Pennsylvania Appellate Court Opinion Injects Uncertainty in Marcellus Shale Gas Ownership (Free Download)

On Sept. 7, 2011, the Pennsylvania Superior Court issued an opinion in Butler v. Charles Powers Estate, 2011 PA Super 198, 2011 Pa. Super. LEXIS 2710 (Pa. Super. Ct. 2011), that creates uncertainty for developers and gas/mineral owners alike (Click here to download the opinion in Butler v. Charles Powers Estate / enhanced version available to lexis.com subscribers).

In addressing a claim that an exception and reservation of one-half the minerals and petroleum oils included natural gas, the court reviewed Pennsylvania's "Dunham Rule," which was established in Dunham v. Kirkpatrick, 101 Pa. 36, 12 Week. Notes Cas. 217 (1882) [enhanced version available to lexis.com subscribers], and which provides that a rebuttable presumption exists that the word "minerals" does not include natural gas or oil. The court also reviewed the expansion of the rule in Highland v. Commonwealth, 400 Pa. 261, 161 A.2d 390 (1960), cert. denied, 364 U.S. 901, 81 S. Ct. 234, 5 L. Ed. 2d 194 (1960) [enhanced version]. The claimants in Butler attempted to distinguish Dunham and Highland on the basis that those cases dealt with conventional gas reservoirs, which involve "ferae naturae," or free flowing "wild" gas, while Marcellus shale contains unconventional gas reservoirs. Based on the differing recovery techniques, the claimants argued that the Dunham Rule does not apply to Marcellus Shale gas.

The claimants also relied on U.S. Steel Corp. v. Hoge, 503 Pa. 140, 468 A.2d 1380 (1983) [enhanced version], to support their argument that "whoever owns the shale, owns the gas." In Hoge, the Court stated that the gas present in coal belongs to the owner of the coal, and the coal bed gas that migrates into surrounding property belongs to owner of the surrounding property.  The claimants' position was that Marcellus shale is similar to coal in that both contain natural gas that can be extracted by hydrofracturing.

After noting that Pennsylvania has yet to determine whether shale is analogous to coal in this context (and that at least one other jurisdiction has found similarities between the two substances in this context - in Cimarron Oil Corp. v. Howard Energy Corp., 909 N.E.2d 1115 (Ind. App. 2009) [enhanced version / unenhanced version available from lexisONE Free Case Law], the court remanded the case to the trial court to develop the record as to whether (1) Marcellus shale constitutes a "mineral"; (2) Marcellus shale gas constitutes the type of conventional natural gas contemplated in Dunham and Highland; and (3) Marcellus shale is similar to coal to the extent that whoever owns the shale, owns the shale gas.

What this means to the industry in the meantime is anyone's guess. Development has been occurring and royalties have been paid to the natural gas owners in Pennsylvania since 2009, and further development is in process. I would be interested to know what other energy practitioners think about this opinion and how it will impact the industry.

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