Development of Oil and Gas in Pennsylvania When Subsurface Owners

Are Unknown or Unlocatable

Lisa C. McManus, Attorney at Lawlisamcmanus616@gmail.com | 814.781.1319

How Do Subsurface Interests Come to Be Owned By Unknown or Unlocatable Owners?

Surface ownership is usually clear based on possession and payment of taxes. Not so severed oil and gas interests.

Dormant oil and gas interests can arise in a number of ways:

•Grantor reserves ½ of O/G in an 1890 deed, but he and his heirs never file further instruments regarding the interest•O/G owner dies owning interest in O/G, but his heirs are not aware of the interest•Defective tax and judicial sales leave the interest in the original owner•Improper conveyancing or estate administration

Is It Necessary to Lease a Missing Owner?

• Oil and gas owned in fee comprise a separate estate in realty and can be the subject of trespass. Under common law, no lease with owner = no development.

• Co-tenant can lease without consent of remaining co-tenants provided 1) no attempt to exclude unleased co-tenant, and 2) no waste.

• Co-tenant cannot bind unleased co-tenant• Accounting to an unleased co-tenant is

required. Who is responsible for accounting in typical proportionate reduction lease?

Why Not Just File a QTA?

• QTA requires plaintiff to establish title by a fair preponderance of the evidence. Moore v. Commonwealth, Dep’t of Environmental Resources, 129 Pa. Commw. 628, 566 A.2d 905 (1989);  Proctor v. Sagamore Big Game Club, 166 F.Supp. 465 (W.D. Pa. 1958)

• You can’t quiet title to something you don’t own 

Adverse Possession & Abandonment• May seek to QTA based on adverse possession through

development > 21 years but only if plaintiff is not a co-tenant

Adverse possession requires actual, continuous, exclusive, visible, notorious, distinct, and hostile possession for 21 years

Upon severance, no action upon surface can impact ownership of subsurface

• Abandonment requires an actual and voluntary relinquishment of possession and ownership; mere non-use does not constitute abandonment

• QTAs with default judgments are being improperly utilized to wrest subsurface ownership from owners under these theories

Pennsylvania DOGA• Facilitates the development of the subsurface estate

by providing a means to lease the interests of “Unknown or Unlocatable Owners” of Oil and Gas

• Protects the interests of the Unlocatable Owners

• Unlike other states’ dormant mineral acts, the PA DOGA does not vest the surface owner with title to the oil and gas interests that have been severed from the surface estate

• Does NOT apply to coal or coal bed methane

Benefits of the DOGA• Provides developer with protection from suit from unleased

owner.o What if the missing co-tenant is found and doesn’t like the

lease terms?? 58 P.S. § 701.6 provides protection to lessees.

o Increased cost of development may militate against “taking a business risk” and developing in the absence of lease approval from a disinterested party.

o DOGA provides protection from liability to an operator.

Who Benefits from the DOGA?• The Missing Heirs

• The Operator

• The Commonwealth

And practically, the co-tenant who may not be able to lease otherwise

Drawbacks to the DOGA• Lack of Clear Standard of Diligence Regarding Efforts to

Locate “Unlocatable” Owners– Reasonable efforts v. Diligent Efforts – What does that mean?– Can the Pa. R. Civ. P. 430 and Deer Park standard survive a constitutional

challenge? • Difficulty in Locating and Leasing Heirs

– How much effort is required before filing a DOGA petition? After? What if administration costs of a multitude of interests consumes the res?

• Standing and Inalienable Interests– Must have an interest in fee, by lease, as royalty or through ownership of

correlative rights in the oil and gas– “Correlative Rights” are not defined. At least one court has allowed an

operator to claim a “correlative rights” as to a tract wholly owned by a missing owner based on the tract’s location in a drilling unit, In re D.L. O’Neill, Bradford Co., 35 Orphans 2012, but PA law would seem to suggest that no one has standing under DOGA if the interest is wholly owned by a missing owner.

Approaches in the Appalachian Basin

Trust Approach Lapse Approach Hybrid Approach

Pennsylvania – 58 P.S. § 701.1 “Dormant Oil and Gas Act”

Ohio – Ohio Rev. Code Ann. § 5301.56

West Virginia – W. Va. Code § 55-12A-1

Creation of Trust for the benefit of unknown owners

Reunites severed estate after a period of non-use

Two step approach: Step one creates Trust; Step two allows possible reversion to surface owner if after time owners do not appear

Three basic approaches to solving the Dormant Interest problem in the Marcellus and Utica Regions of the Appalachian Basin:

Constitutionality of Lapse Statutes

• Texaco, Inc. v. Short, 454 U.S. 516 (1982) USSC upheld constitutionality of Indiana Mineral Lapse Act that automatically vested

surface owner with subsurface mineral interests unused in prior 20 years. State may enact legislation causing retention of property right to be contingent upon

performance of an act within specified time period; failure to exercise ownership over property for specified period of time is abandonment.

