P. 5 ~ Continued - Pennsylvania court raises questions about Marcellus shale gas ownership
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A federal court in Pennsylvania recently addressed a surface owner's reliance on Hoge when considering whether natural gas in the Marcellus shale formation should be treated differently from natural gas in other rock formations. See Hoffman vs. Arcelormittal Pristine Resources Inc., No. 11-cv-0322, 2011 WL 1791709 (W.D. Pa. May 10, 2011). In Hoffman, the defendant acquired oil and gas rights pursuant to a 1928 deed that reserved "all gas and oil within and underlying [the] premises." Id. at *2.
The plaintiff surface owner sought a declaration that the reservation included only natural gas "contained within the sandstone strata underlying the subject land." Id. at *3. The plaintiff argued that, like the coalbed gas in Hoge, gas in shale formations was not economically viable in 1928, and that the drafters of the 1928 deed therefore could not have intended to reserve the gas in the Marcellus shale formation when they reserved "all gas." Id. at *5.
The Hoffman court, however, found Hoge to be factually distinguishable because that case involved a subdivided mineral estate, and the court concluded that the Hoffman deed's reservation of "all gas" clearly and unambiguously included all subsurface gas in all formations, including the Marcellus shale formation. Id. at *5-6. The court emphasized the importance of maintaining consistency and predictability in property law, stating that a ruling in the surface owners' favor "would be tantamount to an eradication of countless oil and gas estates and leases recorded in the history of [Pennsylvania], and would profoundly change the landscape of property law as it has developed over hundreds of years." Id. at * 1.
Fourth, the Pennsylvania courts should not be persuaded by the argument that shale gas should be treated like coalbed gas in Hoge simply because both are "trapped" inside the shale or coal, respectively. All subsurface natural gas is "trapped" in one kind of rock formation or another. The fact that some formations are structured more tightly and may require different extraction and recovery techniques, including hydrofacturing, does not meaningfully affect the interpretation of a deed's language reserving (or not reserving) natural gas in light of the arguments above.
The Butler court noted that "at least one other jurisdiction has found similarities between [coal gas and shale gas] in this context." Butler, 2011 WL 3906897, at *8 n.2 (citing Cimarron Oil Corp. vs. Howard Energy Corp., 909 N.E. 2d 1115 (Ind. App. 2009)).
In Cimarron Oil, the Indiana appellate court addressed a dispute between an owner of coal rights and an owner of natural gas rights and concluded that a conveyance of the ownership rights over coal included the rights to coalbed gas. 909 N.E. 2d at 1123-24. The court, in discussing expert testimony, stated that "[t]he gas in shale is generally produced in the same manner as gas in coal" and described the process through which gas in shale and coal is produced. Id. at 1119-20. The expert contrasted these types of "unconventional" natural gas with "conventional" natural gas. Id.
The Cimarron Oil court, however, did not reach any conclusions regarding shale gas. Rather, the court based its holding on its finding that the parties to the contract at issue did not intend to convey the rights of coalbed gas through a lease that granted rights to oil and gas but that did not include the right to invade the valuable coal seam. Id. at 1123-24. The court's discussion of shale gas was merely limited to recounting the expert's testimony in its discussion of the background facts of the case. Therefore, the court's analysis in Cimarron Oil should have no bearing on the outcome in Butler.
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