The Oil and Gas Addendum

Landowners May Face Difficult Burden Regarding Intermingled Gas

A recent opinion issued by the Pennsylvania Superior Court may place a difficult burden on landowners confronted with a subsurface trespass and the unauthorized intermingling of gas.

In Kennedy v. Consol Energy, 2015 PA Super 93 (April 22, 2015), Earl Kennedy and several other oil and gas interest holders brought an action to quiet title to coalbed methane gas and for trespass, conversion, unjust enrichment and replevin against the owner and operator of the coal seam, Consol Energy Inc. and CNX Gas Co., respectively, referred to collectively as Consol.

There were several key issues before the Kennedy court:

First, a dispute arose among the parties as to the ownership rights to coalbed methane gas, which was present in the coal itself. The Kennedys owned the oil and gas rights under a 790-acre tract of land in Greene County. Consol owned the Pittsburgh coal seam under the tract by way of a 1932 deed. At issue was whether rights to coalbed methane gas were included within the Kennedys’ oil and gas rights or Consol’s coal rights. Consol had been drilling wells and extracting the coalbed methane gas from underneath the tract for several years prior to the court hearing the matter.

Not surprisingly, “coalbed methane gas” was never expressly referenced in any instrument appearing in the chain of title. This particular type of gas was not marketable at the time of the 1932 deed and was thought to be a nuisance, as it had to be ventilated during the coal-mining process to prevent explosion or inhalation. The only gas referenced in the oil and gas reservation contained in the 1932 deed was natural gas. In ruling in favor of Consol, the panel relied upon the 1983 Supreme Court decision of U.S. Steel v. Hoge, which held that when a coal severance deed is silent as to coalbed methane gas, the right to the gas lies with the owner of the coal. Therefore, Consol, as owner of the relevant coalbed seam, owned the coalbed methane gas.

Another critical issue addressed in the kennedy decision was whether Consol’s act of drilling through adjacent strata, other than the Pittsburgh seam, which was specifically conveyed in the deed, for the purpose of ventilating and carrying away the coalbed methane gas was a trespass. The court held Consol’s activity was not a trespass because express language contained in the deed created a right-of-way that permitted Consol to enter adjacent strata in such a manner considered to be “proper and necessary for the advantageous and economical operation … in the digging, mining, ventilating, draining and carrying away of said coal.” Despite the Kennedys’ arguments to the contrary, the fact that the coalbed methane gas became a profitable enterprise, which likely was not contemplated at the time of the conveyance, was of no consequence.

Next, the Kennedys alleged that Consol had wrongfully converted their gas. The Kennedys argued that Consol committed a subsurface trespass during the degasification of the Pittsburgh coal seam. In essence, the Kennedys contended that Consol took their gas without any lease being in place. In support of this claim, the Kennedys introduced evidence that there was gas immediately above and below the Pittsburgh coal seam that likely migrated through the artificially created cavities created during Consol’s degasification operations. While the court agreed with the Kennedys’ version of the facts, it charged the Kennedys with the burden of proving the value of the converted gas.

The Kennedys argued that since Consol did not differentiate the source of the gas produced, it was impossible for them to measure how much gas was wrongfully “drained” by Consol’s operations. As a result, they could not accurately produce a value of the converted gas. Instead, the Kennedys contended that the court should apply the “confusion of goods” doctrine, which shifts the burden of establishing the value of the allegedly converted gas to Consol. The panel, however, opined that application of the confusion-of-goods doctrine is only appropriate when there is evidence of fraud or willful conduct. Given that the record was devoid of any such evidence, the court rejected the Kennedys’ argument and refused to apply the doctrine. “Thus, absent from the record is evidence of the type of fraudulent intermingling of gas that would trigger the confusion-of-goods doctrine,” the court held. As a result, the Superior Court may have now placed a nearly insurmountable burden on Pennsylvania landowners who may find themselves in a situation where their gas has been wrongfully intermingled by virtue of a subsurface trespass.

