Split Estate Property Rights: Who Owns Subsurface Minerals - Especially Coal and Coalbed Methane - in Virginia?

In the United States, property rights can be compared to a bundle of sticks. Owners of real estate can separate out some sticks from the bundle, such as the right to occupy a dwelling unit. One-third of Virginians contract with the owners of real estate for the right to occupy a house/townhouse. Through the rental contract, renters control some of the "sticks" in the bundle of rights, for the term of the lease.

Owners of forested land can sell the right to cut trees to a timber company, separating the ownership of the commercial timber from ownership of the land itself. Owners of rural land can lease their acreage to a farmer for a 10-year period, providing enough control over the land to incentivize the farmer to invest in fertilizer and ensure continued productivity. Most Virginia homeowners have a clause in their deeds, granting utility companies a perpetual easement (a property right) to install power lines across private property. Property rights for underground minerals (such as oil, natural gas, coal, and coal bed methane) are based initially on surface ownership. When the colonial government first sold land to private property owners, all property rights transferred with the deed. Ownership of the surface and ownership of the minerals underneath the surface were united. However, ownership of surface and mineral rights can be split. The right to mine coal can be sold separately from the right to cut timber, and the right to extract coalbed methane can be sold separately from the right to mine coal. (In 2004, the Virginia Supreme Court ruled that coalbed methane was a separate mineral from coal.)1 Before energy companies are willing to spend money on exploratory drilling, followed by development of infrastructure to produce coal/oil/gas, they acquire enough ownership rights to the subsurface resources. "Landmen" for the energy companies negotiate with landowners to purchase the rights to underground resources, while allowing those landowners to retain ownership of the surface for farming, forestry, and housing. Prices for mineral rights vary, depending upon the potential value of the resource. In areas underlain by Marcellus or Utica shale, adjacent property owners may negotiate dramatically different deals with landmen, depending upon the interest of the energy developers and the sophistication of the landowner. Rights to disturb the surface in order to extract the resource through construction of roads, well pads, pipelines, etc. may also vary dramatically. In many cases, leases for subsurface rights are never exercised. A landowner may receive a one-time payment for signing a lease, but get no royalties from production because the resource is never developed. Once a lease expires, the surface and subsurface rights are re-united and the landowner can sign a new deal for subsurface rights. If the mineral rights are developed before the lease term expires, the lease remains in effect and royalties are paid until production ceases. Restoration of the disturbed areas on the surface has been required by state and Federal laws since 1977, but eroding piles of waste rock ("gob") still present on abandoned mine lands show how surface resources were not protected in the past.

the Roman fasces, shown here in the US House of Representatives, symbolized authority and the bundle of rights Source: US House of Representatives, The House Chamber

coal refuse (gob) pile from abandoned 1950's mine in Russell County, eroding sediment into Clinch River watershed
Source: Virginia Cooperative Extension, Powell River Project - Reclamation of Coal Refuse Disposal Areas

Getting every surface owner above a geologic unit to agree to sharing revenue (or even to permit drilling) can be difficult. Under Virginia's Gas and Oil Act of 1990, landowners can be forced to participate in a "pool" and lease their gas rights once a company has leased 25% of the acreage within a geographic area. The Virginia Gas and Oil Board designates a drilling unit of land, and determines the most efficient spacing between wells within that unit. The board can require landowners to participate in a pool, but can not require the surface owner to allow a well pad to be constructed for drilling from the private surface. Each parcel of land in coal/gas country may have a complicated set of surface and subsurface ownership ("split estate") rights, and those determine how much the surface may be disturbed in order to extract underground resources.2

ownership of oil and gas, coal, and coal bed methane may be split separately, so the Virginia Gas and Oil Board resolves development and royalty payments
Source: Virginia Gas and Oil Board, Minutes and results of hearing, April 17, 2007

creation of drilling units is intended to ensure landowners receive fair payment for gas that flows across property boundaries to a well drilled on an adjacent parcel
Source: Virginia Department of Mines Minerals and Energy (DMME), Virginia Gas Escrow Unit Viewer

112.69 acre circular drilling unit boundaries for Well No. COGC434, Virginia Gas and Oil Board Docket No. 97-0520-0584
Source: Virginia Gas and Oil Board, Docket No. 97-0520-0584

