Posted by Dale A. Tice on April 04, 2012

Update: Dunham's Rule and Unconventional Marcellus Shale Gas

By Attorney Dale A. Tice

In an earlier post on this blog I discussed a very significant decision from the Pennsylvania Superior Court in Butler v. Charles Powers Estate, 29 A.3d 35 (2011). A more in-depth analysis of the case written by this Author appeared in the March/April edition of The Pennsylvania Lawyer, a magazine published by the Pennsylvania Bar Association as a service to its members and the legal profession at large.  A copy of the article, Opening Pandora's Box? Calling Shale Gas Rights into Question, can be found here.

The uncertainty generated by the Superior Court decision will hopefully be resolved as the Pennsylvania Supreme Court has now granted the Butlers' Petition for Allowance of Appeal in the case. The issue that the court will review, as stated by the petitioners, is:

In interpreting a deed reservation for “minerals,” whether the Superior Court  erred  in  remanding  the  case  for  the  introduction  of  scientific and historic evidence about the Marcellus shale and the natural gas contained  therein,  despite  the  fact  that  the  Supreme  Court  of Pennsylvania  has  held  (1)  a  rebuttable  presumption  exists  that parties intend the term “minerals” to include only metallic substances, and (2) only the parties’ intent can rebut the presumption to include non-metallic substances.

The Order granting the Petition for Allowance of Appeal may be viewed here.

This case has generated tremendous interest among the oil and gas attorneys in the Commonwealth and has even been reported in the mainstream-media nationally. We will continue to follow developments in this case and post updates here at the Marcellus Shale Law Monitor – stay tuned.

 

Posted by Dale A. Tice on September 12, 2011

Dunham's Rule and Unconventional Marcellus Shale Gas

Pennsylvania case law includes an old rule of law known as “Dunham’s Rule” that was articulated by the Pennsylvania Supreme Court in the 1882 case Dunham v. Kirkpatrick. The rule provides that an exception or reservation of minerals in a deed, without any specific mention of oil and natural gas, creates a rebuttable presumption that the word “minerals” does not include oil or natural gas.

This has been a well-settled rule of law in Pennsylvania for many years.

Last week, the Pennsylvania Superior Court issued a decision that now questions whether Dunham’s rule applies to the Marcellus shale. This is an important decision that will be followed closely by oil and gas attorneys, real estate attorneys and title companies. The decision may prove to be most significant, however, for the oil and gas companies that have signed gas leases based on the presumption that an exception and reservation of minerals in a deed does not include oil and gas – and for the landowners subject to those leases.

In Butler v. Powers the Superior Court reversed a decision by the lower court that had applied Dunham’s rule in an action for declaratory judgment asking the court to interpret a deed that included an exception and reservation of one half of the minerals to the grantor. The text of the decision can be found here.

The Superior Court focused on the distinction between free-flowing gas - “fere naturae” - and natural gas trapped in an unconventional reservoir such as the Marcellus shale. The court analogized the process to obtain gas from an unconventional reservoir to that used to produce gas from a coal vein, noting that the owner of the coal also owns the coal bed gas contained in the coal. The court stated that application of Dunham’s rule did not end the analysis in this case, “absent a more sufficient understanding” of the following issues:

1. Whether Marcellus shale constitutes a mineral;

2. Whether Marcellus shale gas constitutes the type of conventional natural gas contemplated in the  Dunham case and following decisions; and

3. Whether Marcellus shale is similar to coal in that whoever owns the shale, owns the shale gas.

The court concluded that the “parties should have the opportunity to obtain appropriate experts on whether Marcellus shale constitutes a type of mineral such that the gas in it falls within the deed’s reservation.” The case was reversed and remanded for further proceedings.

We will continue to follow the developments in this case as it proceeds - stay tuned.

Posted by Dale A. Tice on September 02, 2011

Eminent Domain for Pennsylvania Pipelines?

Anyone who has recently travelled to Towanda is aware that the gas companies are actively drilling in the Marcellus. According to the Penn State Marcellus Center for Outreach and Research, over 3,400 Marcellus gas wells have been drilled in Pennsylvania through August 1, 2011. The PA Department of Environmental protection reports that natural gas production from the state has increased by 60% in the first half of 2011.

