The parties in this appeal contest the ownership of what is called "coalbed methane," which many refer to simply as "CBM." Coalbed methane, as its name suggests, originates in a coal seam. Traditionally viewed as a dangerous waste product of coal mining,
We note at the outset that West Virginia contains huge reserves of coalbed methane
In a case we discuss at greater detail, infra, the United States Supreme Court has recently described coalbed methane and the process by which it is formed. After recounting the process by which decaying biological matter turns first into peat, and is then compressed into coal, the Court explained:
Amoco Production Co. v. Southern Ute Indian Tribe, 526 U.S. 865, 873, 119 S.Ct. 1719, 1724, 144 L.Ed.2d 22, 29 (1999) (internal citations omitted).
The appellees in this case, Hall Mining Company, Inc., and several individuals,
At some point in the mid-1980's, representatives of appellant Energy Development Corporation, Inc. (sometimes abbreviated as "EDC"), approached Hall Mining and inquired about leasing the oil and gas under the tracts in question. Counsel for Energy Development Corporation prepared the final versions of the leases, and on September 15, 1986, the parties entered into two essentially identical lease agreements, one for each tract. These leases purported to "let lease and demise" to Energy Development Corporation:
Nowhere in the leases is there a explicit reference to coalbed methane, coalbed gas, or other such specific term.
The appellees maintain that, although Energy Development Corporation drilled as many as seven "conventional" gas wells on the leased tracts, at no time did Energy Development Corporation attempt to produce any coalbed methane. Sometime in 1998, a dispute arose between the parties concerning the payment of royalties, and the appellees filed suit against Energy Development Corporation. During the course of this dispute, Energy Development Corporation filed an answer and counterclaim on August 18, 1999, in which it asked the circuit court to declare that "EDC has the right to drill into the coal formations on the properties in question and produce natural gas therefrom, including coalbed methane." The record indicates that this is the first time the parties had any dispute over the issue of coalbed methane.
While the lower court action was pending, on August 15, 2001, the appellees entered into a new and separate agreement with another gas operator, GeoMet, Inc. The record indicates that GeoMet either specialized in, or had some prior experience in, the development of coalbed methane. The new leases expressly granted GeoMet the right to extract coalbed methane and explicitly required GeoMet to develop coalbed methane wells within a certain time period.
After negotiations not detailed in the record, the parties settled all other issues in the case, and by order dated October 22, 2001, the court re-aligned the parties, so that Energy Development Corporation became the plaintiff and the appellees became the defendants. By order dated December 12, 2001, the court denied Energy Development Corporation's motion for summary judgment and rejected its claim that the leases were unambiguous.
Witnesses for Energy Development Corporation testified that the company entered into its first oil and gas lease in 1975, and though Energy Development Corporation had drilled numerous conventional gas wells, it had never drilled a coalbed methane well prior to the signing of the leases in question, nor had it drilled a coalbed methane well in the sixteen years between the signing of the leases and day of the bench trial.
Because the lower court considered the language in the leases to be ambiguous, it heard testimony regarding what knowledge the parties had about coalbed methane in 1986. Energy Development Corporation president William Evans testified that he first became aware of the economic potential of coalbed methane when Congress addressed the topic in the 1978 Tax Reform Act. He stated that his familiarity with a 1983 Pennsylvania case on the subject, his contacts with one of the parties in that case, and his reading of trade journals, all contributed to make him aware of the potential economic value of coalbed methane at the time he signed the 1986 leases with the appellees. Mr. Evans also testified that all, or most, of Energy Development Corporation's conventional gas leases contained the same "all oil and gas" language at issue in this case.
Mr. Evans and his son both testified that they had specifically discussed the issue of coalbed methane with Mr. C. Henry Harman (an original lessor, since deceased) and had actually traveled to Mr. Harman's home to discuss this matter. Dale Harman, a named lessor and a witness for the appellees testified that he had not heard of the economic potential of coalbed methane until 1990, and, to his (Dale Harman's) knowledge, Mr. C. Henry Harman had never met with anyone regarding the leases without having either himself (Dale Harman) or counsel for Hall Mining present.
The lower court entered a lengthy and thoughtfully reasoned order dated June 19, 2002. The court held that the question of whether ambiguity exits in a lease is a question of law to be decided by the court. The court then noted that a lease may contain a "latent ambiguity," and that when considering a latent ambiguity, a court may look to extrinsic evidence, including common industry practices, and that a lease should be construed as of its date of execution. The court also found that a gas lease should be construed against the lessee, especially when the lessee solicits and prepares the lease.
