Pennsylvania Supreme Court’s Butler Decision Affirms Well-Settled Law That Grant or Exception of “Minerals” Does Not Include Oil and Gas

April 25, 2013

The Supreme Court of Pennsylvania issued a long-awaited decision yesterday in Butler v. Powers Estate, reversing a controversial superior court decision from September 2011. In Butler, the plaintiff sought a declaration that its deed, which contained a reservation of all the “minerals” and “Petroleum Oils” underlying the subject property, did not have the effect of reserving the gas in the Marcellus Shale formation. The trial court relied on the case of Dunham & Shortt v. Kirpatrick, 101 Pa. 36 (Pa. 1882) and its progeny to hold that because the deed reservation did not specifically reference natural gas, any natural gas found within the Marcellus Shale beneath the subject land was not intended to be encompassed within the reservation of “minerals.” The superior court had reversed and remanded that decision, opening the door for a potential change in course for Pennsylvania’s law on shale gas ownership and potentially disturbing billons of Marcellus Shale gas investment dollars.

Yesterday, the supreme court reinstated the order of the trial court, holding that the superior court erred in its determination. The supreme court’s decision reaffirmed that the Dunham rule is still the controlling law in Pennsylvania, and affirmed that a mere grant or reservation of “minerals,” without specific reference to the terms “oil” or “natural gas,” does not encompass oil or natural gas “without clear and convincing parol evidence produced by the proponent of the reservation to the contrary.”

The Butler court distinguished its earlier decision in United States Steel Corp. v. Hoge, 468 A.2d 1380 (Pa. 1983), which held that coal-bed gas belongs to the owner of the coal. The court in Butler explained that Hoge inherently recognized a legal distinction between coal-bed gas and natural gas found in non-coal-bearing strata, based on historical distinctions between the treatment of the two types of gas, and thus emphasized that the rule in Hoge was therefore limited to coal-bed gas.

Note that the Butler decision does sound a note of caution: the court observed that the relevant deed’s reservation of the “appurtenance, issue or profit, or substance out of petroleum oil” would encompass natural gas, but did not have occasion to apply that principle, concluding that the appellees had waived the argument by failing to raise it below. Had appellees not waived this argument, the result in Butler would have been different. This observation thus reminds Pennsylvania practitioners of the importance of drafting specific and unambiguous deed language and reviewing existing instruments.

While this decision means that Pennsylvania remains an outlier — given that most states’ laws hold that a grant or reservation of “minerals” includes oil and gas — it has the salutary effect of maintaining, rather than disturbing, longstanding Pennsylvania law and (importantly) a history of conveyances, including more than a century of conveyances on which the Marcellus Shale industry has relied. As Justice Saylor explained in a concurring opinion, while the Dunham rule might be seen as “cryptic, conclusory,” “highly debatable” and “idiosyncratic” in the abstract, “too many settled expectations rest upon it for the courts to upset it retroactively.”