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Marcellus Shale Guide 2012: Business boost

New layers in Marcellus law provide a boon for attorneys

When John Carroll started out as an oil and gas attorney in 1972, the field was a lot smaller than it is today.

“I probably knew every oil and gas lawyer in the commonwealth,” said Carroll, a partner in the Harrisburg office of Philadelphia-based firm Pepper Hamilton and chair of the Pennsylvania Bar Association’s Oil and Gas Committee.

It’s unlikely anyone could make the same claim today. The difference, in large part, is the Marcellus Shale.

Many factors make it difficult to quantify how much the deep-well natural gas industry has stimulated legal activity in Pennsylvania. Among them: the confidentiality of the attorney-client relationship and the problem of defining what counts as shale-related work. But attorneys unanimously declare the shale boom has been big business for them, too.

“Lawyers with experience in oil and gas law are migrating to Pennsylvania from other states,” Carroll wrote in an article in the March/April edition of The Pennsylvania Lawyer magazine.

Texas firms are opening Pennsylvania branches, while Pennsylvania firms are expanding their practices, he wrote.

A decade ago, oil and gas was a minor part of the work at McNeees Wallace & Nurick, partner Curtis Stambaugh said. Now, the oil and gas group he heads has 10 members, several of whom work on little else.

“It’s nothing short of a dramatic increase in terms of the volume of work,” he said.

Marcellus-related legal work takes many forms: leases, right-of-way agreements, litigation and lobbying. In the wake of Act 13, the overhaul of Pennsylvania’s natural gas laws Gov. Tom Corbett signed earlier this year, attorneys for companies, municipalities and individuals are advising their clients on compliance with new environmental regulations and new limitations on local zoning powers.

In some cases, contracts have to be revised, Stambaugh said.

“It’s been an incredibly fluid environment, legally,” he said.

Lawyers in drilling areas handle much of the work, and some goes to attorneys at gas companies’ home offices in Houston or Oklahoma City, but midstate attorneys get their share.

Some keep their clients abreast of legislative and bureaucratic business at the Capitol. Also, “you’d be surprised at the number of people down here who own property” in Northern Tier drilling areas, said Rich Druby of Nestico, Druby & Hildabrand in Derry Township.

Leasing activity there and in Western Pennsylvania hasn’t stopped, but the pace is slowing, Druby and Carroll said. Drilling companies leased most of Pennsylvania’s prime Marcellus sites over the past few years, and what action there is has moved to secondary regions, he said.

Many landowners who signed leases early got much less than their neighbors who waited, Druby said.

However, to keep those leases valid, drillers have to put wells into production within a specified time. Because natural gas prices are so low today, many are reluctant to ramp up production.

Disputes might arise as landowners try to renegotiate rates or argue that leases have lapsed due to lack of activity, Druby said.

Meanwhile, the expansion of midstream operations — the construction of pipelines transporting natural gas from wells to end users — has put lawyers to work drafting right-of-way agreements, Druby said.

Litigation is one area of Marcellus Shale law that many observers expect to expand.

“With any industry, you’re going to have accidents,” and thus the potential for liability, Druby said.

Many environmentalists argue the natural gas industry poses a major threat to air and water quality. In 2009, residents of Dimock Township in Susquehanna County sued Cabot Oil and Gas, alleging the company’s drilling activities contaminated local water supplies. Although Dimock paid $4.1 million as part of a 2010 settlement with the Department of Environmental Protection, the suit remained pending as of this spring.

Suits also are likely to arise in connection with work site accidents and royalty payments, Druby said.

They already are arising in connection with Act 13.

The law strips municipalities of most of their powers to regulate natural gas industry via zoning laws. In late March, seven Pennsylvania townships filed suit in state court alleging Act 13 violates the state constitution.

The best way for drilling companies to avoid lawsuits is to be good neighbors, and recognize they are building long-term relationships in the communities they enter, Druby said.

Many lawyers dealing with Marcellus Shale issues are generalists practicing in rural areas, Carroll said. For that reason, ensuring access to continuing education courses has been very important, he said.

Seminars on Marcellus Shale by the Pennsylvania Bar Institute, the state bar’s continuing-education organization, have drawn hundreds of individuals, Carroll said.

Simply by boosting the economy, the Marcellus Shale helps lawyers, he said.

“There’s plenty of work that’s generated any time you have economic activity,” Carroll said.

A change to the ‘Dunham Rule’

Last September, a state Superior Court judge issued a decision with the potential to throw natural gas leasing into disarray across Pennsylvania.

The issue: whether Marcellus Shale natural gas counts as a mineral for the purposes of state law governing land transfers.

The case has been appealed to the state Supreme Court, which in early April agreed to hear it.

Since the 1882 case Dunham v. Kirkpatrick, state law has held that oil and natural gas are not minerals, and that deeds transferring mineral rights do not transfer ownership of oil and gas unless the latter are explicitly mentioned.

For a century, leases, deeds and contracts have been written based on that precedent, known as the “Dunham Rule,” including those related to Marcellus Shale, said Rich Druby, a partner with Nestico, Druby and Hildabrand in Derry Township.

However, the appellants in the current case Butler v. Powers, William and Craig Pritchard, argue a different precedent should apply.

They are the alleged heirs to an 1881 will that entitles them to half the mineral rights of a parcel of Susquehanna County land. The document doesn’t mention natural gas, but the Pritchards point to a 1983 case in which Pennsylvania courts determined that the owners of a coal deposit own the natural gas trapped in the coal.

The Pritchards argue the Marcellus Shale is similar to coal and the gas is removed by similar processes, and so the “Dunham Rule” shouldn’t apply. They also note their will was drawn up before the Dunham ruling and the distinction it made.

The judge said he couldn’t decide and remanded the case to Susquehanna County court, where it originated. The appellees, John and Mary Butler, then appealed to the state Supreme Court.

Attorney John Carroll, a partner in Philadelphia-based law firm Pepper Hamilton’s Harrisburg office, called the matter “an interesting legal question” with potentially huge implications.

“What you’re talking about is three generations of title,” he said.

Pittsburgh-based firm Buchanan Ingersoll & Rooney joined the Butlers’ legal team after the Superior Court decision.

“We don’t think the Superior Court intended to question the ongoing validity of the Dunham Rule,” said Sean Moran, co-chair of Buchanan Ingersoll’s oil and gas group. Its ruling is being read as raising questions which, “while factually interesting, weren’t legally relevant,” he said. 

“We believe the court should reverse the Superior Court’s decision and reaffirm the century-old precedent in the Dunham case,” he said.

—Tim Stuhldreher

Tim Stuhldreher

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