The court found that the leases in question were, in its terms, "not unambiguous" in
Appellant Energy Development Corporation maintains that the broad "all gas" language in the 1986 deeds conveyed to it the right to develop the coalbed methane, and that the lower court erred in finding to the contrary. While we believe the lower court's decision was broader than necessary,
STANDARD OF REVIEW
We are asked to review the decisions made by the lower court in its bench trial. This Court has stated:
Since our decision in Williams v. Precision Coil, Inc., 194 W.Va. 52, 459 S.E.2d 329 (1995), there can be no doubt that it is for a trial court to determine whether the terms of an integrated agreement are unambiguous and, if so, to construe the contract according to its plain meaning. In this sense, questions about the meaning of contractual provisions are questions of law, and we review a trial court's answers to them de novo. 194 W.Va. at 65 n. 23, 459 S.E.2d at 342 n. 23, citing Thrift v. Estate of Hubbard, 44 F.3d 348, 357-58 (5th Cir. 1995). However, when a trial court's answers rest not on plain meaning but on differential findings by a trier of fact, derived from extrinsic evidence as to the parties' intent with regard to an uncertain contractual provision, appellate review proceeds under the "clearly erroneous" standard. The same standard pertains whenever a trial court decides factual matters that are essential to ascertaining the parties' rights in a particular situation (though not dependent on the meaning of the contractual terms per se.) In these types of cases, the issues are ordinarily fact-dominated rather than law-dominated and, to that extent, the trial court's resolution of them is entitled to deference.
Syl. pt. 6, Cotiga Development Company v. United Fuel Gas Company, 147 W.Va. 484, 128 S.E.2d 626 (1962). With these standards in mind, we now consider whether the circuit court erred in this case.
A. Overview of Coalbed Methane
We are guided in our discussion by the public policy goals announced by the legislature with respect to coalbed methane, which note that it is both dangerous and valuable:
W. Va.Code § 22-21-1 (1994).
What we today call coalbed methane or CBM has also been called "fire damp," "coal gas," "coal seam methane," or "mine gas," and has long been regarded as one of a coal miner's greatest foes. Coalbed methane may have produced more widows and orphans than any other workplace hazard. In two single West Virginia accidents, coalbed methane killed 440 miners, leaving 362 dead in the Monongah Mine Disaster in 1907, the worst mining disaster in American History, and 78 dead in the Farmington Mine Disaster of November 20, 1968.
Zirkle v. Zirkle, 172 W.Va. 211, 212 n. 2, 304 S.E.2d 664, 665 n. 2 (1983). See also, United Mine Workers of America International Union v. Parsons, 172 W.Va. 386, 393 n. 3, 305 S.E.2d 343, 348-49 n. 3 (1983). This disaster also prompted the passage of West Virginia's "Black Lung" compensation law, the first in the nation (now codified at W. Va.Code, § 23-4B-1, et seq.,) as well as the aforementioned national Act (now codified at 30 U.S.C. § 901 et seq.)
Having acknowledged that coalbed methane is dangerous, we also recognize that it is now also considered quite valuable. Our research indicates that operators have drilled several thousand wells in Appalachia. Our neighboring state of Virginia alone produced over seventy billion cubic feet of coalbed methane in the year 2002. Operators have drilled several hundred coalbed methane wells in West Virginia.
B. Ambiguity and Construction of the Lease
There is a great temptation in this case, urged on us by both sides, to wave a wand and declare coalbed methane to be either "coal" or "gas." The logic of either position is facially seductive; "coalbed methane" is indeed "methane" in that both have the same chemical composition; but "coalbed methane" is also intimately bound to the coal, which must be disturbed if coalbed methane is to be produced in paying quantities.
But the precise question we must answer in this opinion is not whether coalbed methane, for all purposes and in all cases, is "coal" or is "gas." The specific question we must answer is whether a gas lease executed in 1986, before the widespread commercial production of coalbed methane in West Virginia, signed by a lessor who owned the land, coal, oil and gas,
Although we are considering a lease in this case, much of our case law concerning contracts, in general, and deeds, in particular, offers us guidance. Clearly the question of whether or not these leases are ambiguous presents a question of law for the court to decide: "The mere fact that parties do not agree to the construction of a contract does not render it ambiguous. The question as to whether a contract is ambiguous is a question of law to be determined by the court." Syl. pt. 1, Berkeley County Pub. Serv. Dist. v. Vitro Corp., 152 W.Va. 252, 162 S.E.2d 189 (1968); accord, syl. pt. 1 International Nickel Co. v. Commonwealth Gas Corp., 152 W.Va. 296, 163 S.E.2d 677 (1968); syl. pt. 3 Fraternal Order of Police, Lodge Number 69 v. City of Fairmont, 196 W.Va. 97, 468 S.E.2d 712 (1996); Tolliver v. The Kroger Co., 201 W.Va. 509, 517, 498 S.E.2d 702, 710 (1997).
