The Butler Decision and Its Implications
September 30, 2011
Is the Marcellus shale that underlies a significant part of western and central Pennsylvania itself a “mineral”? Is Marcellus shale gas the type of natural gas contemplated in prior Pennsylvania case law, or something different? Is the Marcellus shale similar to coal, so that whoever owns the shale owns the gas that is embedded in that shale?
In reversing and remanding the decision by the Susquehanna County Court of Common Pleas, a three judge panel of the Pennsylvania Superior Court asked, but did not answer, those questions of first impression. The lower court had based its decision on case law, dating back to 1882, relating to the interpretation of reservations of “minerals” and whether or not oil and gas are included in the reservations. The decision has set off a bit of a fire storm among commentators, and it has injected concern about what might possibly happen, and when, in the high stakes world of Marcellus shale gas ownership, control, extraction and sale.
The case, John E. and Mary Josephine Butler v. Charles Powers Estate, et al, William H. Pritchard and Craig l. Pritchard, 1795 MDA 2010 (Pa. Super., September 7, 2011), involves a reservation in an 1881 Deed of “one-half of the minerals and Petroleum Oils” under a 244 acre parcel in Apolacon Township, Susquehanna County. The Butlers acquired title to the 244 acre tract, subject to the reservation that was originally set forth in a Deed, recorded October 25, 1881, from the Estate of Charles Powers to the Butlers' predecessor in title. In July, 2009, the Butlers brought a quiet title action, claiming ownership of all minerals and petroleum oils underlying the property by adverse possession. Based upon the relevant chain of Pennsylvania cases on the topic over the last 130 years, the Butlers believed that they owned 100% of the Marcellus shale underlying the property, as well as the gas embedded in it, because the reservation by the Charles Powers Estate did not include any reference to “gas” or “natural gas.” Over the course of the proceedings, the heirs of the Estate of the long-deceased Charles Powers became aware of the action and came forward to file a Declaratory Judgment action, challenging the claim of adverse possession, and also requesting that the Court declare that the reservation of one-half of the “minerals” included one-half of the now-valuable gas within the Marcellus shale.
Pennsylvania’s “Dunham Rule” originated in the Supreme Court’s Opinion in Dunham and Shortt v. Kirkpatrick, 101 Pa. 36 (1882), where the Court began with the recognition that prior cases found “minerals” to be things “of a metallic nature, such as gold, silver, copper, lead [etc]” (Dunham, 101 Pa. 36 at 39). The rule that followed is most clearly stated in the Supreme Court’s Highland v. Commonwealth of Pennsylvania, 161 A.2d 390 (Pa. 1960) decision: “In Dunham, the Court enunciated a rule of construction of the word ‘minerals’ to be applied when determining the inclusion therein or the exclusion therefrom of natural gas or oil.... [i]f, in connection with the conveyance of land, there is a reservation or an exception of ‘minerals’ without any specific mention of natural gas or oil, a presumption, rebuttable in nature, arises that the word ‘minerals’ was not intended by the parties to include natural gas or oil.” Highland, 161 A.2d 390 at 398. The Court eliminated any distinction between whether the language appears in a reservation or a grant, and then stated that ‘[t]o rebut the presumption... that natural gas or oil is not included within the word ‘minerals’ there must be clear and convincing evidence that the parties to the conveyance intended to include natural gas or oil within such word.” Highland, 161 A.2d 390 at 399. Further, the Highland Court stated that the rule had been in effect for decades, that its application has formed the basis to many titles to land, and that it had become a rule of property law that was not to be disturbed or overthrown “except for compelling reasons of public policy or the imperative demands of justice.” Highland, 161 A.2d 390 at 399.
U.S. Steel Corporation v. Hoge, 468 A.2d 1380 (Pa. 1983), involved a dispute between the owner of a coal seam and the lessee under a gas lease. In Hoge, the Pennsylvania Supreme Court stated that natural gas, while capable of migrating, is owned by whoever has title to the property in which the gas is resting, then ruled that coalbed methane trapped in the coal seam is therefore owned by, and under the control of, the owner of that seam until that gas migrates on its own to the property of another. Coal mining operations typically vent the gas in order to reduce the danger of explosion or inhalation, but the Court also explained that hydrofracturing is a method that is available to capture the gas from the relatively impermeable coal seam.
In Butler, Pennsylvania’s intermediate appeals Court respectfully refused at this point in the proceedings to uphold the trial court’s grant of Preliminary Objections in favor of the Butlers, a decision that was based on the long established Dunham rule, and that would have ended the matter in favor of the land owners. The heirs of Charles Powers asserted that the reservation in question predated the Dunham rule and, therefore, the parties could not have anticipated that the Pennsylvania Supreme Court would impose an interpretation that would lead to a finding that gas and oil are presumed not to be included within the legal definition of “minerals,” absent compelling evidence of an intent that they be included. They also drew a distinction between “conventional” and “unconventional” gas – the conventional being that which is of a free flowing or “wild” nature, and the unconventional being that which is trapped in coal, as in Hoge, and in the Marcellus shale.
The Superior Court sent the case back to the trial court so that “the parties should have the opportunity to obtain appropriate experts on whether Marcellus shale constitutes a type of mineral such that the gas in it falls within the deed’s reservation.” (Butler, 1795 MDA 2010 at p. 15). The Superior Court ruling in Butler has understandably caused immediate concern in the oil and gas industry. What will happen to oil and gas titles if the Dunham rule is revised, weakened or overturned? Or if the Marcellus shale is ruled to be a “mineral” under the Dunham/Highland line of cases? Or if it is determined that the distinction between “conventional” and “unconventional” natural gas is a legal one, and that the gas within the Marcellus shale is found to be “unconventional”? Or if the Marcellus shale is ruled to be like coal, independent of the gas that is found in both formations, and even if it is not mined as is coal, so that safety concerns regarding coalbed methane that protect coal miners are extended to the Marcellus shale?
The next step in this case – be it at the trial court or before another appellate court panel – certainly requires the attention and involvement of the oil and gas industry. The industry should also consider seeking a potential legislative solution to the possible confusion about a most basic element of the industry – who owns the rights to the gas to be extracted – that is implicated in this case. Despite the inevitable complications involved in getting the legislature and Governor to pass and sign such a legislative “fix,” given the procedural posture of Butler, the legislative process may prove faster, and may provide more certainty to the issue by confirming that the rules the industry and landowners have abided by for 130 years remain intact.