CHAPTER 1 OWNERSHIP ISSUES AND THEIR IMPACT UPON COALBED METHANE DEVELOPMENT

• Jurisdiction: United States

Coalbed Gas Development
(Apr 1992)
CHAPTER 1
OWNERSHIP ISSUES AND THEIR IMPACT UPON COALBED METHANE DEVELOPMENT
Mark A. Swartz
Kay, Casto, Chaney, Love & Wise
Charleston, West Virginia

TABLE OF CONTENTS

SYNOPSIS

I. INTRODUCTION

II. JUDICIAL DECISIONS ADDRESSING OWNERSHIP

III. STATUTORY SOLUTIONS

A. VIRGINIA

B. RECENT LEGISLATIVE ACTIVITY

IV. THE COMMON LAW AND OWNERSHIP

A. THE MEANING OF THE TERMS MINERALS AND OIL AND GAS

B. INTERPRETATION AND CONSTRUCTION

C. GENERAL RULES OF INTERPRETATION AND CONSTRUCTION

V. CLAIMS ARISING OUT OF UNCERTAIN OWNERSHIP

A. DECLARATORY JUDGMENTS

B. CLAIMS FOR DAMAGES

C. ACTIONS TO PREVENT OR LIMIT DEVELOPMENT

D. POSSIBLE CLAIMS REGARDING VENTING

———————

[Page 1-1]

1500 Charleston National Plaza

Charleston, West Virginia 25327

304-345-8900

329 West Main Street

Abingdon, Virginia 24210

703-628-9211

I. INTRODUCTION

The purpose of this paper is to explore ownership issues which impact upon coalbed methane development in an effort to enlighten and forewarn those who choose to pursue development of this resource.

As is true in many areas of the law, questions which have arisen regarding the ownership of coalbed methane remain unanswered in any definitive way. Because coalbed methane was generally viewed as more of a nuisance, in that it impeded mining because it presented a safety hazard, than as a valuable commodity in its own right, conveyances purporting to sever or transfer mineral interests neglected to address the question of whether the grantor's interests in coalbed methane were being transferred, excepted or reserved when conveyances of coal and oil and gas interests were made. The fact that few conveyances, if any, mention coalbed methane contributes to the uncertainty.

Similarly, coal leases and oil and gas leases have failed, until recently, to address the ownership of coalbed methane. Hence, questions arise as to whether an oil and gas lease which does not specifically state that it has granted the right to explore for and produce coalbed methane has or has not granted such rights. Where a coal lease grants the right to vent coalbed methane, has it impliedly granted the right to produce and sell the coalbed methane? If so, is a royalty due; and if a royalty is due, in what amount?

In the past, when mineral leases and other conveyances attempted to coordinate resource development, the typical provisions found in instruments addressing resource development were obviously intended to make coal the dominant estate and oil and gas the subservient estate. The relatively higher royalty value of the coal estate to the royalty owner, when compared to typical oil and gas royalties, explains this bias toward the coal estate. Oil and gas leases in Kentucky, Virginia and West Virginia often contain terms reflecting this preference for development of the coal estate, for example: a specific acknowledgment by the oil

[Page 1-2]

and gas lessee that coal is the dominant estate; requirements that well locations be approved by the coal owner and/or operator; casing requirements to prevent communication between well bores penetrating coal seams and minable coal seams; payment provisions regarding coal sterilized by well bore location; and requirements to relocate facilities to accommodate mining.

When the technology, markets, and tax incentives coalesced to encourage coalbed methane gas development in the eastern coal fields, the common law of the states involved and the pre-existing private agreements then in place were not well suited to address and resolve the ownership issues and related issues which immediately surfaced.

II. JUDICIAL DECISIONS ADDRESSING OWNERSHIP

The only reported decision of which the author is aware wherein an appellate court has specifically addressed the question of which party to a severance deed should "be recognized as owner of coalbed gas" is United States Steel Corp. v. Hoge¹ , hereinafter Hoge. Therein, a 1920 severance deed conveyed

All the coal of the Pittsburgh or River Vein underlying all that certain tract of land...

Together with all the rights and privileges necessary and useful in the mining and removing of said coal, including the right of mining without leaving any support..., the right of ventilation and drainage and of access to the mines for men and materials...