We also agree with the lower court that a document that may appear on its face to be free from ambiguity, may be deemed latently ambiguous. "A latent ambiguity, which does not appear upon the face of the document, however, may be created by intrinsic facts or extraneous evidence." Kopf v. Lacey, 208 W.Va. 302, 307, 540 S.E.2d 170, 175 (2000) (per curiam) (citing Black's Law Dictionary 794 (5th ed. 1979)). See also, Snider v. Robinett, 78 W.Va. 88, 88 S.E. 599 (1916) ("[when] evidence discloses a latent ambiguity, such, for instance as that there are two objects, to either of which the terms of the writing apply with equal fitness, then prior and contemporaneous transactions and collocutions of the parties are admissible for the purpose of identifying the particular object intended."); Farmers and Merchants Bank v. Farmers and Merchants Bank, 158 W.Va. 1012, 1017, 216 S.E.2d 769, 772 (1975) ("A latent ambiguity is one that is not apparent upon the face of the instrument alone and that is discovered when it is sought to identify the property, the beneficiaries, etc."); Collins v. Treat, 108 W.Va. 443, 446, 152 S.E.
Having determined that a document is ambiguous, a court must embark upon a search for the intent of the parties. With regard to a contract, the Court has explained:
Fraternal Order of Police, Lodge Number 69 v. City of Fairmont, 196 W.Va. 97, 101 n. 7, 468 S.E.2d 712, 716 n. 7 (1996). In reference to a coal severance deed, this Court has explained: "It must be borne in mind in construing this paper [the coal severance deed] that the purpose of all construction is to give effect to the intention of the parties." Rock House Fork Land Co. v. Raleigh Brick & Tile Co., 83 W.Va. 20, 22, 97 S.E. 684, 685 (1918).
With respect to the applicable time period, the Court has stated, with regard to deeds that "[a] deed will be interpreted and construed as of the date of its execution." Syl. pt. 2, Oresta v. Romano Bros., 137 W.Va. 633, 73 S.E.2d 622 (1952); accord, syl. pt. 3, Quintain v. Columbia Natural Resources, 210 W.Va. 128, 556 S.E.2d 95 (2001). We find both of these principles applicable to the case at hand, and correctly applied by the lower court.
The lower court also found that the leases should be construed in favor of the appellees, who were the lessors, and against appellant Energy Development Corporation, the lessee. We concur. "The general rule as to oil and gas leases is that such contracts will generally be liberally construed in favor of the lessor, and strictly as against the lessee." Syl. pt. 1, Martin v. Consolidated Coal & Oil Corp., 101 W.Va. 721, 133 S.E. 626 (1926). See also, Jackson v. Kent, 106 W.Va. 37, 46, 145 S.E. 572, 575 (1928) ("[L]eases for oil and gas development should be construed most strongly against the lessee rather than the lessor."); accord, Charlton v. Chevrolet Motor Co., 115 W.Va. 25, 174 S.E. 570 (1934); Moore v. Johnson Serv. Co., 158 W.Va. 808, 219 S.E.2d 315 (1975); United Fuel Gas Company v. Cabot, 96 W.Va. 387, 122 S.E. 922 (1924); Eclipse Oil Company v. South Penn Oil Company, 47 W.Va. 84, 34 S.E. 923 (1899).
The lower court emphasized the fact that Energy Development Corporation solicited and prepared the leases. While the sophistication of at least some of the lessors in this case may have been greater than average, this Court has noted that a lessor may often be at an informational or technical disadvantage, and must often rely upon the advice of the lessee or his or her agent:
Bettman v. Harness, 42 W.Va. 433, 448, 26 S.E. 271, 276 (1896); accord, Moody v. Smoot Advertising Co., 98 W.Va. 261, 267, 126 S.E. 919, 921 (1925). Although this quotation discusses oil leases, we believe this to be equally true in the gas business or coal business. The court also noted that counsel for Energy Development Corporation had the final say in the wording of the leases. As this Court noted in Moody, concerning the lease of a building:
The circuit court also determined that it could examine the custom and usage of the gas industry at the time the leases were executed in its search for the parties' intent. This, too, is a principle of long standing: "Oral testimony of the general usages of the gas business, which must have been in the minds of the parties at the time of entering into the contract, is admissible to explain an ambiguity in a written contract for the purchase of gas, whether the ambiguity be latent or patent." Syl. pt. 2, Bell v. Wayne United Gas Co., 116 W.Va. 280, 181 S.E. 609 (1935); accord, Cotiga Development Company v. United Fuel Gas Company, 147 W.Va. 484, 128 S.E.2d 626 (1962).