Mineral interest was not taken without just compensation because the interest was "abandoned".

• Illinois, Nebraska, and Wisconsin have declared lapse statutes to be unconstitutional at a state level.

• How can Texaco v. Short be reconciled with PA law governing abandonment, requiring intentional act?

Current Alternatives to DOGA

Surface owners or owners of rights in the corresponding hydrocarbon (e.g., oil v. gas) may file an action pursuant to the Inalienable Property chapter of the PEF Code, which would appear to be appropriate to allow for the sale of the interest, the receipt of the Commonwealth of the proceeds of escheated property (see Links Estate, 319 Pa. 513; 180 A. 1 (1935)), and the subsequent exploitation of the mineral estate.

• N.B. The petitioner may not be the winning bidder at sale. Time and expense could be for nothing.

Proposed Solutions to the Dormant Interest Problem

• SB 258 of 2013SB 258 of 2013 Introduced by Senators Yaw, Erickson, Vulakovich,

and Vogel Referred to the Environmental Resources and

Energy Committee Public Hearing on March 19, 2013

• HB 97 of 2013HB 97 of 2013 Introduced by Representative Robert Godshall Previously introduced as HB 375 Referred to the Environmental Resources and

Energy Committee

• HB 1444 of 2013 HB 1444 of 2013 Introduced by Representative Jesse White Referred to the Environmental Resources and

Energy Committee

•Would amend the Action to Quiet Title law to provide for a ‘rebuttable presumption’ that OGMs have been abandoned in favor of a surface owner after a 50-year period if “the subsurface ownership is unclear or unknown.” Exempts fee interests reserved or acquired by a recorded conveyance. 

•Primary purpose appears to be to vest ownership in the surface owner, rather than the Commonwealth, where living individual owners or existing entity owners have not been identified for a period of 50 years.

•Three potential drawbacks exist with regard to SB 258:

• immediate retroactive application resulting in loss of property rights without prior notice;

• impact upon quiet title law effecting a change in established law regarding abandonment;

• numerous and consequential interpretive issues associated with and necessarily raised by the Bill.

•Opposed as drafted by NARO, the Pennsylvania Bar Association Section of Real Property, Probate and Trust Law (RPPT), and the PBA Environmental and Energy Law Section

SB 258 of 2013SB 258 of 2013

•Would amend the DOGA to provide for the vesting of O&G ownership in the surface owner, rather than the Commonwealth, after a period of 20 years of nonuse, which would constitute statutory abandonment.

•Allows O&G owner to preserve interest by filing notice in the Recorder of Deeds office setting forth the owner’s desire to preserve the interest.

•Three potential drawbacks exist with regard to HB 97:

• immediate retroactive application resulting in loss of property rights without prior notice;

• change in established law of abandonment, requiring intent;• fundamental shift in view as to “abandoned” property, which is traditionally

escheated to the Commonwealth and not to the finder of the property or other non-owner claimant.

•Act could be feasible if grace period for filing statement of claim were incorporated and if “abandonment” of property is limited to oil and gas rights, thereby avoiding a conflict with the Fiscal Code.

HB 97 of 2013HB 97 of 2013

•Provides for judicial process whereby a property owner may petition the courts to have mineral rights rejoined with surface rights based on a deemed abandonment after a period of 10 years of non-use.

•Allows O&G owner to preserve interest by filing notice in the Recorder of Deeds office setting forth the owner’s desire to preserve the interest.

•Contains a grace period for the filing of the statement of claim of subsurface rights, which may establish the necessary constitutional protections.

•A ten-year limitation period may be considered too short.

HB 1444 of 2013 HB 1444 of 2013

Conclusion

DOGA v. Mineral Lapse Traditional notions of holding property in trust for missing owner and escheat

to the Commonwealth compete with certainty of title and ease of administration

Cost of administration of DOGA trust can undermine DOGA’s usefulness and desirability.

Due Diligence Under any approach, the standard for locating missing owners and serving

process upon them must be updated to account for modern search techniques and must be further elucidated to preserve constitutional protections.

Questions?