Pennsylvania High Court Takes Appeal on Marcellus Gas Rights

Photographer: Roy Morsch/Corbis

A natural gas test well in Starlight, Pennsylvania, U.S. in 2010. Close

A natural gas test well in Starlight, Pennsylvania, U.S. in 2010.

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Photographer: Roy Morsch/Corbis

A natural gas test well in Starlight, Pennsylvania, U.S. in 2010.

The Pennsylvania Supreme Court agreed to hear an appeal of a dispute over Marcellus Shale natural-gas rights that could affect thousands of drilling leases in the state.

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 Supreme Court. In the trial court, the Butlers won their claim to the natural gas rights.

Oral argument before the Supreme Court is probably months away, Greg Krock, an attorney for the Butlers, said today in a phone interview. The court denied a request from the Pennsylvania Independent Oil & Gas Association to file papers in support of the appeal.

“The case introduces a tremendous amount of uncertainty into mineral rights in Pennsylvania,” said Michael Joy, an attorney with Reed Smith LLP (1157L) 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 rights for the land, which can be separated from surface rights under Pennsylvania law.

Dunham Rule

Under an 1882 state Supreme Court decision known as the Dunham Rule, surface owners like the Butlers are assumed to own oil and gas under their land unless some other arrangement has been made, said David Fine, a Harrisburg, Pennsylvania-based attorney at K&L Gates LLP (1142L).

The Butlers filed suit in 2010 to claim the gas under their land.

They argued that Powers failed to include the word gas in separating subsurface rights on his former property, giving 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.

Half the Gas

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 the state’s 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 ruling.

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.

The case has garnered national attention because Pennsylvania has attracted some of the biggest oil-and-gas operators in the country, including Chesapeake Energy Corp. (CHK) and Range Resources Corp. (RRC) Chesapeake has leased 1.78 million acres in the Marcellus Shale, according to Bloomberg data, an area larger than Delaware.

Significant Cases

The high court since 2009 has taken at least four significant cases that deal with Pennsylvania’s portion of the Marcellus shale, Fine said. This case could mark the first time the court will deal with the Dunham Rule in more than five decades, he said.

“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.

“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. “People in Pennsylvania have understood that this is the way you wrote deeds since the 1880s.”

The Marcellus Shale is a dense rock formation that stretches from New York to West Virginia and may hold as much as 141 trillion cubic feet of gas, according to data compiled by Bloomberg. In the last decade, energy companies have learned how to recover oil and gas from the Marcellus and similar fields using hydraulic fracturing, or fracking, a process that breaks up the rock using water, sand and chemicals.

Drilling in Pennsylvania’s portion of the Marcellus Shale formation could mean $20 billion to the state’s economy by 2020, from $13 billion last year, according to an industry-funded study published by researchers from Pennsylvania State University in State College.

The case is Butler v. Charles Powers Estate, 760 MAL 2011, Supreme Court of Pennsylvania Middle District (Harrisburg).

To contact the reporters on this story: Sophia Pearson in Philadelphia at spearson3@bloomberg.net; Mike Lee in Dallas at mlee326@bloomberg.net

To contact the editor responsible for this story: Michael Hytha at mhytha@bloomberg.net

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