Two other issues shed light on the intention of the parties and helped persuade the lower court that the appellees did not intend to convey a right to develop the coalbed methane in the leases: First, if the leases included the right to develop coalbed methane, then they would also carry an implied right for Energy Development Corporation to invade the coal seams of the appellees and stimulate them in a fashion that could make it more difficult or dangerous to later produce the coal; second, that the production of coalbed methane was not a common practice in McDowell County at the time the leases were executed. When considering a deed that conveyed an interest in coal, this Court found:
Buffalo Mining Co. v. Martin, 165 W.Va. 10, 18, 267 S.E.2d 721, 725 (1980).
Syl. pt. 1, West Virginia-Pittsburgh Coal Co. v. Strong, 129 W.Va. 832, 42 S.E.2d 46 (1947); syl. pt. 1, Lowe v. Guyan Eagle Coals, Inc., 166 W.Va. 265, 273 S.E.2d 91 (1980); Phillips v. Fox, 193 W.Va. 657, 663, 458 S.E.2d 327, 333 (1995).
With due consideration to the foregoing authority, we hold that, in the absence of specific language to the contrary or other indicia of the parties' intent, an oil and gas lease does not give the oil and gas lessee the right to drill into the lessor's coal seams to produce coalbed methane gas.
C. Other Courts
Other states have grappled with conflicts between various owners as to who has the right to develop coalbed methane.
One of the earliest modern cases is United States Steel Corp. v. Hoge, 503 Pa. 140, 468 A.2d 1380 (1983), which considered a dispute between successors in interest to the original fee owners (and their gas lessee) and a coal owner. In 1920, the original fee owners had sold "[a]ll the coal of the Pittsburgh or River Vein" to U.S. Steel and reserved the "rights to drill and operate through said coal for oil and gas without being held liable for any damages." Id. 503 Pa. at 144, 468 A.2d at 1382. In 1978, the successors in interest to the original owners leased the gas to a third party who began drilling test wells and making plans to develop the coalbed methane by
At the center of this decision was the basic theory of mineral ownership in Pennsylvania, coupled with a concern that the proposed method of production would probably damage the coal seam and increase the danger for miners. Consistent with the "ownership in place" theory that applies in Pennsylvania, the court ruled:
Id. 503 Pa. at 147, 468 A.2d at 1383 (emphasis in original). However, in West Virginia, we follow the "rule of capture" for oil and gas. This Court has stated:
Powers v. Union Drilling, Inc., 194 W.Va. 782, 787, 461 S.E.2d 844, 849 (1995) quoting, Trent v. Energy Development Corp., 902 F.2d 1143 (4th Cir.1990) (citation and internal quotations omitted). That difference between our states duly noted, we believe the important fact about Hoge is not so much our different theories of ownership, but that the court found that a limited reservation of a right to drill through the coal did not include the right to drill into the coal and develop the coalbed methane. Focusing on the intent of the parties, the court stated:
Id. 503 Pa. at 149-50, 468 A.2d at 1384-85. Thus the intention of the parties was a paramount concern, giving consideration to common usage and practice at the time of the conveyance.
The Supreme Court of Alabama has also considered this issue. In NCNB Texas National Bank, N.A. v. West, 631 So.2d 212 (Ala.1993), the Alabama Court also considered the difference between the rule of capture (which it described as a "nonownership theory") and the concept of ownership in place in a dispute between a coal owner and the successor in interest to the original fee owner. The original owner had severed the coal and coal mining rights in a 1954 deed conveying "all the coal," but reserving "all the oil, gas, petroleum and sulphur." In a detailed and complex holding, the court ruled that the coal owner "owned" the coalbed methane when it was still in the coal, and the gas owner "owned" it when it migrated out of the coal strata:
The U.S. Supreme Court has also recently considered a coalbed methane case in Amoco Production Co. v. Southern Ute Indian Tribe, 526 U.S. 865, 119 S.Ct. 1719, 144 L.Ed.2d 22 (1999). The Southern Ute Tribe ceded certain lands to the federal government in 1880. In the early 1900's, much of this land was distributed by the federal government to homesteaders as land grants. Because of an early 20th Century coal shortage in the western United States, Congress enacted new land grant legislation in 1909 and 1910. The 1909 and 1910 laws, unlike earlier legislation, did not grant the land in fee simple absolute, but instead included "a reservation to the United Stated of all coal in said lands, and the right to prospect for, mine, and remove the same." Id. 526 U.S. at 869-70, 119 S.Ct. at 1722-23, 144 L.Ed.2d at 27-28.
In 1938, the federal government returned, in trust, some of the traditional Ute lands to the Tribe, "including the reserved coal in lands patented under the 1909 and 1910 Acts. As a result, the Tribe now has equitable title to the coal in lands within its reservation settled by homesteaders under the 1909 and 1910 Acts." Id., 526 U.S. at 870, 119 S.Ct. at 1723, 144 L.Ed.2d at 27-28. In 1991, the Ute Tribe filed suit against Amoco, who held a gas lease from the successors in interest to the original homesteaders, claiming that the coalbed methane had been reserved along with the coal, so that the Tribe now owned the coalbed methane.