Confusion-of-Goods Doctrine

As stated in Kennedy, a plaintiff alleging a claim for conversion must offer evidence relative to the value of the converted good. In theory, a major purpose of the confusion-of-goods doctrine is to essentially shift that burden to the defendant when it has commingled goods to the extent that they can no longer be independently distinguished. If the defendant cannot carry the burden relative to being able to distinguish between the goods, it may be liable up to the aggregated value of all goods intermingled.

For over 100 years, Pennsylvania courts have defined the confusion-of-goods doctrine as the “willful and fraudulent intermixture of the chattels of the other, without the consent of the latter, in such a way that they cannot be separated or distinguished.” The Kennedy Decision seized on the “willful and fraudulent” language and has now created a heavy burden in the context of unauthorized horizontal drilling.

Pennsylvania courts previously recognized that the “willful and fraudulent” requirement could be satisfied by conduct that may traditionally be considered merely negligent.

For example, in Stone v. Marshall Oil, 57 A. 183, 186 (1904), defendant oil companies had commingled the plaintiff’s gas with gas from other nearby wells. The oil companies alleged that it was impossible to ascertain the quantity that was produced by a particular well under the circumstances. On appeal, the Pennsylvania Supreme Court rejected that defense, holding that the oil companies’ failure to keep an accounting was not an innocent error, but instead “a fixed purpose to secure for themselves the profits of [the plaintiff’s] lease.”

However, the Kennedy court distinguished the Stone case, stating that there was no evidence of any contractual duty on the part of Consol to account to the Kennedys, despite the fact that it appeared likely that it did, in fact, intermingle the gas. Moreover, the Kennedy court further distinguished Stone and other established case law, stating that the Kennedys failed to offer “evidence” of damages. The panel observed that “we concur with the trial court’s refusal to apply confusion of goods to remediate the Kennedys’ failure to establish an ascertainable loss.” The court’s opinion in regard to damages is difficult to comprehend given that the very purpose of the confusion-of-goods doctrine is to shift the burden in order to facilitate the damages calculation.

Unfortunately, this type of reasoning and narrow interpretation of the confusion-of-goods doctrine sends the wrong message. The Kennedy opinion suggests that an operator can commit a subsurface trespass and commingle gas and not have any burden to identify or differentiate the converted gas. A subsurface trespass can occur when an operator drills a horizontal well bore underneath an unleased parcel. Unless the landowner can offer evidence establishing that the operator drilled the unauthorized well bore in a fraudulent or willful manner, the confusion-of-goods doctrine will be inapplicable.

Horizontal well bores are often in excess of 5,000 feet long and typically pass underneath multiple parcels. Once the well bore goes into production and gas from other parcels is commingled with the alleged converted gas, how can the plaintiff-landowner calculate the value of the converted gas? Requiring evidence of fraud or willful trespass is unwarranted and does not reflect the unique characteristics of modern horizontal drilling.

Other oil and gas jurisdictions, such as Texas, appear to have a more pragmatic approach, which does not necessarily require willful or fraudulent conduct. Additionally, per the Texas Supreme Court, it is clear that once the plaintiff produces evidence showing that the goods were commingled, the burden is on the party commingling the goods to properly identify the share of each owner, given that it is possessed with superior knowledge of the events giving rise to the intermingling, as in Humble Oil & Refining v. West, 508 S.W.2d 812, 818 (Tex. 1974).

Moreover, the Texas Court of Appeals, in Browning Oil v. Luecke, 38 S.W.3d 625, 647 (Tex. App. 2000), held that an operator, when confronted with a claim of unauthorized pooling, must establish with “reasonable probability” the amount of well bore production that can be attributed to each individual tract. In other words, the operator must be able to calculate how much gas is produced from each section of the horizontal well bore. The Kennedy decision overlooks this issue.

The Kennedy decision represents a departure from the Texas rule by requiring evidence of fraud or willful trespass. This stringent standard will make it very difficult for landowners to succeed in an action where their gas has been wrongfully intermingled with other gas by virtue of an unauthorized well bore. As the body of law regarding horizontal drilling in Pennsylvania continues to evolve and develop, landowners can only hope that this decision is revisited and that a more pragmatic and realistic application of the confusion-of-goods doctrine is adopted.