Kreher 2-15-99-3a

Coal-Bed Methane Mineral Rights Ownership - A Brief Overview

By David J. Kreher

Part Two: Resolving Questions of Mineral Rights Ownership

One of the first cases which dealt with the question of coalbed gas ownership was a Pennsylvania quiet title action, U. S. Steel v. Hoge ("Hoge"), 468 A.2d 1380 (Penn. 1983). (Note that Pennsylvania is an "oil-in-place" state.) In Hoge, the Pennsylvania Supreme Court found the right to the coalbed gas belonged to the owners of the coal so long as the gas is still in place.

Traditional oil-in-place states adhere to the theory that oil and natural gas are owned by the holder of the mineral interests of a property. Applying the theories behind oil-in-place ownership, the Hoge decision held the gas is owned by the holder of the coal mineral interest so long as the gas is contained in the coal seam, but ownership is lost if the gas migrates away. The holding is consistent with the relatively indistinguishable nature of coalbed gas from other natural gas once the gas escapes.

Hoge also gave a general interpretation of coal leases that reserve to the surface owner the right to drill for oil and gas through the coal seam. In its interpretation, the court added the implied terms of "commercially exploitable" quantities to the reservation. By doing so the court was able to find that older coal leases written prior to technological advances capable of exploiting coalbed gas, but which included the reservation of gas to the surface owner or third party, did not reserve coalbed gas to this other party.

In applying the above reasoning Hoge held that, at the time the lease was written, coalbed gas could not be commercially extracted, therefore, the reservation of a separate oil and gas estate did not apply. Additional reasoning for the decision involved the wording in the coal lease that allowed the coalbed owners the right of ventilation of the gas to the atmosphere.

The implication of the holding is that today a properly worded lease could create a reservation of the coalbed gas separately from the coal estate in an oil-in-place state. However, separation of the coalbed gas from the coal estate may not be prudent from a business perspective because of potential conflicts between the holders of the separate estates.

Alabama, a non-ownership theory state, in a pair of cases in 1993 also found coalbed gas contained within the coal belonged to the coal owner. According to the non-ownership theory, oil and gas are not owned until extracted. A mineral interest in the oil and gas gives the holder only the right to extract the products. If a producer on adjacent property captures oil or gas previously located under adjacent property, the oil or gas is then owned by the producer. The exception would be if the producer intentionally trespassed onto the neighboring property in an effort to extract the said minerals. (This "Rule of Capture" also applies in oil in place states).

In Vines v. McKenzie Methane Corp. ("Vines"), 619 So.2d 1305 (Ala. 1993), the Alabama Supreme Court held that the owner of the coal interest has the right to extract the gas from the coal. For its reasoning, the court first held that the nature of the association of the gas in the coal makes the gas inseparable from the coal. Second, the court found little to no distinction between drilling procedures used to extract and vent the gas versus the procedure to extract and capture the gas for resale; both intrude upon coal extraction techniques. Third, the court reaffirmed prior rulings that allow coal producers the right to carry on reasonable mining operations which included the extraction of gas for safety reasons. Finally, the court held that "the grant of 'all coal' necessarily implies the grant of coalbed gas…"¹ However, the allocation is exclusive of an express provision in the lease retaining the right or granting the right to a third party.

In NCCB Texas Nat. Bank v. West ("West"), 631 So.2d 212 (Ala. 1993), the court did distinguish Alabama law from that established in Hoge. The distinction occurs where a coal lease reserved to the lessor/grantor the gas. In Hoge, the reservation was interpreted to include the implied concept of economically extractable gas, not simply all gas, and to relate the determination of ownership to the lease at the time it was written. In West, the reservation of gas in a grant includes all gas, including coalbed gas regardless of when the lease was written.

The Federal Tenth Circuit Court of Appeals has also had the opportunity to rule on coalbed gas ownership in Southern Ute Indian Tribe v. Amoco Production Co. ("Southern Ute"), 119 F.3d 816 (10^th Cir. 1998). In Southern Ute, the Tenth Circuit also found that coal owners on federal or Indian lands owned the gas in place.

Contrary to the above cases, the Supreme Court of Montana, in Carbon County v. Union Reserve Coal Co. ("Carbon County"), 898 P.2d 680 (Mont. 1995) held the coalbed gas was separable from the grant of the coal and did not belong to the coal owner unless specifically stipulated in the lease. But Carbon County followed the summary judgement ruling of the Colorado Federal District Court opinion in the Southern Ute case that was subsequently reversed by the Tenth Circuit. The result is a precedent that will hopefully soon be overturned.

Coming Next: Federal and State Statutes and Regulations

¹Vines at 1309.

"Lewis Mosburg's OIL & GAS NEWSLETTER"™ and "Lewis Mosburg's OIL & GAS PRIMERS"™ are trademarks of Lewis G. Mosburg, Jr.