PA Supreme Court Decides Shale Mineral Rights Case

Fortunately, the PA Supreme Court ruled to keep the Dunham rule in place. Drillers and landowners can breathe a sigh of relief.

Published on: Apr 30, 2013

Last week, Pennsylvania Supreme Court settled a Marcellus natural gas rights dispute that's been in lower courts since 2011.

In Butler v Powers, the court justices took up the issue of whether or not natural gas rights should be part of the broader concept of "mineral rights" in PA. In most states when a deed or lease agreement is signed for mineral rights it includes natural gas as well, on the theory that the gas comes from a mineral—shale rock. But that has not been the case in PA. Going all the way back to a case in 1882, PA has had "the Dunham rule" which separates natural gas rights from the broader concept of mineral rights.

In brief, that rule says natural gas, for the purposes of deeds, contracts and leases, is not a mineral right. If you want to sell or convey the rights to natural gas under your property in PA, you have to specifically state "natural gas" in a deed, lease or contract. One family (the Butlers) sued the heirs of another family (the Powers) claiming the gas under their property was all theirs. In 1881 (one year before the Dunham rule) the Butler forebear deeded half of the mineral rights under the property to the forebear of the Powers family. Powers' descendants are now claiming natural gas as part of the original deal. But the Butlers maintain because "natural gas" was not specifically mentioned, the gas rights were not part of the deal, according to the Dunham rule.

PA Supreme Court Decides Shale Mineral Rights Case
PA Supreme Court Decides Shale Mineral Rights Case

A Susquehanna County court agreed with the Butlers. It's plain by any reading of the law: the Butlers are correct—natural gas rights were not conveyed if you use the standard set up by the Dunham rule. But on appeal, the PA Superior Court disagreed with the lower court saying the case should be reconsidered apart from the Dunham rule—in essence challenging the Dunham rule itself. Most other states consider natural gas to be part and parcel of "mineral rights" and PA Superior Court thinks its high time PA do the same (see this MDN story for more background).

A case filed several years ago in Susquehanna County, PA sought to overturn the Dunham rule and join gas and mineral rights back together, which would have been disastrous for thousands of lease and royalty agreements already in place. Dissolving the Dunham rule would have "changed the rules of the game" long after the game had started and likely would have thrown the drilling industry in PA into chaos–stopping drilling activity until agreements could be renegotiated and/or litigated. A real mess.

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Fortunately, the PA Supreme Court ruled to keep the Dunham rule in place. Drillers and landowners can breathe a sigh of relief…

Long-standing case law on the ownership of below-ground minerals and natural gas that has guided the booming natural gas industry since it began exploring the vast Marcellus Shale formation is still in force, Pennsylvania's Supreme Court ruled Wednesday.

The case raised legal questions about whether natural gas trapped in the thick shale is somehow different than natural gas in different formations, and had the potential to up end some of the leases between property owners and the natural gas industry.

But the court sided unanimously with a Susquehanna County couple in ruling that legal precedent going back at least 130 years "remains viable and controlling."

The Supreme Court's review was prompted by the lower Superior Court's action in 2011 that suggested that perhaps the precedent set in an 1882 case, Dunham v. Kirkpatrick, could not be used to separate mineral rights from gas rights in instances involving the Marcellus Shale.

But the Supreme Court soundly rejected that view, saying that natural gas is not a mineral, regardless of what it is trapped in or what method is used to extract it from the ground.

"In our view, neither the Superior Court nor appellees have provided any justification for overruling or limiting the Dunham Rule and its long-standing progeny that have formed the bedrock for innumerable private, real property transactions for nearly two centuries," the court wrote.

The case stems from a dispute between John E. and Mary Josephine Butler and a man named Charles Powers and his heirs.

The deed for the Butler's 244 acres in Apolacon Township split "minerals and petroleum oils" between the parties in a land deal that originated in 1881. Natural gas rights were not mentioned, so all of the gas should still belong to the property, the Butlers contended. A Susquehanna County judge agreed, citing the Dunham rule.

But Powers' heirs appealed, and a Superior Court panel said it could not say with certainty that Powers' heirs have no claim to the gas. Rather, it said, expert testimony helped decide whether the Marcellus Shale is a mineral and whether the gas it holds falls within the deed, prompting the Butlers to seek Supreme Court review.*

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Information courtesy of Marcellus Drilling News