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LEGAL UPDATE: The Pennsylvania Superior Court issued a decision that reverberated through the natural gas industry

By: T.H. Lyda, Esq. and Jeffery D. Roberts, Esq.

September 7, 2011 – The Pennsylvania Superior Court issued a decision that reverberated through the natural gas industry by putting long standing precedent, as well as thousands of gas leases, in doubt. The court issued its decision in Butler v. Charles Powers Estate. The case involves a deed recorded in 1881 in which the grantor, Charles Powers, conveyed 244 acres of land in Apolacon Township, but reserved “one half the minerals and Petroleum Oils” for himself and his heirs. The Butlers, who own the land, filed a complaint to quiet title in the natural gas naming the defendants as Charles Powers’ estate, and the estate’s heirs and assigns. The heirs of Mr. Powers filed for a declaratory judgment, arguing that they owned the natural gas by virtue of the reservation of minerals in the deed. The Butlers responded by filing preliminary objections, claiming that reservation of minerals did not include the natural gas. The Butlers relied on the “Dunham Rule,” which developed from the Pennsylvania Supreme Court’s opinion in Dunam v. Kirkpatrick, 101 Pa. 36 (1882) and can be stated as:

[I]f, in connection with a conveyance of land, there is a reservation or an exception of “minerals” without any specific mention of natural gas or oil, a presumption, rebuttable in nature, arises that the word “minerals” was not intended by the parties to include natural gas or oil.

Highland v. Commonwealth, 400 Pa. 261, 276-77 (1960). The trial court agreed with the Butlers and granted their preliminary objections, holding that the Dunham Rule controlled the issue because the reservation did not specifically include natural gas. The heirs of Charles Powers appealed to the Superior Court.

On appeal, the heirs of Charles Powers argued that: 1) Marcellus shale is a mineral consistent with the reservation of rights in the deed; 2) Marcellus gas is different from free flowing wild conventional gas; and 3) similar to coal bed methane gas where the owner of the coal owns the gas, the owner of the shale owns the Marcellus gas. The Superior Court found merit in these arguments, and reversed the trial court’s decision and remanded the case for further proceedings to determine whether: 1) Marcellus shale constitutes a “mineral”; 2) shale gas constitutes the type of natural gas contemplated by the Dunham Rule; and 3) Marcellus shale is similar to coal to the extent that whoever owns the shale, owns the shale gas.

If it is ultimately decided that Marcellus shale constitutes a mineral, dozens of energy companies could lose the right to drill for shale gas.