A Pennsylvania court ruling has raised questions about the validity of billions of dollars in leases bought by oil and gas companies to access the vast Marcellus shale natural gas resource in Pennsylvania.
The state Superior Court has ruled that a lower court should obtain expert opinions as to whether the right to capitalize on shale gas belongs to the owner of the gas rights or the mineral rights.
“It has the potential to be huge,” said James Pellow, a leasing attorney for Eckert Seamans in Pennsylvania. “Gas operators stand to lose enormous sums of money if the courts decide they do not have title to the oil and gas under their leases.”
In Pennsylvania, there are considered three different rights for sale underground – rights to the minerals, such as limestone; rights to coal; and rights to oil and gas.
Shale gas had never come into question because the technology to economically extract it had not been put in place until the past few years. While the oil and gas industry started in Pennsylvania, most of the prime fields were deemed to have been tapped out, with production over the past 40 years marginal.
However, within the past five years, the discovery that multi-staged hydraulic fracturing (fracking) combined with horizontal drilling could economically extract gas from tight shale rock opened Marcellus as the biggest gas field in the U.S. and companies such as Chesapeake and Anadarko rushed to become involved.
“Once the rush is on to lease up acreage, sometimes people go faster than they should,” said Larry Nettles, an attorney with Vinson & Elkins, which focuses on the oil and gas industry.
Mr. Pellow added that while many gas companies believed leasing drilling rights from owners of gas rights made sense, uncertainty about how this will play out goes back to the 1980s when the Pennsylvania Supreme Court said the owner of coal rights had the right to profit from coal bed methane because the methane gas could only be obtained by accessing the coal. In other words, the owner of gas rights could not profit from the gas produced.
“Coal was king in Pennsylvania,” Mr. Pellow said. “So you understand why that decision came out that way even though it is difficult to reconcile with existing legal precedents.”
Many landowners had decades ago leased gas rights to independent drillers in Pennsylvania for hundreds of dollars an acre or less. But when the rush into the Marcellus began, Mr. Pellow said lawyers thought they could get landowners in on the bonus payments of up to $5,000 (U.S.) an acre paid by drillers if they could claim that because the gas was trapped in the shale minerals, the owner of the shale rights owned the gas.
“Determining mineral ownership may sound easy but it can get quite complex, particularly in a place such as Appalachia where landholdings have been subdivided for many generations,’’ said Raoul LeBlanc, senior director at consultancy PFC Energy.
“But companies must go to the trouble because, without a valid lease, no one can do anything securely. As they say in oil companies: ‘No lease, no grease.’”
The industry is continuing to produce gas while the courts study the matter.
“There is a lot at stake,” Mr. Pellow said. “If the final ruling is against the industry, this will go to the Pennsylvania Supreme Court.”
Copyright The Financial Times Ltd. All rights reserved.
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