Ownership of coalbed methane (“CBM”) is an important, unresolved issue that continues to plague oil and gas companies, coal companies and landowners alike. The law on this subject is developing in several states, including West Virginia and Kentucky, but is not yet settled. In an opinion that may tangle the issue even more, the Supreme Court of Kansas recently addressed ownership of coalbed methane in an opinion that follows a pattern of awarding ownership of CBM to oil and gas owners in states where that industry historically has had a more substantial economic presence than coal.
In a decision entered on February 6, 2009, the Supreme Court of Kansas decided that the owner of a coal seam, severed and held separately from the oil and gas estate within the same property, does not own the coalbed methane (CBM) contained within the coal. Not decided in the appeal is a separate claim for trespass by the coal owner against the oil and gas lessee.
From the late 19th until the mid-20th century, the area of southeast Kansas enjoyed a small but significant coal industry. Between 1924 and 1926 the predecessor to Central Natural Resources, Inc. secured deeds to coal in 16 separate tracts in Labette County in which the landowners conveyed “all coal without reference to quality or quantity . . . together with the right to mine and remove the same.” No coal was ever mined from the tracts, nor did the coal owner attempt to drill for and recover the CBM. The landowners separately leased oil and gas around 2000. The oil and gas lessees secured permits and drilled into the target coal seam without notice to Central Natural Resources. An action to quiet title and in trespass was filed by the coal owner, and the trial court awarded judgment to the defendant oil and gas company solely on the quiet title claim. An interlocutory appeal was filed and granted by the Kansas Supreme Court, which upheld the trial court.
On appeal Central Natural Resources presented every legal theory in favor of CBM ownership by coal owners that have been accepted by the appellate courts in Pennsylvania, Alabama and Illinois. The Kansas Supreme Court considered and rejected each theory of ownership.
The coal owner first proposed that the court recognize that the first severance of a mineral from the fee estate, in this case coal, should be interpreted as including within the conveyance all substances contained within the coal. The court rejected this approach calling it an “artificial rule of law” and held that if a coal deed included the CBM, it must do so based on the parties’ intent.
The court next considered Central Natural Resources argument that the deeds should be interpreted as creating a presumption manifesting the parties’ intent to convey the CBM with the coal. The trial court had found the deeds to be unambiguous, but had nevertheless resorted to extrinsic evidence in the forms of treatises and appellate decisions from other states. The Supreme Court did not expressly state whether the deeds were or were not ambiguous, but did find the ambiguity analysis historically accepted by Kansas courts to be useful in ascertaining the grantors’ intent. Employing longstanding Kansas law, together with a statute that provides what interest in an estate is conveyed by deed, the court declined to accept those principles as creating a presumption that the CBM passed to the Central Natural Resources as the grantee under the 1920 era coal deeds.
Finally, in ascertaining the parties’ intent at the time of severance of coal from the fee estate, the court acknowledged that Kansas law requires it to place itself “as nearly as possible in the situation of the grantors and . . . determine as best it can the purpose of the grantors and the intentions they endeavored to convey.” Notwithstanding its adoption of that temporal principle, the court declined to find that the parties impliedly intended to convey the CBM with the coal. Accepting that the parties recognized that CBM in the 1920’s was a known hazard that exited within coal and coal mines, the court could not “divine that the grantors contemplated that the grantee could separately own and produce the CBM without exercising the right to mine and remove the coal.” In short, the deeds passed ownership of coal, and not the CBM within it.
In reaching its decision, the Kansas Supreme Court systematically considered and rejected every argument that the coal owner advanced for its claim of ownership. In holding that the oil and gas lessee owns the right to recover the CBM, it expressly did not have to reach the independent claim of trespass into the coal seam as this was not addressed by the parties in the motion for summary judgment. Since CBM cannot be recovered without a physical occupation of the coal seam, and the entry into the coal seam was without the express or implied consent of the coal owner, the ultimate disposition of the trespass claim will determine whether commercial recovery of CBM in Kansas will be viable in the absence of the consent of coal owners.
The case is Central Natural Resources, Inc. v. Davis Operating Company, 288 Kan. 234, 201 P.3d 680 (2009). For more information, contact Ken Tawney at 304 340-1189 or Blair Gardner at 304 340-1146.
This article was authored by Blair M. Gardner, Jackson Kelly PLLC. For more information on the author see here.
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