The Oil and Gas Addendum

Since the 1890s, your family has owned a 150 acre farm in Washington County, Pennsylvania. In 2014, you and your siblings sign an oil and gas lease with a prominent driller. The language in the lease states that it covers “that certain tract of land consisting of 150 acres, more or less…” The lease also contains a peculiar clause stating that the signing bonus will be paid on “the net mineral acres” owned by your family. At the time, you and your siblings did not think much about these clauses as it was assumed the family owned the oil and gas rights under all 150 acres. About three months after signing the lease, you receive a letter from the driller, along with the signing bonus check. Much to your surprise, the check is much less than what you expected. The letter states that due to “competing ownership interests”, the actual net mineral interest owned by the family is approximately 139 acres. You are confused, frustrated and concerned. Who else could possibly own some of the oil and gas rights?

The letter informs you that Pennsylvania’s Department of Conservation and Natural Resources (DCNR) is asserting an ownership interest in the oil and gas formations under a shallow stream that meanders through the farm. The letter notes that the signing bonus (and future royalties) will be held in suspense until it is determined who actually owns the oil and gas under the stream. Your frustration and confusion now turns to anger. Can the DCNR actually own the oil and gas rights under the stream?

The short answer is, “Yes.” Many landowners across Pennsylvania are discovering that portions of their oil and gas holdings might actually be owned by DCNR. As detailed below, the presence of even small streams can create unique and challenging oil and gas title issues.

The Stream:

The stream flows in a southeasterly direction through the farm. The width of the stream varies from 30 feet to approximately 20 feet. It is no more than three feet deep and during the summer, the depth can be less than one foot in some areas. Over the years you have observed people kayaking and canoeing down the stream. Although you have seen people fishing in the stream, it is your understanding that the Pennsylvania Fish & Boat Commission does not stock the stream.

Whether the DCNR can claim ownership of the oil and gas formations underlying the stream will depend on whether the waterway is deemed “navigable” under Pennsylvania law. It is well-settled that title to land underlying navigable waterways is owned by the Commonwealth. See, Mountain Properties v. Tyler Hill, 767 A.2d 1096 (Pa. Super. 2001); see also, Delaware Ave LLC v. DCNR, 997 A.2d 1231 (Pa. Commw. 2010) (“[O]nce a body of water meets the navigability test, title to the bed is in the Commonwealth”). If the waterway is navigable, then the adjacent landowner’s ownership extends only to the low watermark. Conversely, the beds of non-navigable waterways are “owned by the property owners of the land along the waterways.” See, Lehigh Falls Fishing Club v. Andrejewski, 735 A.2d 718 (Pa. Super 1999). In such cases, the adjoining landowner’s ownership extends to the middle of the stream or, if he owns the land on both sides, then he owns the entire streambed. The navigability of a particular waterway can be established by falling into one of three distinct categories: i) being classified as a Great River, ii) navigability-at-law, or iii) navigability-in- fact.

In 1826, the Pennsylvania Supreme Court in Shrunk v. Schuylkill Navigation Company, 14 Serg & Rawle 71 (Pa. 1826) recognized nine principal or “great” rivers which the Court designated navigable as a matter of law. This characterization remains valid today. The nine principal rivers are the Ohio, the Monongahela, the Youghiogheny, the Allegheny, the Susquehanna, the Juniata, the Schuykill, the Lehigh, and the Delaware. Pennsylvania, unlike other jurisdictions, holds that a navigable waterway is considered navigable throughout its entire length regardless of intervening hydraulic conditions. See, Lehigh Falls Fishing Club, 735 A.2d at 722 (“once a river is held to be navigable, its entire length is encompassed…”). This broad rule means that even the shallow head-waters of one of the Great Rivers, as well as other segments of the rivers with obstructions or rapids, could be nonetheless deemed “navigable” in the legal sense.

The second category classifies those waterways that were specifically designated as a “public highway” by legislative act. In the late 1790s and early 1800s, the General Assembly often declared certain streams and rivers as public highways. Although these designations were made many years ago, if a waterway was deemed navigable by one of these acts, that designation remains valid today. See, Leaf v. Pennsylvania Company, 112 A. 243 (Pa. 1920) (“…but in this state the rule of title to low water make applies to rivers actually navigable or made so by legislature…”). In other words, a stream or creek that has not supported commercial traffic since the 1830s may still be characterized as a navigable waterway today if there is an official “Act of Assembly” previously designating that waterway as a highway.

