Land & Renewables Connection

A company in New York is attempting to secure leases to allow it to produce oil and gas and to use the leased land for a carbon dioxide injection program for long-term storage. Does this herald a new type of development that Pennsylvania landowners could expect to see or is it just an attempt to skirt New York’s prohibition on hydraulic fracturing?

The Marcellus formation gets its name from outcroppings in Marcellus, New York. Despite this, New York has not seen shale gas development of any real scale because hydraulic fracturing techniques have not been allowed. Now, Southern Tier CO2>Clean Energy Solutions (“Southern Tier”), proposes to secure lease rights that would allegedly generate both production royalty payments and carbon sequestration payments.

According to its website, Southern Tier “intend[s] to directionally drill horizontal wells and produce natural gas from the Marcellus and Utica shales using carbon dioxide as a replacement for water in the well drilling and stimulation process.” By using carbon dioxide instead of water, Southern Tier offers a way to get around New York’s prohibition on hydraulic fracturing. Southern Tier also proposes that “[t]he carbon dioxide used in the drilling and completion process, in addition to the carbon dioxide periodically injected for reservoir pressure management, will enhance natural gas production and become, over time, trapped in the pore space or absorbed into the shale matrix.” Southern Tier suggests that its lease would pay property owners for oil and gas production royalties and for carbon sequestration.

Injecting carbon dioxide into the ground as part of oil and gas development is nothing new. Oil and gas drillers have used carbon dioxide injections as part of “enhanced oil recovery” operations for years. The value of carbon dioxide in enhanced oil recovery operations is its ability to mix with oil in the formation and its pore spaces, pressurizing and moving the oil so that it can flow to the surface. Injecting carbon dioxide to extract natural gas from shale gas formations has also been studied and shown theoretical promise, though it has not been used on a wide scale. If carbon dioxide is used to stimulate shale gas production instead of hydraulic fracturing, then the carbon dioxide remains in the subterranean pore space instead of water.

Injecting carbon dioxide to stimulate shale formations and to dispose of that carbon dioxide poses interesting questions about subsurface ownership that will almost certainly arise in Pennsylvania. The contours of the legal issues that may be faced in Pennsylvania are not set, but will likely revolve around pore space ownership, the accommodation doctrine, and the developer’s intent in the project.

The foundation of the inquiry rests on the fact that “Pennsylvania law recognizes three discrete estates in land: the surface estate, the mineral estate, and the right to subjacent (surface) support. [. . .] Because these estates are severable, different owners may hold title to separate and distinct estates in the same land.” Hetrick v. Apollo Gas Co., 608 A.2d 1074, 1077 (Pa. Super. Ct. 1992). In general, it seems that if the surface has been severed from subsurface rights in Pennsylvania, the owners of subsurface rights own the oil, gas, coal or mineral molecules but not the subterranean pore space where those oil, gas, coal or mineral molecules are located. See, Chartiers Block Coal Co. v. Mellon, 25 A. 597, 598–99 (Pa. 1893) (“Practically considered, the grant of the coal is the grant of a right to remove it. This right is sometimes limited in point of time; in others it is without limit. In either event, it is the grant of an estate determinable upon the removal of the coal”); Snyder Brothers, Inc.. v. Peoples Natural Gas Company, 676 A.2d 1226, 1230 (Pa. Super. Ct. 1996) (an oil and gas lease is “. . . sale of an estate in fee simple until all the available minerals are removed”). As we have written before, the owner of the surface estate in Pennsylvania likely owns the pore space that remains after subsurface minerals are extracted. So, if oil and gas is removed, the subsurface pore space that the oil and gas occupied would likely be owned by the surface owner.

When substances are injected into the subsurface to stimulate oil and gas, the rights of both the oil and gas owner and the pore space owner are impacted. The “accommodation doctrine” controls the duties of different estate owners in a piece of property. In Chartiers, the Pennsylvania Supreme Court explained that:

Each of the separate layers or strata becomes a subject of taxation, of incumbrance, levy, and sale, precisely like the surface. As against the owner of the surface, each of the several purchasers would have the right, without any express words of grant for that purpose, to go upon the surface to open a way by shaft, or drift, or well, to his underlying estate, and to occupy so much of the surface beyond the limits of his shaft, drift, or well, as might be necessary to operate his estate, and to remove the product thereof. This is a right to be exercised with due regard to the owner of the surface, and its exercise will be restrained within proper limits by a court of equity, if this becomes necessary; but, subject to this limitation, it is a right growing out of the contract of sale, the position of the stratum sold, and the impossibility of reaching it in any other manner.

Chartiers Block Coal Co., 25 A. at 598. Nearly a century later, the Pennsylvania Supreme Court confirmed that the right to develop subsurface rights includes hydraulic fracturing, stating that “[h]ence, the coal owner may mine his coal, extract the gas from it, or both. If he chooses to extract the gas, drilling as well as hydrofracturing are available means, so long as their utilization does not impinge upon the rights of owners of the surrounding property, since the damage to coal inflicted by these processes is within his dominion to inflict.” U.S. Steel Corp. v. Hoge, 468 A.2d 1380, 1384 (Pa. 1983).

From this background, there is no dispute that an oil and gas owner (including the lessee) generally has the right to inject substances into the subsurface to stimulate the production of the oil and gas. In general, the right to inject substances into the ground to stimulate production should not be dependent or contingent on whether water or another substance is injected to stimulate production, as long as it is commercially reasonable. But, if an operator uses carbon dioxide injection to stimulate oil and gas development and that carbon dioxide remains in the pore space, the accommodation doctrine may be implicated and the surface owner (who owns the pore space) may be entitled to the carbon sequestration payments instead of those payments being made to the oil and gas owner.

But, if an operator undertakes carbon dioxide injection for the principal purpose of carbon sequestration, with stimulation of oil and gas production being ancillary to that primary purpose, it is questionable if a lease secured only from an oil and gas owner could allow for this carbon dioxide injection. While both stimulation and sequestration would involve carbon dioxide injection, the legal distinction may be the purpose of the carbon dioxide injection and the purpose of the usage of the subsurface pore space.

Regardless of whether Southern Tier’s plan gets off the ground, its proposal raises interesting questions about the intersection of oil and gas development with carbon capture and storage in subsurface pore space. It puts a new wrinkle on the age-old questions of precedence in property rights and the obligations of property owners to accommodate other owners’ development plans. If you have been approached by a company seeking an oil and gas lease or a company seeking to secure carbon capture and storage rights, contact attorney Brendan A. O’Donnell at odonnellba@hh-law.com or 412-288-2226.