate will be stymied without the ability to establish a trust in favor of the unknown or unlocatable owners of the other. The stated intent of the Act is to facilitate development and to protect the interests of owners who cannot be found. It follows that an argument could be made that the intent was to recognize standing in those owners of the corresponding estate who wish to develop. It is possible, however, that the Act will be interpreted to confer standing only on one who jointly owns a particular estate with a missing heir or owner. What happens, then, if no one who has a current interest, whether correlative or fractional, can be found?
 
B. Non-DOGA Options for Development Where Owners Cannot be Located
 
In order to prevail in an action to quiet title, a plaintiff must establish title by a fair preponderance of the evidence. Moreover, plaintiff has the burden of proving a prima facie title, which proof is sufficient until a better title is shown in the adverse party. Moore v. Commonwealth, Dep’t of Environmental Resources, 129 Pa. Commw. 628, 566 A.2d 905 (1989). See also Proctor v. Sagamore Big Game Club, 166 F.Supp. 465 (1958) (holding that a plaintiff seeking to recover the possession of an estate in land must do so upon the strength of his own title, not upon the imperfections in the title of a defendant). Subsurface gas in place is an estate in land. F. H. Rockwell & Co. v. Warren County, 228 Pa. 430, 77 A. 665 (1910). Accordingly, pursuant to property law in Pennsylvania, where a party has no title at all to a severed mineral interest, he cannot quiet title to the same in himself. Thus, a quiet title action will not avail a surface owner or would-be developer who has no fractional or correlative interest in the oil and gas rights.
 
Pennsylvania law does provide a mechanism to prevent dormant mineral rights from being unexploited, however. Pursuant to the Inalienable Property chapter of the Probate, Estates and Fiduciary Code, the court of common pleas has power to authorize the sale of real property where the legal title is inalienable. See 20 Pa. C.S. § 8301. “In essence, alienation is the transfer of real property from one person to another. It follows that inalienation is the non-transferability of property, or property which cannot be transferred.” Rupert Estate, 11 Pa. D. & C.4th 538 (1990). The PEF Code appears to allow for the sale of the interest, the receipt of the Commonwealth of the proceeds of escheated property (see Links Estate, 319 Pa. 513; 180 A. 1 (1935)), and the subsequent exploitation of the mineral estate.
 
The predecessor to § 8301 was the Price Act of 1853, which was revised in 1917. In In re Conveyance of Land Belonging to Du Bois, 461 Pa. 161, 335 A.2d 352, 1975 Pa. LEXIS 745 (1975), the court explained the purpose of the Act as follows:
 
By its very nature, the Act was intended to facilitate the removal of encumbrances and to foster the alienability of land. … “Its [the Act’s] design is well expressed in the preamble of the act, to make real estate freely alienable and productive to the living owners thereof. Though not unmindful of the future, and of the duty owing to posterity, the special interests of society belong to the men of to-day, rather than to those of another generation. The intention of this law is manifestly to untie the cords which fetter the real estate of the Commonwealth, whether bound around it by the disabilities of persons. The limitations of contingent interests, or by restrictions to limited uses and purposes, and at the same time to preserve to every interest its proper share in the result. The law being beneficient and remedial, is not to be so construed as to defeat its main intent. Such has been the expression of opinion by this court in its favor: Smith v. Townsend, 8 Casey 444 [434]; Gilmore v. Rodgers, 5 Wright [120] 128.” (Emphasis in original) Burton’s Appeal, 57 Pa. 213, 219 (1868).
 
In re Conveyance of Land Belonging to Du Bois, 461 Pa. at 174.
 
All jurisdiction conferred by this chapter of the PEF Code is to be exercised on the petition of any party in interest, upon such terms and upon such security and after such notice as the court directs by general rule or special order. 20 Pa.C.S. § 8304.
 
The Act would appear to be applicable to oil and gas interests and would appear to be the only mechanism by which to revive dormant mineral rights where no owner of that estate can be found. If the mineral rights are clearly held by parties whose whereabouts are unknown and whose heirs are unascertainable, no one has standing to file an action to quiet title. Consequently, the mineral rights have become inalienable. As the policy of the Commonwealth is to avoid inalienation, an action pursuant to the Inalienable Property chapter appears to be appropriate. Although the Act itself does not define who a “party in interest” is, a potential purchaser of the rights would appear to have standing to petition the court for a judicial, public sale of the mineral rights. The proceedings would then follow the requirements for a judicial sale.
 
The obvious drawback to filing a petition for the sale of the oil and gas interests is that the petitioner may incur the expense of the proceeding, only to fail to obtain the property by being outbid by another interested developer.
 