The parties of the first part [surface owners] hereby reserve the right to drill and operate through said coal for oil and gas without being held liable for any damages.²

In Hoge, the Supreme Court of Pennsylvania quieted title to the coalbed methane in the seam under consideration in the coal owner, United States Steel Corporation.³ The rationale tendered

[Page 1-3]

in support of the majority view was:

(1) that at the time the severance deed was made, "although commercial exploitation of coalbed gas was known such operations were very limited and sporadic";⁴

(2) that the deed itself was evidence of and consistent with the commonly held view that coalbed methane gas was "a dangerous waste product" which had to be vented to permit safe mining because the deed specifically granted the right to vent;⁵ and

(3) that the reserved right to drill through the seam was intended only to reach through and below the seam to gas then recognized to be "commercially exploitable" as evidenced by the exculpatory language ("without being held liable for any damages") set forth in the deed reservation.⁶

An unreported decision by the United States District Court for the Northern District of Alabama, Western Division,

[Page 1-4]

herein after referred to as Rayburn ⁷ also held that the coal owner, again in the face of an oil and gas reservation in the severance deed, had acquired title to the coalbed methane gas. The pertinent portions of the severance deed were as follows:

[T]he undersigned Grantors do hereby grant...unto the said United States Steel Corporation the minerals and mining rights, except oil and gas and the right to explore for and remove the same....

Grantors herein covenant and agree that any right to explore for or produce oil and gas, or to drill wells...shall be subject to the requirement that all coal seams located in said lands penetrated in such exploration or drilling operations shall be encased or grouted off, except those which may be specifically exempted by United States Steel Corporation in writing. The grout plug or casing shall extend from fifty (50) feet above the top of such seam to fifty (50) feet below the bottom of said seam....⁸

The District Court in Rayburn resolved the title issue in favor of the coal owner reasoning that the covenant above quoted "clearly expressed [an] intention...that the methane in the coal bed not be available to any well drilled by the grantors" who had reserved the oil and gas.⁹ The District Court went on to note that at the time of the deed coalbed methane gas was not regarded as commercially recoverable.¹⁰

[Page 1-5]

In another unreported decision set forth in a letter opinion resolving cross motions for summary judgment, an Alabama trial court granted partial summary judgment in favor of the coal owner, holding as a matter of law that the coal owner had title to the coalbed methane gas. The letter opinion did not express the Court's reasoning.¹¹

These cases confirm expectations that any effort to sort out title issues regarding coalbed methane must begin with an analysis of the relevant conveyances. The Hoge case is particularly interesting, given its tortured path through the Pennsylvania judicial system, in that it discloses the reasoning of the trial judge, offers two conflicting "appellate" decisions and a well reasoned dissent. Although these three cases all find a way to vest title in the coal owner, they do not offer any reliable standard against which other transactions may be measured for the purpose of predicting the outcome of other disputes.

III. STATUTORY SOLUTIONS

A. VIRGINIA

The Virginia Gas and Oil Act of 1990¹² (hereinafter Act) was enacted for the purpose of fostering and encouraging the development of the Commonwealth's oil and gas resources.¹³ The 1990 Act addressed the development of oil and gas resources in general, but it also specifically addressed problems peculiar to the development of coalbed methane gas, which problems had prevented utilization of coalbed methane as an energy resource in Virginia.¹⁴

Coalbed methane gas is defined in the Act as gas which is trapped in a coalbed and/or associated rock strata.¹⁵ Because this gas poses a danger to miners, it had for many years been vented to the atmosphere through the use of vertical ventilation holes (which are essentially wells drilled to "de-gas" the coal in advance of mining) and by general mine ventilation. This resource was simply vented into the air at the surface and wasted.

[Page 1-6]

No significant development of this resource had occurred within the Commonwealth, primarily because of unresolved questions regarding ownership of coalbed methane and, perhaps, because of economic considerations, absent the availability of Section 29 tax credits.¹⁶ The widespread severance of mineral title throughout the Commonwealth had, unfortunately, made questions of ownership difficult to resolve. Few deeds and leases, if any, specifically addressed the question of title to coalbed methane, inasmuch as it had previously been regarded as more of a nuisance than a valuable commodity. To complicate matters further, the severance of minerals from the surface and one from the other was so common that it is unusual to find land owned in fee.

As a consequence, coal owners, coal lessees, oil and gas owners, oil and gas lessees, and some surface owners claimed title. These conflicting claims, until settled or litigated, thwarted development because those who wished to produce the gas were understandably reluctant to expose themselves to claims of trespass or conversion.

The 1990 Act (in contrast to the...