The Bristol Herald Courier won a Pulitzer Prize for a 1999 series of articles exposing that administrative barriers blocked landowner access to royalties deposited into the escrow fund, and revealing an excessively cozy relationship between regulators/coal companies and mismanagement of the fund.3

Disputes over split estate ownership rights were not limited to just the failure of the Virginia Gas and Oil Board to distribute royalties. Surface landowners claimed that energy companies had misinterpreted the deeds to coal rights, and that the coal bed methane was not included in the right to extract coal. Based on that interpretation, energy companies were obliged to pay holders of mineral rights 100% of the value of the methane that had been extracted, not just a 12.5% royalty.

58.77-acre square drilling unit boundaries for Well VC-3561, to access methane in the Nora Coal Bed Gas Fields from all Pennsylvanian aged coals down to 1,800 feet
Source: Virginia Gas and Oil Board, Docket No. 96-0220-0534

In 2004, the Virginia Supreme Court determined in Ratliff v. Harrison-Wyatt that a landowner who sold their rights to the coal had not sold their ownership of coal bed methane. The ruling meant that companies with a lease for mining coal were not automatically entitled to drill for coal bed methane. Many landowners would be entitled to 100% of the value of the gas removed from beneath their land, and energy companies would have to pay far more than the 12.5% already deposited into the escrow fund.4

In part because the stakes were so high, the ownership dispute continued for years even after that Virginia Supreme Court ruling. In 2010, the General Assembly passed a law codifying how the Oil and Gas Board should implement the 2004 Virginia Supreme Court decision, directing the Oil and Gas Board to assume surface landowners had retained rights to coal bed methane and distribute royalties to surface landowners unless contracts documented otherwise.

The 2010 legislation was then invalidated by a ruling by the Attorney General. That ruling was controversial in part because a staff lawyer in the Attorney General's office provided legal advice to oil and gas companies in their efforts to block landowners from filing class action lawsuits to force payments of $28 million in escrow by 2013, and in part because the Attorney General received substantial donations from energy companies in his 2013 race for governor.⁵

Two companies, CNX Gas and EQT Production, were the focus of the legal disputes regarding coal bed methane royalties. The companies claimed that they were paying appropriate royalties into the escrow fund and that Virginia (not the companies) was at fault for delaying payments to individual landowners. A Pulitzer-prize winning series of articles in the Bristol Herald-Courier revealed that the Oil and Gas Board had not audited accounts or required payments, so all required royalties may not have been deposited into escrow as required. Owners of coal bed methane might have been cheated if the gas companies had understated production, but the Oil and Gas Board had failed to conduct independent assessments to verify reports from those companies.

The claimants' capacity to pursue lawsuits against those energy companies was limited, because legal costs would be high and even a successful lawsuit would provide only a small payment to an individual property owner. Since Virginia did not allow class-action lawsuits in state courts to resolve the dispute, landowners partnered together to pursue a class action lawsuit in Federal court.

If successful, the legal costs could be minimized - so not surprisingly, the energy companies opposed certification of class-action lawsuits by the Federal courts. Forcing plaintiffs to sue separately, rather than consolidate their legal costs in a class action suit, limited the risk that the energy companies would be forced to deposit additional funds into the escrow account.⁶

A Federal District Court approved a class-action lawsuit in 2012, but the Fourth Circuit U.S. Court of Appeals blocked that action in 2014 and returned the case to the District Court for further documentation of the "class." In 2015, the Virginia General Assembly passed a law that once again directed the Oil and Gas Board to release escrowed funds to landowners unless the energy companies objected by January 1, 2016. That state law (HB 2058) allowed landowners to collect royalties already paid by the gas companies, but still sue the gas companies to collect additional royalties.⁷

some - but not all - gas wells in southwestern Virginia have been included in pooling units, with royalties deposited into escrow accounts
Source: Virginia Department of Mines Minerals and Energy (DMME), Virginia Gas Escrow Unit Viewer

• Bristol Herald Courier
  • Pulitzer Prize winning series of 1999 articles on natural gas royalties
• Geology.com
• Mineral Rights
• Virginia Department of Mines, Minerals and Energy
• Virginia Division of Gas and Oil
• Virginia Gas Owners Litigation Group

References