Oct. 16 (Bloomberg) -- A property deed fight over Marcellus Shale natural-gas rights that may threaten thousands of drilling leases could be decided by Pennsylvania’s top court based on what was considered a mineral more than a century ago.
The Pennsylvania Supreme Court heard arguments from lawyers for a couple who are challenging an intermediate appeals court ruling that puts into question how deeds transferring ownership in subsurface rights are worded.
The case might mark the first time in more than five decades that the court will address a 130-year-old rule, known as the Dunham Rule, governing land transfers of oil and gas rights. The rule serves as a foundation for many Marcellus Shale leases.
“One hundred years ago, shale was a useless rock that had no economic value,” Justice J. Michael Eakin said during today’s hearing in Pittsburgh while question a lawyer for the landowners. “If people 100 years ago thought it was a mineral, would it be considered relevant?”
Gregory Krock, an attorney for John and Mary Josephine Butler, replied, “No expert can testify as to whether someone would know if people knew the value of shale.”
Pennsylvania has attracted some of the biggest oil-and-gas 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.
Since 2009, more than 5,000 wells have been drilled in Pennsylvania’s portion of the Marcellus Shale, which stretches from New York to West Virginia. The formation may contain 141 trillion cubic feet of gas, enough to meet U.S. demand for about six years, according to the Energy Department.
“A lot of people care about what happens here,” said David Fine, a Harrisburg, Pennsylvania-based attorney at K&L Gates LLP who represents oil and gas companies with leasing interests in the state. “If the court decides this in one of the many ways it could, it could cause chaos for no good reason.”
In the past decade, energy companies have learned how to recover oil and gas from the Marcellus Shale and similar fields using hydraulic fracturing, or fracking, a process that breaks up the rock using water, sand and chemicals.
At issue is an 1881 deed governing 244 acres in the Apolacon Township of Susquehanna County in the northeastern part of the state along the New York border. The deed, drawn by Charles Powers, transferred to his heirs half the oil and mineral rights for the land, which can be separated from surface rights under Pennsylvania law.
The Butlers sued in 2010 to claim the gas under their land, arguing 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 claimed they own the rights to half of the gas because Marcellus gas, which is trapped in rock, should be considered a mineral and part of the rights explicitly transferred.
A lower court sided with the Butlers in 2010, relying on previous rulings that established ownership of oil or gas doesn’t change hands unless specified in a deed. In September 2011, the state’s Superior Court reversed the trial court’s decision, ruling that state law governing the issue isn’t clear and expert scientific testimony was needed to determine whether shale gas is in fact a mineral.
That evidence is “irrelevant in determining what ordinary people intended to include in the term ‘mineral’ when they negotiated their deed,” Krock and Thomas Meagher, another attorney for the Butlers, said in written arguments filed in the case.
“The very foundation of the Dunham presumption is that ordinary people don’t use the word mineral in the scientific sense,” Krock told the six-justice panel during today’s hearing. Minerals in the 1800s wouldn’t have included anything other than metallic substances to ordinary people, he said.
The Dunham Rule, which stems 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. The Powers deed mentions only petroleum oils and minerals. There is no mention of gas, according to court documents.
Attorneys for William and Craig Pritchard, the Powers heirs, argued that the rule should not apply in this case because the deed was written a year before the Dunham decision. The reservation language included in the Powers deed is also more inclusive than language used in the case underlying the Dunham rule, the Pritchards’ attorney Laurence Kelly wrote in court papers filed in the case.
“We’re dealing with a 35-word exception in this case,” Kelly argued today. “We’re not taking the Dunham case head on.”
The Dunham case recognized that clay, rock and sand constitute minerals, Kelly said.
“Gas by its nature is going to flow free to the ozone if it’s not encapsulated in the earth,” Justice Max Baer replied. “Because you own what’s holding it there doesn’t mean you own the gas.”
The court should seek to ascertain not what the parties may have intended by the language but what is the meaning of the words they used, Kelly said.
If the court were to say that Dunham is no longer appropriate, “do we just turn the whole world upside down?” Baer asked. Pennsylvania stands alone among the 50 states in its reliance on the Dunham Rule to interpret land transfers of subsurface rights, Baer said.
“Pennsylvania is certainly in the minority but the rule has been in place so long and the people in the industry know it,” Krock replied.
The case is Butler v. Charles Powers Estate, 27 MAP 2012, Supreme Court of Pennsylvania, Middle District (Harrisburg).
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