The Court focused its inquiry upon the intent of the Congress in passing the 1909 and 1910 acts, finding that, "[i]t is evident that Congress viewed CBM gas not as part of the solid fuel resource it was attempting to conserve and manage but as a dangerous waste product, which escaped from coal as the coal was mined." Id., 526 U.S. at 875, 119 S.Ct. at 1725, 144 L.Ed.2d at 31. Ultimately the Court concluded that the coalbed methane did not belong to the Ute Tribe, who owed the coal, but rather to the successors in interest to the original homesteaders. The Court largely based its decision on the limited nature of the reservation made by Congress:
Id., 526 U.S. at 877, 119 S.Ct. at 1726, 144 L.Ed.2d at 32. Thus, one might argue that the Amoco Court took the view that, when one makes a reservation of rights, one only gets what one named explicitly and specifically in the reservation.
Id., 526 U.S. at 879, 119 S.Ct. at 1727, 144 L.Ed.2d at 33 (emphasis added). The appellant argues that the decision in Amoco is dispositive on the issue of coalbed methane ownership in West Virginia. Appellant claims that, because the Amoco Court found that Congress's reservation of coal did not include coalbed methane, and found that the right to vent does not ipso facto amount to ownership, that coalbed methane is conclusively "a gas" and thus passed under the "all gas" language of the 1986 leases.
While seductively simple, this logic does not persuade us. We believe that what the Court determined was that a limited reservation (recall that Congress had previously made these land grants in fee simple absolute) reserved only that which was specifically and explicitly mentioned. Moreover, the Court in Amoco concerned itself primarily with the intent of the Congress and what it would have understood about the industry at the time of the enactments. Just as in the instant case, the focus was on what a party, at the time of the conveyance, would have intended to pass, or not pass, in the conveyance. Thus, we conclude that Amoco is not at odds with our holding in this case, and does not require a blanket finding by this Court that coalbed methane "is gas."
In a dispute between a coal operator and gas owner, the Wyoming Supreme Court determined that a deed that conveyed "all coal and minerals commingled with coal," but reserved to the grantor "all oil, gas and other minerals," did not convey the coalbed methane to the coal owner, but, instead, reserved it for the grantor. In a decision at odds with the Pennsylvania case of Hoge, but consistent with U.S. Supreme Court in Amoco, the Wyoming court focused on the intent of the parties:
Newman v. RAG Wyoming Land Company, 2002 WY 132, 53 P.3d 540, 549 (2002). The court went on to hold:
Id., 53 P.3d at 550. Again, although this decision ultimately favored the gas owner, the court considered the intent of the parties at the time of the conveyance and found that it was unlikely that the party making a specific conveyance of one mineral, the coal, would have silently included another interest, the coalbed methane. Thus, we feel that the underlying logic of the Wyoming case is not entirely inconsistent with our view.
The Montana Supreme Court reached a similar conclusion that the conveyance of "all coal and coal rights" did not include coalbed methane. In Carbon County v. Union Reserve Coal Co., Inc., 271 Mont. 459, 898 P.2d 680 (1995), the Montana Court considered a dispute between the county and its gas lessee on one side, and the coal owner on the other. The deed in question had conveyed "all coal and coal rights" but was silent as to gas. The county later granted a lease to a gas operator that specifically included the right to develop coalbed methane. When the gas operator started to drill wells into the coal, the coal owner objected, and the county filed suit to quiet title to the coalbed methane.
After concluding that "methane gas is not a constituent part of coal," id., 271 Mont. at
Id., 271 Mont. at 474, 898 P.2d at 689. Again, this decision turned upon the intent of the original owner at the time of making a specific and limited conveyance of the coal. While we are considering a lease, and not a deed, and while we are not making any sweeping statements regarding the "true nature" of coalbed methane, that underlying logic of the Montana Court is not inconsistent with our holding.
Finally, we note that the Supreme Court of our neighboring state of Virginia has before it a similar dispute in Ratliff, et al. v. Harrison-Wyatt, LLC, et al., Case No. 187-00 (29th Va. Cir.Ct.2002), which as of the writing of this opinion, has not yet been decided. Understanding that the Virginia Supreme Court will have the final word on the matter, we still find an examination of the Virginia case valuable. The lower court in Ratliff considered a dispute between a coal owner and the successors in interest to the original surface/fee owner who had conveyed by deed in 1873 and 1877 "all coal and reasonable surface and underground use of the property in connection with mining the coal."
