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Susquehanna County court asks: Is shale a mineral?

| Thursday, Sept. 22, 2011

For anyone who's played the game "Animal, Vegetable, Mineral," it might seem obvious that the Marcellus shale isn't alive and doesn't grow -- it's a rock layer in the ground, so it's a mineral.

In the Pennsylvania courts, the answer is not so clear.

A Susquehanna County Common Pleas court is headed for a hearing to determine whether the gas-rich Marcellus shale is a mineral, and therefore, included in mineral rights. The state Superior Court ruled this month that case law is unclear, leaving big questions over who legitimately controls drilling rights and the valuable natural gas in the mile-deep rock layer, legal observers say.

"With this ruling, it is now not clear who owns the rights to Marcellus gas where there has been a 'mineral' reservation," said Ross Pifer, director of the Agricultural Law Resource and Reference Center at Penn State's Dickinson School of Law. "The leases will still be valid, but they may not convey rights to the Marcellus shale."

Pennsylvania is unique among states in that it does not consider gas as a mineral when it comes to land rights and leases, said Sean Moran, an energy lawyer at Buchanan Ingersoll & Rooney PC, Downtown. It's known as the "Dunham rule," a precedent the state Supreme Court set in 1882. The justices have ruled that any land deal involving "mineral rights" -- but not specifically including gas or oil -- essentially does not transfer those oil and gas rights along with the minerals.

If the Marcellus shale is a mineral, it could change everything drillers have assumed about the state's oil and gas laws. Valuable mineral deeds -- especially older deeds with imprecise language -- and the validity of Marcellus contracts based on them could be in jeopardy all over Pennsylvania. The uncertainty alone could lead drillers scrambling to write "cover leases" or hesitating to drill on land where mineral rights have been sold or partially sold in separate deals, said Pifer.

Ruling that shale is a mineral "would upset 110 years of oil and gas law, which the courts don't want to do," said Gregg M. Rosen, who represents several drilling companies for McGuireWoods LLP, Downtown. "And it would turn a billion-dollar industry on its head, subjecting oil and gas drillers to many lawsuits."

Rosen is one of a few lawyers who doubts the courts will overturn a century of precedent. But the ramifications are potentially so big that they're all keeping watch in Pennsylvania. It's one of several bubbling legal issues as the state maps the frontier of unconventional gas exploration.

The Susquehanna County case started two years ago when John E. and Mary Josephine Butler filed a title complaint on a land deal that originated in 1881. The deed for their 244 acres in Apolacon reserves only "half the minerals and petroleum oils," giving the other half to a man named Charles Powers and his heirs, now the appellants. Gas was not listed among the rights, so all of the gas should still belong to the property, the Butlers argued.

This month the Superior Court reversed the lower court decision, which upheld Dunham's rule as the deciding factor. The higher court said it is not, necessarily, and wants the lower court to hear expert testimony on whether Marcellus shale is a mineral. No hearing date has been set.

"Anyone who's interested in the definition of minerals or who's interested in the rights of the Marcellus shale should pay attention to this case. And they are," said Paul Kelly, a retired attorney from Susquehanna County who was one of the first lawyers on the case.

It's hard to say how many people and companies the case could affect, but it's likely to be a significant number, said Joshua Lorenz, who represents landowners for Meyer, Unkovic & Scott LLP, Downtown. Mineral rights have been severed in land deals going back to the mid-1800s, and older deals were not as detailed as they are today. Anyone whose estate accounts only generically for mineral rights could be affected, he said.

Pifer said the case has cast a pall of uncertainty over the Marcellus shale.

"The frustrating thing for the state of the law is that we had -- whether it was good or not -- we had what was believed to be established case law," Pifer said. "Now ... we really don't know which competing owner owns the Marcellus shale."

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