The Oil and Gas Addendum

On April 24, 2013, the Pennsylvania Supreme Court issued its much anticipated decision in Butler v. Charles Powers Estate (“Butler II”). At issue in Butler II was whether a reservation of “minerals” in an 1881 deed included the Marcellus Shale gas. For more than 130 years, Pennsylvania law had long recognized that such a reservation did not include the oil and gas formations.1 However, the 2011 decision of the Pennsylvania Superior Court in Butler suggested that the Marcellus Shale gas should be treated differently. See, Butler v. Charles Powers Estate, 29 A.3d 35 (Pa.Super. 2011) (“Butler I”). In Butler I, the Superior Court implied that since the Marcellus Shale is, in essence, a rock formation it should be treated as a “mineral” just like coal, iron and limestone. Relying on Pennsylvania’s treatment of coalbed gas as precedent, the Superior Court further opined in Butler I that a reservation of “minerals” in a deed may possibly include the underlying shale formations and the natural gas trapped within the shale. Not so, said the Supreme Court. In Butler II, the Pennsylvania Supreme Court re-affirmed the long-standing principle of Pennsylvania law that a reservation of “minerals” in a deed does not include the oil and gas. The Butler II panel stated that:

“[W]e hold that the Superior Court erred in ordering the remand, and further that Marcellus Shale natural gas cannot, consistent with the Dunham’s Rule, be considered a mineral for private deed purposes.”

See, Butler v. Charles Powers Estate (p. 21, J-118-2012). The Supreme Court expressly rejected the analogy of coalbed gas. Since the early 1980s, Pennsylvania law has recognized that the owner of a coal seam owns the coalbed gas trapped within the seam. This rule was adopted by the Pennsylvania Supreme Court in the United States Steel v. Hoge, 468 A.2d 1380 (Pa. 1983). In considering which party possessed the right to the coalbed gas, the Hoge court noted “as a general rule, subterranean gas is owned by whoever has title to the property in which the gas is resting…” Hoge, 408 A.2d at 1283. The Hoge court further observed that “such gas as is present in coal must necessarily belong to the owner of the coal…” Id. In the Butler I decision, the Pennsylvania Superior Court was persuaded by this reasoning and suggested that the logic of Hoge should apply to the Marcellus Shale formation and the gas contained within the shale.

On appeal, the Pennsylvania Supreme Court in Butler II distinguished the rationale of Hoge on several grounds. First, the Supreme Court noted that the mineral reservation at issue in Hoge concerned specific coal rights and the related right of ventilation. Commercial exploitation of coalbed gas is “very limited and sporadic” because it is generally viewed as a dangerous waste product of coal mining. As such, it had to be vented from coal seams to allow the coal to be safely mined. As these issues are not present in connection with the extraction of hydrocarbons from the Marcellus Shale, the Supreme Court concluded that the Superior Court’s reliance on Hoge in Butler I was therefore misplaced.

Second, the Supreme Court noted that the Hoge panel inherently recognized a “legal distinction” between coalbed gas and the natural gas found in other non-coalseam horizons. Given this historical distinction, the Supreme Court in Butler II concluded that the Hoge decision was, and is, limited to coalbed gas and cannot be read as broadly as the Superior Court did in Butler I. The Supreme Court found “no reason” to apply Hoge and held that:

“[W]e therefore find no merit in any contention that because Marcellus Shale natural gas is contained within shale rock, regardless of whether shale rock is or is not a mineral, such consequentially renders the natural gas a mineral…”

See, Butler v. Charles Powers Estate (p. 24, J-118-2012). By rejecting Hoge and reversing the Superior Court’s Butler I decision, the Supreme Court re-affirmed Dunham’s Rule as controlling law in Pennsylvania.

Under Dunham’s Rule, a reservation of “minerals” in a deed will not include the oil and gas unless there is “clear and convincing evidence” that the parties intended to include such hydrocarbons. “[T]he rule in Pennsylvania is that natural gas and oil simply are not minerals because they are not of a metallic nature…” See, Butler v. Charles Powers Estate (p. 21, J-118-2012). Most states, unlike Pennsylvania, include oil and gas in a mineral reservation. However, as Justice Baer noted in the 6-0 majority opinion in Butler II, Dunham’s Rule has “formed the bedrock for innumerable private, real property transactions for nearly two centuries.” Given this longstanding history, the panel in Butler II was reluctant to overturn this well-established principle of Pennsylvania law and invalidate hundreds, if not thousands, of Marcellus Shale leases.

1 The rule in Pennsylvania that the term “minerals” includes only metallic substances is known as Dunham’s Rule and is derived from the 1882 decision of the Pennsylvania Supreme Court in Dunham v. Kirkpatrick, 101 Pa. 36 (Pa. 1882)