Oil and Gas are not Property, Part II…

Previously, I have argued that oil and gas should be subject to the public trust. I would posit further that oil and gas, in situ, is not really property. When someone references “oil and gas” or “all oil and gas” they are really talking about the bundle of rights that make up the rights to use the property to explore for and if found, produce and market oil and gas. This is because there is no way of knowing whether or not oil or gas exists. Even if it does exist, it is always subject to the Rule of Capture, that someone else in the same pool, or close enough to drain the pool, could capture the oil or gas first. Thus, there is no real ownership (and no real property) until oil or gas is reduced to possession.

Consider, then this real life scenario. Two exceptions are made in 1928 and 1932 respectively, of “…all the oil and gas in or under the herein described lands, with the right to operate for same by ordinary methods now in use” and “…all petroleum oil and natural gas together with the right to prospect for, drill and bore for, produce and remove the same.” The question is, whether these words were intended by the parties to the transactions to allow use of the modern horizontal drilling and hydrofracturing method for removal of oil and gas from under the properties being conveyed.

Clearly, the intent of the parties at the time of the severances was to limit the oil and gas estate to that which was capable of being extracted by the usual and ordinary methods in use in 1928. A limited exception introduced certainty into the transaction for the parties. The buyer would have had a reasonable expectation of the extent of the exception and, most significantly, the method by which encumbrance of the exception was limited. Both parties would have known the expected life of a well, the time it took to develop and market oil and gas and certainly would have known that – at some point – there would be no more oil and gas being produced, as the usual and ordinary methods at the time of the severance would have removed “all” of the oil and gas capable of being removed in that manner.

Finally, the second exception. This one was dated 1932 and stated “…all petroleum oil and natural gas together with the right to prospect for, drill and bore for, produce and remove the same.” This later exception and reservation contains language commonly understood at the time, such as drill and bore for, produce and remove. It does not, however, contain words such as “stimulate”, “rework” or “deviate”, which words could have been commonly understood at the time. It also does not contain the words “hydrofrack”, “laterally drill” or “horizontally drill.”

The issue is whether “oil and gas” or more specifically “all oil and gas” is a thing in and of itself, or whether it is made up of sticks in the bundle of rights. If made up of sticks, it can be split vertically, horizontally, breadthwise and also in time. So there are two differing interpretations. One views “all oil and gas” as being a whole thing embodying all rights necessary, even if not state. This follows the case of Belden and Blake v. Commonwealth, Department of Conservation and Natural Resources, 600 Pa. 559, 969 A.2d 528 (Pa. 2009) and demands the implication of the right of access pursuant to Chartiers Block Coal Company, 152 Pa. 286, 25 A.597 (Pa. 1893). A second viewpoint sees all oil and gas as being modified by the following phrase “with the right to operate for same by ordinary methods now in use”. By this view, only the oil and gas which could be operated for by ordinary methods in use in 1928 were conveyed. The rest of the sticks in the bundle were sold with the property. In addition, the second exception was also limited and did not allow certain modern techniques.

It is the intention of the parties at the time of entering into a transaction that governs and such intention is to be gathered from a reading of the entire deed. Stewart v. Chernicky, 439 Pa. 43, 266 A.2d 259 (1970); New Charter Coal Co. v. McKee, 411 Pa. 307, 191 A.2d 830 (1963); Wilkes-Barre Township School District v. Corgan, 403 Pa. 383, 170 A.2d 97 (1961). The primary function of a court is to ascertain and effectuate the intent of the parties at the time of the original conveyance of the property from the common grantor. Jedlicka v. Clemmer, III, 677 A.2d 1232 (Pa.Super. 1996). When a deed is capable of two constructions, the most reasonable construction should be the one adopted. Id. The nature and quantity of an interest conveyed must be ascertained from the instrument itself and cannot be orally shown in the absence of fraud, accident or mistake. Brookbank vs. Benedumtrees Oil Co., 389 Pa. 151, 131 A.2d 103 (1957).

The severances in this case were expressly limited. The oil and gas estate was limited by production methods then in use. One can argue that oil and gas is not property in and of itself, as it is incapable of being property until it is in actual possession. Otherwise, the Rule of Capture is illogical. Imagine, Exxon bought 1,000 acres and fully developed the Elk Sands. Thereafter, they farmout the production, removal, transportation and marketing of oil and gas to Shell. Years later, Exxon finds out there are shale gasses which can be accessed from an adjoining property. Exxon cannot simply drill from an adjoining property and ignore the rights they granted and intended to grant to Shell. Exxon only owns the oil and gas when it retrieves it from the subsurface strata in which it is held (the Rule of Capture). Until captured, the ownership issue is not an issue of ownership of “oil and gas”, but who owns what production rights to the oil and gas. It is a fact specific determination whether Shell’s rights are impacted. In effect, either no one “owns” the oil and gas or it is irrelevant who “owns” the oil and gas. Either way, Exxon does not have an implied right to ignore its previous contract with Shell. This is not an academic argument. All over the Commonwealth, different contracts, exceptions and deeds use different language at different times. There is no earthly reason why they should all be treated the same.

Rather, oil and gas is an estate consisting of a bundle of rights that allows the production and development of oil and gas. Texas law describes the oil and gas estate in this manner. French v. Chevron USA, Inc., 871 S.W.2d 276 (C.App. Tx. 1994) (“mineral estate possesses five essential attributes: (1) the right to develop; (2) the right to lease; (3) the right to receive bonus payments; (4) the right to receive delay rentals; and (5) the right to receive royalty payments.” at 277.) Texas has had much more oil and gas production for a much longer time period to deal with these esoteric issues of when oil and gas is reduced to possession, when it actually becomes property capable of being legally protected and what the nature of that property is at any given point in time. Even assuming, arguendo, that oil and gas in situ could be owned, it is at best one stick in the bundle of rights. The ability to develop the oil and gas estate was limited such that no owner could. proceed without the other’s acquiescence. To hold otherwise does not give effect to the plain language of the instruments in this case and defeats the intention of the parties to the original transactions.

Accepting recitation of Belden and Blake as providing all rights, regardless of the parties’ intent, disregards the ability of private parties to contract as they wish. Belden and Blake involved a public entity demanding rights which exceed than of a private landowner. If Belden and Blake preempts the rights of landowners to negotiate a contract, then it is an impermissible judicially created infringement upon the ability of landowners to contract for the sale of their property in the manner they see fit. Oil and gas in the ground is a finite resource. The total exercise by an oil and gas company of the rights a landowner claims to own, destroys any chance for the landowner to exercise those rights in the future, or in a different manner.