Bubbling up through the state courts in Pennsylvania is a legal dispute with huge implications for the ongoing natural gas boom in that state. Hanging in the balance is the validity of hundreds (if not thousands) of leases entered into by gas companies under the assumption that included in the lease rights is the ability to extract Marcellus shale gas.
Almost 130 years ago the Pennsylvania Supreme Court created what has become a rebuttable presumption that the right to extract “minerals” under a typical lease between private parties does not include the right to extract “oil” or “natural gas” absent specific contrary intent. This has been coined the “Dunham Rule,” after the 1882 case Dunham v. Kirkpatrick, 101 Pa. 36 (1882), and since 1960 has been an established rule of state property law. The controversy created by the instant case, Butler v. Charles Powers Estate, surrounds whether the term “minerals and Petroleum Oils” conveys an interest in unconventional Marcellus shale gas.
The lower court resolutely said no, relying on Dunham’s Rule. On September 7th, however, the Pennsylvania Superior Court, reversed this decision and remanded the case to determine three threshold questions: (1) whether Marcellus shale constitutes a “mineral”; (2) whether Marcellus shale gas constitutes the type of conventional natural gas excluded by Dunham; and (3) whether Marcellus shale gas is similar to coal-bed methane such that the owner of the shale would also own the shale gas (analogous to U.S. Steel Corp. v. Hoge, 503 Pa. 140 (1983), which held the owner of the coal also owns the coal-bed methane). The Superior Court agreed with many of the arguments advanced in favor of an interpretation that “minerals and Petroleum Oils” would include shale gas. And the court’s remand leans in favor of a positive outcome for gas companies. However, the Butler case has injected significant uncertainty into Pennsylvania property law.
The Butler case, of course, comes during an unprecedented boom in leasing and drilling for unconventional gas in the Pennsylvania portion of the Marcellus. And this boom has been and is being fueled by aggressive lease buying by Chesapeake and others. The ability to extract unconventional shale gas turns on the right to do so, which is governed by the terms of the conveyances attached to often lengthy and complicated chains of title. The challenge for the courts will be to preserve a longstanding rule of property law (which thousands of conveyances depend on), while recognizing that unconventional shale gas is a different animal from conventional oil and gas, and might require new common law (or at least new interpretations of old law). The challenge for the companies will be to ferret out problem leases, and ensure that new leases soundly convey the right to extract shale gas. Given the potential economic ramifications and reverberations for drilling in Pennsylvania, all eyes will be on the Butler case.