As we have done in the instant case, the Virginia Court in Ratliff considered "what the language meant to the parties at the time of conveyance" .. and "examin[ed] the terms used in light of the common understandings, along with other facts and circumstances during the time period." Id. It is notable that the court, as we have, resisted the temptation to declare coalbed methane to be either "coal" or "gas." The Ratliff court stated: "[T]he only finding that would allow the Court to rule in favor of the coal owners is that the CBM is a constituent of the coal itself. The Court cannot make such a finding." Id. The Virginia Court concluded by making the following specific holdings:
Ratliff, et al. v. Harrison-Wyatt, LLC, et al., Case No. 187-00 (29th Va. Cir.Ct.2002).
We find no fault with the Virginia decision, though it may be reversed on appeal. The basic premise of that decision, that one making a grant of one interest need not specifically reserve every other possible interest, is in harmony with West Virginia law; the court's focus of inquiry, the intent of the parties, is precisely the same as ours. We believe the underlying, intent-focused rationale of Virginia holding is consistent with our view in the instant case.
D. The Statute
The Legislature, aware as we have noted of both the dangerousness and value of coalbed methane, has crafted an elaborate statutory scheme in an attempt to balance the conflicting goals of guarding against
Once these areas are defined, the operators must then contact all the parties that might have an interest in the coalbed methane.
(3) Each coal owner and each coal operator (i) from whom a consent and agreement
W. Va.Code § 22-21-9 (1994). We find it noteworthy that the statute requires notice to all parties who might have some interest in the coalbed methane: surface owners, coal owners, coal operators, and the owners, lessees, and operators of oil and gas wells. Also worthy of note is the way the statute completely avoids and eschews any attempt at deciding ownership of coalbed methane. The statute provides in part:
W. Va.Code § 22-21-17 (1994) (emphasis added). After considering these issues, the review board issues an order, either granting or denying the pooling request, and giving anyone with a claim to the coalbed methane several options:
W. Va.Code § 22-21-17 (1994). Presuming that all those who think they have an interest in the coalbed methane agree, the review board then issues and order establishing how to distribute the profits. In the case of a conflict, any profits from production go into an escrow account:
W. Va.Code § 22-21-17 (1994).
However, the statute offers little guidance on what to do in the event that potential claimants are unable to work out a solution on their own:
W. Va.Code § 22-21-17 (1994) (emphasis added).
We do not feel that our decision in this case is at odds with the statute, or adverse to the public policy goals expressed by the Legislature, nor does it prevent conventional gas lessees in this state from participating in the production of coalbed methane. A gas lessee, like Energy Development Corporation, holding a conventional gas lease need only obtain the express right to produce coalbed methane from the lessor, or other party deemed to have ownership of the coalbed methane. As the statute suggests, in those cases where there is still a dispute over ownership, the parties may seek "resolution of conflicting claims ... by voluntary agreement or a final judicial determination." In most cases, disputes among multiple parties claiming the right to develop coalbed methane can be resolved via the application of the West Virginia Coalbed Methane Act, W. Va. Code § 22-21-1, et seq. (1994), and cooperation among the parties.
For the reasons stated, the order of the Circuit Court of McDowell County is affirmed.
Chief Justice STARCHER concurs and reserves the right to file a concurring opinion.
Justice ALBRIGHT dissents and reserves the right to file a dissenting opinion.
ALBRIGHT, Justice, dissenting.
(Filed Jan. 8, 2003)
The ultimate question presented to this Court by the case before us requires an identification of who acquires the right to drill a coalbed methane gas well under the statutory scheme adopted in 1994 and set forth in Article 21, Chapter 22 of the Code of West Virginia of 1931, as amended. The immediate question posed to the Court, however, is whether, under leases executed in 1986, a lessor of "all of the oil and gas and all of the constituents of either" in and underlying certain tracts of land, acquired the right to explore for, extract and market coalbed methane gas from those tracts.
The majority answers the immediate question by skillfully: (1) finding ambiguity in the leases, (2) avoiding the determination of whether coalbed methane is "gas" within the meaning of the leases, and (3) proceeding to construe the leases in a manner that prevents the lessee from applying for a permit to explore for and produce coalbed methane. Moreover, the majority simply ignores the ultimate question of identifying the party or parties who may be entitled to drill a coalbed
We have consistently held that, in the absence of an ambiguity, a lease or other instrument may not be construed by the courts but must be applied according to its clear terms. Cabot Oil & Gas Corp. v. Pocahontas Land Corp., 180 W.Va. 200, 376 S.E.2d 94 (1988). This Court has also consistently defined ambiguity as follows:
Under our law an oil and gas lease grants first a contingent title—an inchoate right or mere license—to explore for oil and natural gas; if either is found, a right vests in the lessor to produce such minerals and, in turn, to take title to the oil or gas produced as personalty when either is actually extracted from the land. See South Penn Oil Co. v. Haught, 71 W.Va. 720, 78 S.E. 759 (1913); McGraw Oil & Gas Co. v. Kennedy, 65 W.Va. 595, 64 S.E. 1027 (1909); Lowther Oil Co. v. Miller-Sibley Oil Co., 53 W.Va. 501, 44 S.E. 433 (1903).
