Marcellus Shale: Is It a Mineral or Is It a Gas?

By Brett Woodburn, Esq.

Once upon a time, not so very long ago, there was a boom in the real estate market. While the overall real estate market has cooled, there is one facet of real estate that is still booming – gas. Or more specifically, the conveyance and leasing of gas and oil rights in the parts of Pennsylvania that overlay the Marcellus Shale Shelf.

Though the practice is regionalized, real estate brokers have been preparing deeds from time in memoriam. In fact, the Pennsylvania Supreme Court recognized (in 1934) that, “there can be no objection to the preparation of deeds…by such [real estate] brokers…” To many, drafting deeds is (generally) a straightforward process in which the drafter merely copies the language from the prior deed. Now comes the gas boom... If the seller wants to reserve (or except) the gas and oil rights to himself, then all the drafter has to do is add a sentence or two reserving (or excepting) the oil and gas rights. Right?

Not so fast.

Before the 20th Century, the law recognized three "kingdoms" -- animal, vegetable, mineral. In those days, it was understood that language reserving 'mineral rights' included any attendant gas and oil rights. However, in 1882, the Pennsylvania Supreme Court dramatically altered the law when it held that a reservation or exception of "minerals" in a deed reserving that did not specifically mention or include natural gas and oil rights created a rebuttable presumption that the reservation or exception of the mineral rights did not include natural gas or oil. This remarkable change in what had been the established law for many decades came to be known as the “Dunham Rule”. In 1960, the Pennsylvania Supreme Court refined the Dunham Rule by stating that rebutting the presumption that natural gas or oil was not included in a reservation of mineral rights required the parties to the conveyance to show clear and convincing evidence that the reservation of “minerals” was intended to include gas and oil.

If this has been the rule for over a century, why is it suddenly making headlines?

On September 17, 2011, the Pennsylvania Superior Court decided that they needed to have additional evidence to determine whether the scope of a reservation of mineral rights included Marcellus Shale, and thus the Marcellus Shale gas. How can such an argument survive? In 1983, the legal landscape shifted again when the Pennsylvania Supreme Court was asked to decide a dispute between two parties that owned the distinct mineral rights on the same parcel of land. In determining which party owned the coal bed gas at issue, the Pennsylvania Supreme Court learned that coal contains certain beds of gas that can only be extracted by a process known as “hydrofracturing”, a process by which water is pumped under extreme pressure into the vein to fracture the coal and release the gas. The Supreme Court determined that the gas that rests within the coal is owned by the individual who owns the coal rights, while the gas that has seeped into the surrounding property is owned by the individual who owns that land or the attendant gas rights. Today, certain owners of mineral rights are arguing that Marcellus Shale gas is akin to coal bed gas since the Marcellus Shale gas can also only be extracted by hydrofracturing.

The Pennsylvania Superior Court discovered that no court in Pennsylvania has decided this issue. As such, it returned the case to the trial court for expert testimony to offer opinions as to whether Marcellus Shale is a mineral, whether Marcellus Shale gas is of the type of conventional natural gas that would fall under the Dunham Rule, or if Marcellus Shale gas is similar to coal bed gas so that whomever owns the shale owns the gas. Individuals involved with real estate and oil and gas rights are watching this decision very closely. Once the trial court renders its decision, it will almost certainly be appealed back to the Superior Court. It may be some time before we have any clear guidance from an appellate court as to where Marcellus Shale and Marcellus Shale gas rights may pass, particularly when excepting or reserving those rights. For those of you real estate licensees who are also drafting deeds, reservations and exceptions of rights in deeds and reservations and exceptions of rights in agreements of sale, proceed with extreme caution. What if the agreement you prepare or the deed you draft doesn't meet the parties' expectations regarding the retention or conveyance of the Marcellus Shale gas rights?

Mr. Woodburn is an attorney with Caldwell & Kearns and serves as general counsel to PAR. A substantial portion of his practice is dedicated to providing advice and counsel to real estate licensees and representing and defending real estate salespersons and brokers in civil lawsuits and licensing claims across the Commonwealth. He routinely counsels employers on employee relations issues as one of the voices of the PAR Legal Hotline. He may be reached at realcompliance.com.