February 24, 2013 2806 VIEWS
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Sunday, February 24, 2013 / Olumide Olusegun-Obayemi, LL.M; S.J.D.* (Dedicated to RoSeanna Trasean Shavers) *

Reviewing The Impact of the Pennsylvania case of Butler v. Charles Powers Estate on Nigerian Oil and Gas Regime:

 

We agree with Dominic Asada that petroleum is a predominant source of Nigeria's revenue and foreign exchange. The petroleum industry in Nigeria is divided into two main segments. The upstream and the downstream sectors. The upstream refers to activities such as exploration, production and delivery to an export terminal of crude oil or gas. The downstream on the other hand encompasses activities like loading of crude oil at the terminal and its user especially transportation, supply trading, refining distribution and marketing of petroleum. See, DOMINIC ASADA, in THE PETROLEUM INDUSTRY IN NIGERIA: JOINT OPERATING AGREEMENTS, MEMORANDUM OF UNDERSTANDINGS, COMPENSATION AND OTHER RELATED ISSUES IN PERSPECTIVE.

 

This leads to the questions: What do we mean by “Petroleum” in Nigeria and how do similar common law jurisdictions define the same concept? Finally, who owns the rights to the Petroleum Products to be extracted?

 

Several Nigerian authors have defined petroleum products within the Nigerian Oil and Gas jurisprudence. For instance, according to Yinka Omorogbe, in her treatise—Oil and Gas Law in Nigeria (Simplified) (2003 ed.) at page 1, “Petroleum” is a compound mainly composed of hydrogen and carbon, and is commonly called hydrocarbon, and that such can exist in gaseous, coal, shale, tar sands or bitumen. In liquid form, it is referred to as Crude Oil. Hydrocarbons in gaseous form are known as natural gas. Omorogbe went on to state that the most commonly known hydrocarbon is crude oil, which is also referred to by many as petroleum, while noting that, strictly speaking, this term—petroleum—covers other types of hydrocarbons.

 

Along the same vein, according to Godfrey Etikerentse in his book—Nigerian Petroleum Law, (1985 ed. MacMillan), at page 1, “Petroleum” is defined both in a standard Nigerian Oil Mining Lease and in Section 14(1) of the Nigerian Petroleum Act of 1969 as …mineral oil (or any related hydrocarbon) or natural gas as it exists in its natural state in strata, and does not include coal or bituminous shales or other stratified deposits from which oil can be extracted by destructive distillation.”
 

With the above in mind, we can examine the a case presently pending before the Supreme Court of Pennsylvania which is considering a question that seemingly has been settled in that state for 130 years: i.e., Is gas a mineral?

 

Butler v. Charles Powers Estate, 27 MAP 2012, Supreme Court of Pennsylvania (313688L), Middle District (Harrisburg). This appeal involves a property deed fight over Marcellus Shale natural-gas rights that will certainly threaten thousands of drilling leases in Pennsylvania based on what was considered a mineral more than a century ago. A couple (John and Mary Josephine Butler) are challenging an intermediate appeals court ruling that puts into question how deeds transferring ownership in subsurface rights are worded.

 

The case also marks the first time in more than five decades that the court will address a 130-year-old rule, known as the Dunham Rule, governing land transfers of oil and gas rights. The rule serves as a foundation for many Marcellus Shale leases.

 

The major issue in Butler is whether rights to natural gas produced from the Marcellus shale should qualify as “mineral” rights under an 1881 deed. The deed at issue contained an exception reserving “one half the minerals and Petroleum Oils to said Charles Powers and his heirs and assigns forever…”

 

The Butler case should be considered against the background that Pennsylvania has attracted some of the biggest oil-and-gas operators in the United States, including Chesapeake Energy Corp. (CHK) and Range Resources Corp. (RRC). In fact, according to data compiled by Bloomberg, Chesapeake has leased 1.78 million acres in the Marcellus Shale, an area larger than Delaware. Thus, since 2009, more than 5,000 wells have been drilled in Pennsylvania’s portion of the Marcellus Shale, which stretches from New York to West Virginia. The formation may contain 141 trillion cubic feet of gas, enough to meet U.S. demand for about six years, according to the Energy Department.

 

In Butler, as of 2009, the owners of the surface estate filed a complaint to quiet title to the property, including the minerals and petroleum oils. There was the 1881 deed governing 244 acres in the Apolacon Township of Susquehanna County in the northeastern part of the state along the New York border. The deed, drawn by Charles Powers, transferred to his heirs half the oil and mineral rights for the land, which can be separated from surface rights under Pennsylvania law. The heirs to Powers’ estate opposed the action and sought a declaratory judgment that the reservation rights in the deed’s exception included Marcellus shale gas.