The third category designates those waterways that are navigable by virtue of their historical use. To qualify under this category, the waterway must actually have been used as a “highway for commerce.” See, Lakeside Park Co. v. Forsmark, 153 A.2d 486 (Pa. 1959). The Lakeside court noted that the size of the waterway or its capacity to float a boat is not dispositive:

“[R]ather it should depend upon whether the water is used or usable as a broad highway for commerce and the transport in quantity of goods and people…”

Any historical commercial use, however brief, can satisfy this criterion. Many shallow streams and creeks in Pennsylvania fall within this category since they often supported one-way commercial traffic – the shallow draft wooden barges were floated down the waterway and then dismantled and sold as lumber at the mouth of the river. This one-way river traffic was quite common prior to the construction of the Pennsylvania railroad in 1850. Such streams and rivers, despite their shallow depth, were often the only viable transportation option in the early to mid-1800s. As such, when evaluating whether a particular waterway may be “navigable-in-fact” one must examine and research local newspaper accounts, census records and other contemporaneous historical records from the 1800s to ascertain how that particular waterway may have been used throughout its history.

Returning to our fact pattern, it is doubtful DCNR will prevail under the first criterion. The shallow stream is not one of the Great Rivers. However, the DCNR may try to argue that the stream itself is part of the “headwaters” of the Monongahela River and therefore entitled to automatic “navigability” status. This approach could be challenged under the rationale recently espoused by the United States Supreme Court in PPL Montana, LLC v. Montana, 132 S.Ct. 1215 (2012), which held a reviewing court should utilize a “segment-by-segment” approach when evaluating claims of navigability. The Supreme Court observed that “physical conditions that affect navigability often vary significantly over the length of a river.” Given the Supreme Court’s preference for a segment-by-segment analysis, it is doubtful that the DCNR could establish navigability of the stream merely as a headwater of one of the Great Rivers.

With respect to the second criterion, if there is an official Act of Assembly previously designating the stream as a public highway, that designation will remain effective and binding and the DCNR will own the oil and gas rights under the streambed. The critical issue, however, is whether the official Act of Assembly was enacted prior to the Commonwealth conveying the adjoining real estate to your heirs. The General Assembly cannot, by legislative action, make a non-navigable stream navigable after title to the land has passed from the Commonwealth to a private citizen. See, Commonwealth v. Foster, 36 Pa. Super. 433 (Pa. Super. 1908). Assuming the Commonwealth granted the adjacent lands to your heirs in 1805, the Act of Assembly must pre-date this conveyance in order to be binding. It does not matter if the Act of Assembly is from 1790 or 1802 – the legal effect of such a designation does not diminish over time. If the DCNR can produce an official, legislative act that pre-dates the original conveyance, the stream may be deemed navigable-at-law regardless of historical or current usage.

Finally, even if the DCNR cannot establish navigability under categories one or two, it may still own the underlying oil and gas rights if it can prove that the stream once supported actual commerce. Proving navigability under this criterion can be very fact intensive. The DCNR will have to proffer evidence that the stream, at one time, was actually used to move commerce. Current recreational use, such as kayaking or fishing, will not satisfy this test. See, Mountain Properties v. Tyler Hill Realty, 762 A.2d 1096 (Pa. Super. 2001). As noted, the DCNR can satisfy this test by demonstrating that shallow-draft, flat-bottom wooden barges were floated down the stream in the 1830s. Even if such river traffic ceased in the 1850s, the fact that the waterway once supported primitive commercial traffic will remain conclusive on the issue of navigability. Once a waterway is deemed navigable, it does not lose that status. Accordingly, if the DCNR can demonstrate such historical usage, the waterway is considered navigable and the DCNR may own the oil and gas formations under the entire stream, regardless of current usage.

There are hundreds of small streams and waterways located in Pennsylvania. Many of these streams may have once supported commercial river traffic. If so, the DCNR may have a legitimate claim to the underlying oil and gas formations. Nonetheless, there are a number of variables and factors that must be evaluated before a waterway can be deemed navigable. Given the complexity of this issue, it is highly recommended that any landowner receiving a letter from the DCNR asserting ownership of the streambed oil and gas should immediately consult with an experienced oil and gas attorney.