At the time of the execution of the leases at issue here, "natural gas" had been defined as:
Webster's New Intl. Dictionary 1631 (2nd ed 1958).
The same dictionary notes that in popular usage the term "gas" includes "[a]ny combustible gaseous mixture used for illuminating or as a fuel; as, natural gas, coal gas, etc." and recites that a typical analysis of the composition of natural gas revealed the sample to be 92% methane, 3% hydrogen and 2% nitrogen. See id. at 1035-36 (defining "gas"). Under the Energy Policy Act of 1992, the United States Congress defined "coalbed methane gas" as "occluded natural gas produced (or which may be produced) from coalbeds and rock strata associated therewith." 42 U.S.C. § 13368(p)(2) (2000). In West Virginia's response to the Energy Policy Act of 1992, as one of the named "affected states" particularly addressed by that federal legislation, our legislature adopted a somewhat more expansive definition: "`Coalbed methane' means gas which can be produced from a coal seam, the rock or other strata in communication with a coal seam, a mined-out area or a gob well." W.Va.Code § 22-21-2(c) (1994) (2002 Repl.Vol.). Finally, it is noted that the leases in question granted the lessee rights to explore for and exploit all of the oil and gas underlying the tracts of land covered by the leases.
The majority found an ambiguity in the grant of a lease of "all of the oil and gas and all of the constituents of either" where reasonable minds could not differ as to the true and intended meaning of that language. Moreover, it appears beyond cavil that coalbed methane is gas, that is natural gas. Each of the dictionary definitions clearly identify methane as the principal component of natural gas and both the federal and state definitions of "coalbed methane" describe it as a gas. Consequently, the majority erred in finding ambiguity and, in the larger picture, in failing to clearly define coalbed methane as a gas, as natural gas.
I turn now to a review of the impact of the decision of the majority to construe the leases at issue here, rather than to apply their clear language. The majority construed the leases in a manner that prevents the oil and gas lessees here from applying for a permit to explore for and produce coalbed methane and led to the corollary decision to ignore the ultimate question of who may apply for a permit to drill such a well. In setting forth its reasoning, the majority relied heavily on
Why do I say this? First, I note that the regulatory requirements for sealing drill holes running through coal seams apply only to workable coal seams. For the purposes of applying those requirements, "coal seam" and "workable coal bed" are interchangeably defined by statute as "any seam of coal twenty inches or more in thickness, unless a seam of less thickness is being commercially worked, or can in the judgment of the department foreseeably [sic] be commercially worked and will require protection if wells are drilled through it." W.Va.Code § 22-6-1(e) (1994). In other words, for a coal seam of less than twenty inches thickness that is neither being worked nor considered by the regulatory authorities as capable of being worked, the statutory and regulatory sealing requirements upon which the trial court and the majority relied are simply inapposite. The majority failed to consider that as a result of the limitation of the sealing requirements to workable coal seams, generally of twenty or more inches thickness, an oil and gas lessee always had the expectation and the right to explore for and capture gas—including methane—in, under and above any coal seam not considered workable. In other terms, the words in a lease granting the right to explore for and extract "all" oil and gas have always included the right to extract methane gas. The extraction of methane has not been limited by the terms of the lease; the extraction of methane has heretofore been limited only by the state's regulatory scheme for protecting coal miners and coal mining and the lack of technology for the commercially justified production of methane gas from coalbeds.
Secondly, without regard to coal seams, it is simply a fact that methane can be found in a variety of strata, near or far from coal seams, and there has never been any doubt that such gas may be found, captured and extracted under standard oil and gas leases such as the lease at issue in this case.
Both the trial court and the majority ignore the historic ability of oil and gas lessees to explore for and capture methane under the circumstances here described and literally jump to the conclusion that coalbed methane found in workable or previously worked coal seams cannot fall within the ambit of an older, standard oil and gas lease that does not specifically mention coalbed methane. Put directly, a grant of the right to explore for and exploit "all of the oil and gas" under a tract does not mean merely a right to explore for and extract only some of that oil and gas; "all" means all. Accordingly, I particularly dissent from the ruling forth in
I suspect that a substantial factor in the majority's narrow decision in this case proceeds from a belief that the ruling protects surface owners, who, in the case before us, also retained ownership of the coal in and underlying their land, free and clear of any coal lease or deed severing ownership of the coal from ownership of the surface. I fear that in more instances than not the majority's position accomplishes the opposite effect: It may well freeze out of the permit process for drilling a coalbed methane well the economic interests of the very small landowners the majority intended its ruling to protect.