Along with increased natural gas production comes an increased need for gas pipelines. Landowners throughout the Marcellus region of Pennsylvania have been approached with pipeline right-of-way agreements, as the midstream companies work to increase takeaway capacity. The gas companies’ need for pipelines places the landowner in a good position to negotiate. And unless the landowner has already given the gas company a right-of-way under the terms of an oil and gas lease, the landowner has the ultimate right to say no to the pipeline.

That may be changing here in the Commonwealth in the near future. The Pennsylvania Public Utility Commission has recently denied two petitions for reconsideration of its June 14, 2010, order which found that pipeline company Laser Northeast Gathering is a public utility. This is very relevant because if Laser Northeast is granted a certificate of public convenience, the company will have eminent domain powers as a public utility.

There are some pipeline companies that have eminent domain authority today. Transmission lines that transport gas from the natural gas producing regions to the consumer are regulated by the Federal Energy Regulatory Commission and classified as public utilities. In contrast, gathering lines that move natural gas from the wellhead to the transmission lines have typically not been considered as serving the public need and thus not been granted the power of eminent domain.

In the PUC order denying the petitions for reconsideration, a request for clarification of the previous order was granted. The clarification consists of a 4-part test that was used to determine whether the proposed pipeline qualified as a public utility service:

-       Laser will be transporting or conveying natural or artificial gas by pipeline or conduit for compensation. 

-       Laser will serve any and all potential customers needing to move gas through the pipeline system.  

-       Laser intends to utilize negotiated contracts to secure customers; contracts are not meant to be exclusionary, but rather to establish technical requirements, delivery points, and other terms and conditions of service. 

-       Laser has made a commitment to expand its capacity, as needed, to meet increased customer demand.

As noted by another respected Commentator, attorney Elizabeth U. Witmer of Saul Ewing, this is an extremely broad test that appears to rely entirely on the stated intent of the applicant. Despite the vigorous dissent from Commissioner James H. Cawley, it seems likely Laser Northeast Gathering will ultimately be granted a certificate of public convenience. Presumably the same broad test will be used in evaluating the two other pipeline cases currently pending before the PUC.

Even if the gathering pipeline companies are granted eminent domain authority, it may be hoped that it will be utilized only as a last resort after negotiations break down. However, landowners will be in a poorer position to negotiate and will no longer have the final say regarding placement of a pipeline on their land, with the gathering companies holding the eminent domain trump card.

 

 

Posted by Dale A. Tice on July 01, 2011

New York DEC Recommends Lifting Ban on Hydraulic Fracturing

The New York Department of Environmental Conservation has issued a series of new recommendations after completing a scientific review of the process of hydraulic fracturing. The controversial report concludes that hydrofracking should be permitted under specific circumstances, as follows:

-       High-volume fracturing would be prohibited in the New York City and Syracuse watersheds, including a buffer zone;

-       Drilling would be prohibited within primary aquifers and within 500 feet of their boundaries;

-       Surface drilling would be prohibited on state-owned land including parks, forest areas and wildlife management areas;

-       High-volume fracturing will be permitted on privately held lands under rigorous and effective controls.

The full report is to be issued today – July 1, 2011.

The public outcry was promptly jump-started by the New York Times with the headline “Cuomo Will Seek to Lift Ban on Hydraulic Fracturing.” 

Politics aside, this is big news for the citizens of New York generally and for New York mineral owners in particular. Prior to the fracking ban, many landowners in the Southern Tier of New York had signed oil and gas leases in anticipation of natural gas royalties. As a result of the moratorium, many of those leases have been extended beyond the initial primary term under the Force Majeure clause found in most gas leases.

A Force Majeure provision will extend an oil and gas lease when the gas company cannot fulfill its contractual obligations due to some “greater force” that could not be reasonably anticipated. Whether the Force Majeure extensions are valid may be decided in the litigation filed by some New York landowners challenging the actions of the gas companies involved.

If the New York fracking ban is lifted, the primary term of the leases that have been extended will begin to run. This means that the gas companies will have to begin drilling on the properties in order to prevent the leases from terminating.

Lifting the moratorium in New York would also impact landowners in Pennsylvania. If the operators are forced to move drill rigs to New York to hold leases, it seems likely that rate of drilling in Pennsylvania may decrease.

Of course, the gas companies have to drill to hold leases in Pennsylvania, too. So, the operators may be faced with the dilemma of holding more expiring leases with fewer drilling rigs. Perhaps the ultimate impact on Pennsylvania landowners will be larger production units to hold more acreage, with smaller royalty checks as the interests of the individual landowners in the unit are diluted.