Gas drillers face ‘Chaos’ in land law ruling

A Pennsylvania appeals court ruling has raised questions about who can claim ownership of natural gas embedded in the Marcellus shale formation, potentially putting in doubt the legitimacy of thousands of drilling leases.

The state’s Superior Court said Pennsylvania law governing ownership of oil and gas rights isn’t clear and a lower-court judge should solicit expert opinions in a case pitting current landowners against the heirs to an 1881 deed.

“Dozens of energy companies have invested billions of dollars in leasing shale gas production rights in Pennsylvania,” Larry Nettles, an attorney with the Houston- based law firm Vinson & Elkins LLP, said in a telephone interview. “This opinion calls into question whether they have those rights.”

For more than a century, Pennsylvania has required landowners to consider oil and gas rights separate from more general “mineral rights” when transferring ownership of resources beneath the surface of their property. The defendants in the title dispute argued shale gas is different and should be considered part of the mineral rights because it is contained inside rock.

The Superior Court, the second-highest court in the state, ruled Sept. 7 that current law doesn’t sufficiently address whether “Marcellus shale constitutes a mineral,” the question that’s now to be hashed out by the lower court.

Wrong Owner?

Until the case is decided, oil and gas companies will face uncertainty about whether they’ve signed drilling leases with the right people, legal experts say. Owners of oil and gas rights who signed leases with gas producers could find that they don’t own the gas after all.

“If, somehow, shale gas is different, that would be a sea change in Pennsylvania law,” David Fine, a Harrisburg, Pennsylvania-based attorney for K&L Gates LLP, said yesterday in a telephone interview. “The issue is whether they’ve entered into a lease with someone and somebody else is going to find a problem with the title.”

The case may take as long as two years to wind through the courts, Fine said.

“There could be waves of litigation,” said Nettles, the Vinson & Elkins attorney, who predicted the opinion would be overturned or set aside.

Creating ‘Chaos’

Oil and gas companies may need to check the title to thousands of oil and gas properties they’ve leased, said David Poole, general counsel of Range Resources Corp. (RRC) Range, based in Fort Worth, Texas, drilled one of the first Marcellus wells in 2004 and has leased 1.2 million acres in Pennsylvania. Poole said the Pennsylvania legislature may have to act if the courts don’t clear up the question.

“If the courts keep changing the rules in a property law area, it creates chaos,” Poole said in an interview.

The gas industry, which has leased millions of acres in the state to drill wells, is monitoring progress of the case through Pennsylvania’s courts, Kathryn Z. Klaber, president of the Marcellus Shale Coalition, a 200-company group that includes producers Royal Dutch Shell Plc (RDSA), Statoil ASA (STL), and Chevron Corp. (CVX), said in an e-mailed statement yesterday.

An 1881 deed for 244 acres in Susquehanna County is at the heart of the lawsuit. The deed transferred “half the minerals and petroleum oils” under the land to Charles Powers, whose heirs say that entitles them to half of the gas. The current landowners, John E. and Mary Josephine Butler, say they own all the gas because the deed transferring minerals to Powers’s heirs failed to mention gas.

Lower Court Ruling

A lower court sided with the Butlers, relying on previous rulings that established ownership of oil or gas doesn’t change hands unless it’s specified in a deed. Powers’s heirs argued in court that the deed gave them the right to other minerals such as coal — and that they own the gas trapped in the shale the same way they would own the gas trapped in a coal seam.

John Butler, 73, a retired dairy farmer and land surveyor, said in an interview that he is discussing with his attorney whether to appeal the Superior Court decision to the state Supreme Court. Michael John Giangrieco, a Montrose, Pennsylvania-based attorney representing the Butlers, wasn’t available for comment yesterday, according to his office.

Laurence M. Kelly, a Montrose, Pennsylvania, attorney for the Powers’s heirs, didn’t immediately return a telephone message seeking comment on the case.

The effect of the case “is only uncertainty,” Russell L. Schetroma, a Meadville, Pennsylvania-based attorney for Steptoe & Johnson LLP wrote in a Sept. 16 note on the firm’s web site.

Supreme Court Petition

One option would be for a trade association or gas producer to petition the Pennsylvania Supreme Court to hear an expedited appeal of the case, Ken Komoroski, an attorney in Pittsburgh with Fulbright & Jaworski LLP, said in an interview.

Gas production in Pennsylvania increased to about 2.8 billion cubic feet a day in July, up from about 0.6 billion cubic feet in January 2010, according to the U.S. Energy Information Administration. About 218,000 Pennsylvanians worked in Marcellus Shale-related industries at year-end, helping drive the state’s unemployment rate below the national average, the Pennsylvania Department of Labor and Industry said in a September report.