In October of 2012 the Pennsylvania Supreme Court heard oral argument on two key cases that potentially could reshape the laws and rules applicable to hydraulic fracturing in the state.  We wrote extensively about these cases in 2012 and expanded on our analysis in a web interview with LXBN-TV.  Last week the Pennsylvania Supreme Court issued its decision in one of those casesButler v. Powers Estate — and unanimously declined to rewrite existing state law governing conveyances of oil and gas property interests.

In Butler, the court was tasked to determine whether shale gas rights are included as part of a deed’s oil and gas reservation of rights to “minerals and petroleum oils”.  In other words, the critical issue was whether shale gas counts as a “mineral” under state property law.  In 1882, the state supreme court instituted a rule in the case of Dunham & Short v. Kirkpatrick that a provision in a deed reserving “minerals” without mentioning natural gas or oil creates a rebuttable presumption that the grantor did not intend to reserve natural gas or oil rights, based on “the common understanding … that oil is not a mineral.”  This is known as the Dunham rule, and has governed transactions involving subsurface rights in Pennsylvania ever since (subsequent decisions expanded the rule to cover natural gas).

In the original suit concerning who owned Marcellus Shale gas rights on a particular property, the state trial court applied the Dunham rule and concluded that a reservation of rights in an 1881 deed did not include shale gas.  But the Pennsylvania Superior Court overruled this decision on appeal.  It determined that expert testimony was required at the trial court “on whether Marcellus shale constitutes a type of mineral such that the gas in it falls within the deed reservation.”  The Supreme Court accepted the appeal of this directive, and heard oral argument in late October.

Before the Supreme Court, appellants claimed that since the gas is trapped within the Marcellus Shale, it must be included as part of their claim to rights on “minerals and petroleum oils.”  They also claim that natural gas is a product of petroleum and therefore could not be considered separate from it.   Their opponents argued that shale gas must be treated differently than conventional gas due to geological concerns and the differing methods in extracting the gas.   Among other arguments, appellees compared Marcellus Shale “to Coca-Cola and the shale gas as the ‘fizz’ that emanates from the liquid soda, arguing that no court could ever reason that the ‘fizz’ is separate and apart from the Coca-Cola liquid.”

Last week the Supreme Court determined 8-0 that “Marcellus shale natural gas was not contemplated by the private deed reservation presented in this case” and reversed the Superior Court’s decision.  The court specifically expressed its reluctance to upset longstanding state property law, stating that “neither the Superior Court nor Appellees have provided any justification for overruling or limiting the Dunham Rule and its longstanding progeny that have formed the bedrock for innumerable private, real property transactions for nearly two centuries.”  And because the term “natural gas” did not appear in the 1881 deed’s reservation of rights, appellees needed to demonstrate by clear and convincing evidence that the parties at that time intended to reserve natural gas rights — a burden they could not meet.

Notably, the Supreme Court also explicitly rejected appellees’ Coca-Cola / fizz argument:  “While we recognize that hydrofracturing methods are employed to obtain both coalbed gas and Marcellus shale natural gas, the basis of the Dunham Rule lies in the common understanding of the substance itself, not the means used to bring those substances to the surface.”

For Marcellus shale gas owners in Pennsylvania, the Butler decision foreclosed the possibility of upending 130 years of state property law, which would have prompted reexamination of thousands of titles and conveyances.  But one critical case remains before the Pennsylvania Supreme Court — Robinson Township, which concerns newly-enacted state restrictions on local government powers to regulate zoning as applied to shale development.  This blog will provide a full analysis of that decision once it is released.