 

In essence, the Butlers claimed the gas under their land, arguing that Powers’ failure to include the word “gas” in separating subsurface rights on his former property gives them the right to tap it. The Powers heirs claimed they own the rights to half of the gas because Marcellus gas, which is trapped in rock, should be considered a mineral and part of the rights explicitly transferred.

 

The Durham Rule

The Dunham Rule arose in 1882 and it provides that when a deed transfers ownership in minerals it must refer specifically to oil and gas to transfer rights to those products. In Butler, the Powers deed mentions only petroleum oils and minerals. There is no mention of gas, according to court documents. Dunham v. Kirkpatrick, 101 Pa. 36 (1882)--Dunham established the following rule regarding deed reservations and exceptions reserving minerals: If a deed contains a reservation or exception of “minerals” without any specific mention of natural gas or oil, then there is a rebuttable presumption that the word “minerals” was not intended to include natural gas or oil.  (per Christen M. Blend)

 

Also, in Highland v. Commonwealth, 400 Pa. 261, 161 A.2d 390 (1960)--Highland, the Pennsylvania Supreme Court had ruled that that presumption can only be rebutted if it is shown by “clear and convincing evidence” that the parties to the conveyance intended to include natural gas or oil within the word “minerals.”

 

The trial court sided with the Butlers in 2010, relying on previous rulings that established ownership of oil or gas doesn’t change hands unless specified in a deed and dismissed the heirs’ declaratory judgment action with prejudice, holding that the heirs failed to state a cognizable cause of action based upon two Pennsylvania Supreme Court decisions — Dunham v. Kirkpatrick, 101 Pa. 36 (1882), and Highland v. Commonwealth, 400 Pa. 261, 161 A.2d 390 (1960).

 

Reversal of the Durham Rule

In September 2011, the state’s Superior Court reversed the trial court’s decision, ruling that state law governing the issue isn’t clear and expert scientific testimony was needed to determine whether shale gas is in fact a mineral.

 

As to whether expert evidence is required, on October 16, 2012, the Pennsylvania Supreme Court heard oral arguments in Butler v. Charles Powers Estate, Krock and Thomas Meagher, representing the Butlers had argued that such expert evidence would be “irrelevant in determining what ordinary people intended to include in the term ‘mineral’ when they negotiated their deed…The very foundation of the Dunham presumption is that ordinary people don’t use the word mineral in the scientific sense,…Minerals in the 1800s wouldn’t have included anything other than metallic substances to ordinary people.”

 

Underscoring the need for a revision of definitions under oil and gas regimes as compared with old and antiquated laws was the question posed by Pennsylvania Associate Justice J. Michael Eakin during the hearing in Pittsburgh while questioning a lawyer for the landowners thus: “One hundred years ago, shale was a useless rock that had no economic value….If people 100 years ago thought it was a mineral, would it be considered relevant?

 

Responding to this question, Gregory Krock, an attorney for John and Mary Josephine Butler, had replied,

No expert can testify as to whether someone would know if people knew the value of shale.”

 

Another Associate Justice, Hon. Max Baer also noted that:

 

“Gas by its nature is going to flow free to the ozone if it’s not encapsulated in the earth. Because you own what’s holding it there doesn’t mean you own the gas.”

 

Who owns the rights to the Petroleum Products to be extracted?

Pennsylvania oil corporations are encouraged to seek legislative intervention for a permanent fix in ascertaining the ownership of rights to the Petroleum Products to be extracted. The Dunham Rule is old and did not envisage modern day explorations.

 

Nigeria, in this instance, is ahead. Yet, we must divest the federal government of ownership of 100% title to all petroleum products in Nigeria. The individual families and communities that have owned the lands upon which petroleum products are extracted must be allowed to transfer or retain their rights to petroleum products mined from their lands.

 

* Disclaimer/Advice to Readers:

While the website is checked for accuracy, we are not liable for any incorrect information included. The details of this publication should not be construed as an investment advice by the author/analyst or the publishers/Proshare. Proshare Limited, its employees and analysts accept no liability for any loss arising from the use of this information. All opinions on this page/site constitute the author’s best estimate judgement as of this date and are subject to change without notice. Investors should see the content of this page as one of the factors to consider in making their investment decision. We recommend that you make enquiries based on your own circumstances and, if necessary, take professional advice before entering into transactions. This information is published with the consent of the author(s) for circulation in/to our online investment community in accordance with the terms of usage. Further enquiries should be directed to the author, Olusegun-Obayemi who is admitted to Nigerian and California Bars and can be contacted vide obayemilaw@hotmail.com. 

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