A case pending before the Supreme Court of Pennsylvania considers a question that seemingly has been settled in that state for 130 years: Is gas a mineral? 

In Butler v. Charles Powers Estate, Pennsylvania’s highest court will consider whether rights to natural gas produced from the Marcellus shale should qualify as “mineral” rights under an 1881 deed. The deed at issue contained an exception reserving “one half the minerals and Petroleum Oils to said Charles Powers and his heirs and assigns forever…”

In 2009, the owners of the surface estate filed a complaint to quiet title to the property, including the minerals and petroleum oils. The heirs to Powers’ estate opposed the action and sought a declaratory judgment that the reservation rights in the deed’s exception included Marcellus shale gas. The trial court dismissed the heirs’ declaratory judgment action with prejudice, holding that the heirs failed to state a cognizable cause of action based upon two Pennsylvania Supreme Court decisions — Dunham v. Kirkpatrick, 101 Pa. 36 (1882), and Highland v. Commonwealth, 400 Pa. 261, 161 A.2d 390 (1960).

Dunham established the following rule regarding deed reservations and exceptions reserving minerals: If a deed contains a reservation or exception of “minerals” without any specific mention of natural gas or oil, then there is a rebuttable presumption that the word “minerals” was not intended to include natural gas or oil. In Highland, the Pennsylvania Supreme Court ruled that that presumption can only be rebutted if it is shown by “clear and convincing evidence” that the parties to the conveyance intended to include natural gas or oil within the word “minerals.”

In the Butler case, the trial court held that because the 1881 deed did not specifically mention a reservation of natural gas, natural gas was deemed not to have been reserved.

Powers’ heirs appealed, arguing that despite the Highland and Dunham decisions the trial court should have ruled that Charles Powers reserved a one half interest in the Marcellus shale gas under the property. The heirs made the following arguments, among others, in support of their position:

• That Marcellus shale is a “mineral” consistent with the deed’s exception because, under Pennsylvania law, a mineral is any inorganic object that can be removed from soil and used commercially.
• That the ordinary meaning of the word “mineral” in 1881 included natural gas and that the rule set forth in Dunham is inapplicable to the 1881 deed because it was decided a year after the deed was drafted.
• That Dunham and Highland are inapplicable because those cases dealt with conventional natural gas, and Marcellus shale gas is an unconventional gas.
• Finally, the heirs cited a 1983 Pennsylvania Supreme Court decision (U.S. Steel Corp. v. Hoge) addressing the rights to coalbed gas and argued that the court should apply the rule set out in that case to shale and hold that “whoever owns the shale owns the gas.”

The appellate court agreed with some of the heirs’ arguments and reversed the trial court’s decision. Specifically, the appellate court found that the Dunham and Highland decisions do not settle the questions (1) whether Marcellus shale constitutes a “mineral,” (2) whether Marcellus shale gas constitutes the type of conventional natural gas contemplated in Dunham and Highland, and (3) whether Marcellus shale is similar to coal in that whoever owns the shale owns the shale gas. The appellate court remanded the case to the trial court for further proceedings to allow the parties to obtain appropriate experts to address those questions.

The owners of the surface estate appealed the appellate court’s decision to the Pennsylvania Supreme Court, which accepted the appeal to determine whether the appellate court’s decision was erroneous. The Pennsylvania Supreme Court heard oral argument on the case in October 2012, but has not yet issued a decision.

Though a decision in favor of the heirs could effect a significant change in Pennsylvania law, it would bring Pennsylvania law in line with the longstanding law of many neighboring jurisdictions, including Ohio. [See, for example, Hardesty v. Harrison, 6 Law Abs. 445, 446 (Ohio 1928) (“[I]t is a well settled law that petroleum oil is a mineral and is a part of the realty, like coal, iron and copper. A grant without qualifying or limiting words of the minerals underlying certain real estate will include oil and gas.”); Sult v. A. Hochstetter Oil Co., 63 W. Va. 317, 325 (1908) (“Legally and scientifically, oil and gas are universally held to be minerals.”)].

But we think it is more likely that the Pennsylvania Supreme Court will avoid an overly broad decision that could create confusion within the Pennsylvania oil and gas industry that has relied upon the rules set out in Dunham and Highland for decades. If the Court rules in favor of the heirs of Charles Powell, we expect that it will limit the impact of its decision, perhaps by making its decision applicable only to deeds recorded before the 1882 Dunham decision.

Regardless of the Pennsylvania Supreme Court’s decision, the Butler case is an example of how changes in technology can present both new opportunities and unexpected challenges for the oil and gas industry.