Consider this scenario. In 1900, landowners' predecessor in title gave a severance deed for all the coal in and underlying their land, which coal is now owned by A. In later years it was determined that the coal seem was only 30 inches thick at best and is too gaseous and of such low quality as to not justify efforts to extract the coal. In 1986, landowners gave B an ordinary oil and gas lease, reserving "the usual 1/8th" royalty. In 2004, A elects to grant to C the right to "drill into C's coal seam to produce coalbed methane gas" horizontally from adjoining coal lands owned by A, and gives the necessary written consent to C so that C can obtain a coalbed methane permit. Under the majority's ruling, the oil and gas lessee, B, has no standing to claim an ownership interest; landowners will get no royalty under their oil and gas lease; and such landowners will have a royal fight on their hands to get one dime from the production of coalbed methane "occluded" in the coal under their land. Their sole recourse is to litigate an assertion that the severed coal owner has no right to allow the extraction of the coalbed methane gas from the coal owner's coal.
On the other hand, had the majority preserved the oil and gas lessee's ability to search for and produce gas even from a coalbed, such a lessee would have been entitled to negotiate with the coal owner for its permission to "drill through the coal seams to produce coalbed methane gas," and, if successful, would be duty bound to pay lessor land and surface owners the agreed upon royalty had the well or wells proven productive. Alternatively, if the coalbed owner desired to extract and commercially market coalbed methane found in the coal seams, both the owner of unleased oil and gas and an owner-lessor of the oil and gas in place could then expect to share in the proceeds, at least to the extent of the usual royalty, if not more. In my view, the majority's opinion achieves the opposite result. It enhances the ability of holders of severed interests in minerals to grant methane rights on properties where the surface owner or the owner's lessee holds oil and gas rights. The reality is that the majority's ruling is not a victory for most small landowners in this state. Nor is it simply a defeat for active oil and gas operators under a current oil and gas lease. Rather, it is a huge victory for the owners of large tracts of coal who hold that coal by virtue of severance deeds made decades ago, often long before the economic potential of coalbed methane or, for that matter, the economic potential of natural gas generally had been recognized.
It is clear that the majority intended its decision to apply only to the narrow issue the majority addressed in its opinion: Whether the lease at issue contemplated that the lessee might explore for and extract coalbed methane gas from the leased premises. Accordingly, this Court retains some ability to further examine the ramifications of its ruling in future cases. If that opportunity arises, this Court should, as the majority did not, give careful consideration to the framework adopted by the Legislature in West Virginia Code § 22-21-1, et seq. for (1) encouraging the production of coalbed methane from workable coal seams, mined out areas and potential gob wells, (2) protecting as a first priority the safety of ongoing mining operations, and (3) providing a means of apportioning both the cost and profit from the production of coalbed methane among all the parties with legitimate claim to an economic interest in the coalbed methane.
To be sure, the process spelled out by the legislation is not without some uncertainty or even ambiguity.
The state law contemplates that, with the permission of the owner of the workable or mined out coal seam involved, an "operator" may be permitted to drill and operate a coalbed methane well. It does not undertake to define who is the "owner" of the coalbed methane nor does the legislation specify who may or may not be an "operator" of such a coalbed methane well. However, the law does provide three separate, alternative means of allocating the cost and, in due course, the profit, from such an operation.
It appears that this comprehensive legislation was intended to broadly encourage the development of the coalbed methane resources of this state by providing that either the owner or the owner's lessee of the oil and gas in an underlying a tract of land, or the owner or the owner's assignee of a workable coal seam underlying a tract of land may become the "operator" of a coalbed methane gas well on such a tract. The legislation appears to also contemplate that the owner or lessor of such oil and gas would, in all events, be entitled to the payment of a royalty on the extraction of such gas, subject to the resolution by the owner of the working interest in the oil and gas and by the owner of the coalbed of the means by which, under the statute, the costs of drilling the well are to be recovered and the profits allocated. Of course, the legislation expressly provides that the owner of the coal must consent to the drilling of such a coalbed methane well.
I regret that the majority did not address the ultimate issue of who might be an "operator" under the coalbed methane well act and did not embrace the view that the lessees here, as well as the owners of the coal in place and all other parties having an interest in the land, could be an "operator" under the coalbed methane well act.
For the reasons assigned, I respectfully dissent.
W. Va.Code § 22-21-1(a) (1994).
W. Va.Code § 22-21-15 (1994).
W. Va.Code § 22-21-17(k).