C. Filing under the Dormant Oil and Gas Act
 
With regard to the mechanics of an action under the Act, the Act provides as follows:
 
(a) GENERAL RULE.—Any person who owns an interest in oil and gas underlying a tract of land may petition the appropriate division of the court of common pleas of the county in which the tract or any portion of the tract is located to declare a trust in favor of all unknown owners of an interest in the oil and gas underlying the tract whose identity, present residence or present address is unknown and cannot be determined by diligent efforts….
 
 
 
Thus, the Act requires the filing of a petition in the name of the co-owner of the rights. In practice, this means that the operator will not file the petition, unless the operator has actually purchased the rights at some point. An operator who has already leased the rights may opt to pay the legal costs for prosecuting the action but name the co-owner of the rights as the petitioner.
 
            The Orphans’ Court has jurisdiction of DOGA actions pursuant to 20 Pa.C.S. § 711(11). Upon request in the DOGA petition, the court may order service by publication pursuant to Pa. R.C.P. 430(a):
 
If service cannot be made under the applicable rule the plaintiff may move the court for a special order directing the method of service. The motion shall be accompanied by an affidavit stating the nature and extent of the investigation which has been made to determine the whereabouts of the defendant and the reasons why service cannot be made.
 
Accordingly, to commence an action under the Act, a petition should be filed in the Orphans’ Court Division of the Court of Common Pleas, along with a request for service by publication setting forth all of the efforts to determine the whereabouts of the unknown or unlocatable owners/heirs.
 
D. Prosecution of a DOGA Petition
 
Once the court receives the Petition, the court will schedule a hearing, at which time the co-owner will testify that it is his desire to develop the oil/gas and to have the unlocatable heirs’ royalties placed into trust. An abstractor will be required to testify with regard to the efforts made to locate the heirs through searching courthouse records. An attorney may also advise the courts of additional efforts made to locate the heirs. The efforts must be exhaustive and mirror the requirements of Pa. R.C.P. 430(a).
 
A trustee will need to be identified to administer the trust. The trustee need not testify. Identifying a trustee who is willing to serve prior to hearing expedites the process. Pursuant to § 701.4, the trustee must be a financial institution authorized to do business in this Commonwealth, and upon appointment, the trustee may execute and deliver one or more oil or gas leases or other instruments on terms and conditions approved by the court.
 
Once the court hears the testimony, it will make a decision as to whether the interest should be placed in trust. The court may make its decision from the bench and will usually do so if the evidence is unequivocal. Once the trust is approved and the trustee is appointed, the lessee must submit the proposed lease or other instruments to the court after obtaining approval of the terms from the trustee. Once approval is obtained, the trustee may execute the lease, and the lessee may proceed. Pursuant to § 701.5, the lessee must pay all bonuses, rental payments, royalties and other income due to the unknown owner or owners to the trustee until the trust is terminated and notice of its termination given to all interested parties. If the unknown or unlocatable owners are not found, the trust proceeds escheat to the Commonwealth. From a practical standpoint, courts may be more inclined to approve a trust because 1) the lessee is not attempting to take the oil or gas interest itself but is acting in the interest of the owners by paying the monies into trust; and 2) the Commonwealth will likely gain possession of the funds as unclaimed property as the real owners will not be found.
 
Proceeding under DOGA provides benefits to developers in that § 701.6 restricts liability: Any lessee or other person who pays bonuses, rental payments, royalties and other income due to the unknown owners to the trustee shall not be liable for further claims by the unknown owners for any other income produced from the oil and gas interests subject to the trust. On the other hand, § 701.7 provides a penalty for noncompliance: Any person who fails to pay any bonuses, rental payments, royalties or other income due owners of interests in oil and gas who are unknown or cannot be found to the trustee within six months of the date of which those funds become due shall be liable for all attorney fees and court costs of collection, with interest to the date of payment. Accordingly, filing a DOGA petition is advisable any time co-owners of oil and gas interests cannot be found and development is desired.
 
E. Conclusion
 
The Dormant Oil and Gas Act establishes a method to insure that owners of oil and gas interests are not deprived of the opportunity to exploit their rights by the unfortunate inability to locate other owners of oil and gas rights. The Act is also intended to protect the rights of unascertainable or unlocatable heirs and owners of partial interests. Any operator that determines that some of the co-owners of an oil or gas interest cannot be located should proceed under the Act to create a trust for the interests of those owners in order to protect itself from liability.

Comments

Anonymous
Anonymous
  • 02-09-2012

can a gas lease be executed with equitible title