On April 24, 2013, the Pennsylvania Supreme Court reversed a court of appeals decision that had garnered much attention and raised uncertainty regarding ownership rights to natural gas in the Marcellus shale formation. The supreme court’s ruling in Butler v. Charles Powers Estate reinstated the trial court’s order finding that a deed’s reservation of mineral rights did not include natural gas. The decision reinforces long-standing Pennsylvania law that a reservation or grant of minerals does not include oil or natural gas unless such reservation or grant is expressly stated or unless clear and convincing parol evidence demonstrates the parties’ intent to include oil or natural gas in the general reservation or grant.

The deed in question, recorded in 1881, reserved to the Charles Powers Estate “minerals and Petroleum Oils.” Successors to the Estate sought a declaratory judgment that the reservation included the rights to shale gas. The trial court dismissed the claim, reasoning that ever since the Pennsylvania Supreme Court’s 1882 decision in Dunham v. Kirkpatrick, the law in Pennsylvania has been that a reservation of “all minerals” does not constitute a reservation of oil or natural gas.

The court of appeals, however, questioned whether the Estate was correct in arguing that shale was a “mineral” reserved by the deed and whether shale gas should be treated like coalbed gas, which generally belongs to the owner of the coal rights according to the Pennsylvania Supreme Court’s decision in U.S. Steel Corp. v. Hoge (Hoge II). The court of appeals therefore reversed the trial court’s order and remanded the case to allow the parties to submit expert testimony on topics including whether Marcellus shale constitutes a “mineral” and whether Marcellus shale is similar to coal to the extent that whoever owns the shale owns the shale gas.

Reversing the court of appeals, the Pennsylvania Supreme Court held that the Dunham rule governed the dispute and that the deed’s reservation of “all minerals” did not include natural gas. After examining the history of the Dunham rule, the court explained that for nearly 177 years Pennsylvania courts have defined the term “minerals” in property conveyances and reservations to mean substances of a metallic nature, as was the historical common understanding of the term. Thus, although oil and natural gas are scientifically “minerals” because they are neither animals nor plants, they are not considered minerals for the purposes of a deed reservation under Pennsylvania law. The Butler court emphasized that the policy considerations of predictability and certainty in property law counseled in favor of deferring to the long-standing Dunham rule.

The supreme court held that the Hoge II case involving coalbed gas was not controlling and rejected the argument that because the natural gas is contained within the Marcellus shale, the owner of the shale owns the gas. The court concluded that Hoge II neither expressly addressed nor implicitly abrogated the Dunham rule. Among other reasons, the court distinguished the deed reservation in Hoge II as concerning the right to ventilate coalbed gas, which was extremely dangerous and volatile in nature and not commercially viable at the time the deed reservation in Hoge II was executed. The court also reasoned that Hoge II made a legal distinction between coalbed gas and natural gas because it upheld the landowner’s right to drill through the coal seam to obtain natural gas, even though the landowner did not retain rights to coalbed gas. The questions raised by the Butler court of appeals concerning whether shale is a mineral and who owns the shale therefore were irrelevant to determining whether the deed reservation included natural gas.

Accordingly, the Pennsylvania Supreme Court reaffirmed the rule that natural gas is not included in a deed reservation or grant without either: (1) natural gas being explicitly contemplated within the reservation or grant; or (2) clear and convincing parol evidence that the parties intended for natural gas to be included within the deed reservation or grant, despite only a general reservation or grant of minerals. Because neither existed, the court held that the trial court correctly concluded that Marcellus shale gas was not included in the deed reservation.

The case is Butler v. Charles Powers Estate, No. 27 MAP 2012, --- A.3d ----, 2013 WL 1749828 (Pa. Apr. 24, 2013). A copy of the Pennsylvania Supreme Court’s opinion can be found here.