Expert Blog

On Wednesday, April 24, 2013 the Pennsylvania Supreme Court issued its long-awaited decision in the case of Butler v. Charles Powers Estate, No. 27 MAP 2012.

The Butler decision answers the question whether natural gas trapped within an unconventional shale formation in Pennsylvania belongs to the owner of the oil and gas estate or the owner of the mineral estate. Pennsylvania Courts have long held that gas is not a mineral; a reservation of “minerals” in a deed is not a reservation of “gas.” This is known in Pennsylvania as the “Dunham Rule” from the case Dunham v. Kirkpatrick, 101 Pa. 36 (1882).

An exception to the Dunham rule was created for coal-bed methane in the Pennsylvania Supreme Court’s decision in United States Steel Corporation v. Hoge, 468 A. 2d 1380 (1983)(“Hoge II“). There the coal owner (U.S. Steel) objected to the hyrdo-fracking of its coal seams by the owner of the gas estate to produce coal-bed methane; i.e. methane trapped within the coal seam. The Hoge II Court concluded that coal-bed methane belonged to the owner of the coal.

In Butler the owner of the mineral estate asserted ownership to natural gas trapped in the Marcellus shale, relying on Hoge II and arguing that the Marcellus shale is itself a mineral such that gas trapped within the shale belonged to the owner of the mineral estate. The Butler Court distinguished and discredited Hoge II and reaffirmed Dunham and its progeny, concluding that gas is (still) not a mineral in Pennsylvania.

The Butler decision should provide the shale gas industry with the predictability and certainty it craves, and hopefully will end any chilling effect that the litigation has had to date on continued or increased leasing activity within the Commonwealth.

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Bud Shuffstall

A cemetery association may be able to increase its income by entering into a shale gas lease. However, several special issues arise if it does.  For example, the cemetery association may not be able to permit any surface activity anywhere on its premises; however, an oil and gas lease with a surface non-disturbance clause may be available to allow for the development of shale gas resources deep below the surface.  Further, under PA law, an oil and gas lease is construed as a sale of an interest in real estate.  As such, the cemetery association management should be prepared to set aside 10% of any bonus and subsequent royalty income to its Permanent Custodian Fund. The remaining income may be endowed and part thereof committed to operations as the Board shall determine. For further details, please consult your legal counsel.

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Christopher A. Junker

Many landowners ask themselves this important question before signing an oil and gas lease. Landowners who own only the surface of their property are very disappointed to find out that they will receive no bonus or royalties from oil and gas production activities on their land. So, how can you tell whether or not you own the oil and gas rights?

The only way to properly answer this question is to obtain a title opinion from a qualified attorney with oil and gas experience. The attorney will obtain a full abstract of the oil and gas chain back to at least August 1859 (the date of Drake’s well and the date of the earliest severances of the oil and gas estates from the surface estate). The downside to this approach is the potential significant cost and delay associated with it. Oil and gas title searches are longer and more complex than regular surface title searches. Qualified oil and gas abstractors are in short supply and high demand. Full oil and gas title searches and title opinions from a qualified oil and gas attorney can take months to obtain and can cost thousands of dollars.

Moreover, this approach is somewhat duplicative. After leasing but before drilling, the oil and gas company will perform a full oil and gas title search (again, back to at least August 1859). Some companies will do some title work before offering a lease, but increasingly they wait until after a lease is signed before undertaking title examination; they often will offer a lease conditioned upon them obtaining an oil and gas title opinion showing clear title vested in the landowner.

Most landowners choose not to incur the significant expense (and delay) of duplicating the oil and gas company’s title work. Oil and gas companies generally do not rely on title work performed by on or behalf of the landowner and will perform their own title work, regardless of the results of any abstract, title search or opinion rendered on behalf of the landowner.

Things you should know:
1) Realize that deed language is not always determinative. Just because your deed doesn’t say anything about the oil and gas rights to your property, that doesn’t mean that you own your oil and gas rights. Title issues may exist from years ago which are not apparent on the face of your deed.

2) Be aware that, just because you had the “title” searched when you bought your property, in fact no one likely ever expressed an opinion regarding title to the oil and gas rights to your land. Standard title insurance policies and attorneys’ title certificates do NOT cover matters concerning oil and gas rights.

3) Realize that oil and gas rights could have been severed from the surface rights by conveyance (deed out) OR by reservation in the chain of title; prior severances may have occurred decades in the past, way outside of standard residential and commercial real estate abstract search periods.
Things you can do:
1) Engage the services of a qualified attorney to answer their oil and gas related legal questions. There simply is no substitute for the opinion of a qualified professional in this regard.

2) Before signing a lease, review with your attorney the effect of the warranty provisions of the lease on title issues and defects. Consult with your attorney regarding the relative benefit to you, the landowner, of providing a special (as opposed to general) warranty of title in the lease, and the need to address these issues concerning title defects and curative work.

3) Look at your deed. Does it have language indicating that oil and gas rights have been excepted or reserved from the conveyance? If so it is a red flag suggesting you may not own your oil and gas rights – consult your attorney.

Some landowners who have reason to suspect that they may not own the oil and gas rights to their property hire an attorney to order an oil and gas title abstract and render an opinion. If you don’t, other interested parties (for example, the oil and gas company, your neighbors, or other speculators) may identify the prior severance and seek to acquire the rights out from under you.

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Bud Shuffstall