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Monday, October 31, 2011

Shale Gas Fuels Legal Boom (In Pennsylvania)

From the Wall Street Journal 10-31-11

Fights Over Underground Rights  Confound Companies, 

Pennsylvania Landowners

The natural-gas boom in Pennsylvania is stoking legal battles over who owns gas that was worthless until a few years ago but now holds the promise of great wealth.
New drilling techniques have made it possible for energy companies to extract natural gas from a layer of rock deep underground called the Marcellus Shale, and the companies have paid Pennsylvania property owners billions of dollars since 2008 for the right to do so.
But because surface rights to properties in the state are sometimes sold separately from rights to the underlying minerals, such as coal, or oil and gas, and because mineral law in Pennsylvania remains murky, lawsuits are mounting.
These skirmishes could cause problems both for the energy industry and for people like Jim Grande, a retired printer in northern Pennsylvania. The 158-acre farm he bought in 1965 didn't include mineral rights, which are commonly sold separately in Pennsylvania.
When a quarry operator asked to mine stone from his property years later, Mr. Grande hired a lawyer to help him acquire the mineral rights to his land. A judge granted him ownership in 1999 after no one came forward to dispute his claim.
A decade later, Chesapeake EnergyCorp. offered him $293,000 to drill for natural gas. After consulting with a lawyer, Mr. Grande said, he signed the lease and took the money. Six months later, he was sued by the heirs of a former owner of the property who proved he had improperly claimed mineral rights belonging to them.
"It scared the hell out of me, to be blunt," said Mr. Grande, who is 81 years old and, with his wife, lives on a $944 monthly check from Social Security. He hopes to settle the lawsuit by paying the money back to Chesapeake, but he said he has spent more than half the money, largely on taxes and legal fees.
An attorney for the heirs who sued Mr. Grande didn't respond to requests for comment. Chesapeake, also a defendant in the suit, declined to comment.
No one tracks the number of disputes over gas ownership in Pennsylvania, but lawyers and court clerks in counties with heavy drilling say such conflicts are mounting. "I predict it will become the predominant area of litigation in the next year or two," said Joel Burcat, a lawyer at Saul Ewing in Harrisburg, Pa.
John Lowe, a professor of mineral law at Southern Methodist University in Dallas, said Pennsylvania is a particularly fertile ground for lawsuits because mineral law there hasn't developed as thoroughly as in states with longer histories of natural-gas production.
"You have all of this money sloshing around, and unanswered questions are getting addressed," Mr. Lowe said.
Historically, litigation over mineral rights often follows a boom in oil and gas production; such cases continue to crop up in states like Texas and Louisiana. Laws governing ownership of mineral rights vary from state to state, but it is common in many to sell separate rights to minerals, coal, oil and gas.
That is the case in Pennsylvania, where new legal questions are coming up on some fundamental issues. These include whether ownership of shale gas, which is tightly bound to the rock in which it is found and usually extracted using horizontal-drilling techniques, should be treated differently from conventional gas extracted through traditional vertical wells.
In September, in a tangled case involving an 1881 land sale, a state appellate court found some merit in the argument of a Susquehanna County couple's claim that shale gas should belong to those who own the rock that contains it, and not to those who own rights to conventional natural gas on the property.
The court sent the case back to a lower court for expert testimony, raising questions about the validity of some leases and sending tremors of uncertainty through the industry.
Lawyers for energy companies have called for the Pennsylvania Supreme Court to immediately review the case and quell the uncertainty.
Range Resources Corp., which has bought a lot of drilling rights in the Marcellus, got so many phone calls and emails about the case that in late September it drafted a letter to investors and analysts.
"Range does not expect the ultimate ruling to result in a change in law," the Fort Worth, Texas, company wrote, adding it would conduct business as usual but would identify leases that could be affected by the case.
Write to Daniel Gilbert at daniel.gilbert@wsj.com and Kris Maher atkris.maher@wsj.com

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