Case Title: NEWMAN v. RAG WYOMING LAND COMPANY

Citation: 

Docket Number: 

State: wyoming

Court: Wyoming Supreme Court

Date: 2002-09-06T00:00:00Z

Document:
NEWMAN v. RAG WYOMING LAND COMPANY2002 WY 13253 P.3d 540Case Number: 01-209Decided: 09/06/2002
APRIL TERM, A.D. 2002

                                                                                                            

MARY 
NEWMAN, N.D. MORGAN, JR.,

MARSHALL 
MORGAN, KARLA DENZIN,

LYNDA MORGAN, MITZI HARRIS,

MIKE WALTERS, JANE COWAN,

ALICE MORGAN, RICHARD MORGAN,

JIM and JOLENE FREEBURN, TONI

NELSON, CHUCK MORGAN, KRISTI

FLUHARTY, JOANNE McGUIRE, LISA

SIGLER and ROCK MORGAN (the

"MORGAN MINERAL HEIRS"),

Appellants(Plaintiffs),

 

v.

                                    
                                                

RAG WYOMING LAND COMPANY,

a Delaware corporation, and HI-PRO

PRODUCTION, LLC, a Wyoming Limited

Liability Company,

Appellees(Defendants).

 

Appeal from the District Court of Campbell County

The Honorable John R. Perry, Judge

 

Representing Appellants:

            
Clay B. Jenkins of Jenkins Law Office, Sheridan, Wyoming  

 

Representing Appellee RAG Wyoming Land 
Company:

Joseph E. Hallock and James L. Edwards of Stevens, Edwards 
& Hallock, P.C., Gillette, Wyoming 

 

Representing Appellee Hi-Pro Production, 
LLC:

Dan B. Riggs, David C. Smith, and Michael C. Steel of 
Lonabaugh and Riggs, Sheridan, Wyoming 

 

Before HILL, C.J., and GOLDEN, LEHMAN,* KITE, and VOIGT, 
JJ.

*Chief Justice at time of oral argument

  
            
KITE, Justice.

 

[¶1]      In 1968, the 
landowners, who owned both the surface and mineral estate in certain Campbell 
County property, leased their ranch for oil and gas development. Production 
occurred, and the lease remained held by that production.  The landowners 
deeded the surface of the ranch and "coal and minerals commingled with [the] 
coal" to a neighboring coal mine operator in 1974, reserving all "oil, gas, and 
other minerals" not otherwise conveyed.  Twenty years later, development of the gas 
found within the coal, known as "coalbed methane," became commercially 
feasible.  A 
coalbed methane operator obtained an assignment of the oil and gas leasehold 
rights from the surface to a depth of 1,000 feet and began development of the 
coalbed methane.  
The successors in interest to the landowners claimed their right to 
royalties on the coalbed methane; however, the coalbed methane operator paid all 
royalties to the coal operator.  The landowners filed a complaint seeking a 
declaratory judgment as to the ownership of the coalbed methane and recovery of 
the unpaid royalties.  
The district court granted summary judgment in favor of the coal 
operator.  We 
reverse.

 

ISSUES

 

[¶2]      The Morgan Mineral 
Heirs present the following issue for our review:

Do deeds which grant:

All coal and minerals co-mingled with coal that may be 
mined or extracted in association therewith or in conjunction with coal mining 
operations

But reserve:

            
All oil, gas and other minerals except as set forth above

Convey coal bed methane gas, or not?

RAG Wyoming Land Company (RAG) restates the issue as:  "Was the district 
court correct in granting summary judgment to Appellees by ruling that coalbed 
methane gas was conveyed by Appellants through the warranty deeds?"  Hi-Pro Production, 
LLC (Hi-Pro) phrases the issue as:

Do warranty deeds which grant "all coal and minerals 
commingled with coal that may be mined or extracted in association therewith or 
in conjunction with such coal operations" and which reserve "all oil, gas and 
other minerals except as set forth above" convey coalbed methane gas ("CBM") as 
produced from the Wyodak coal seam?

 

FACTS

 

[¶3]      In 1968, Alfreda M. 
Morgan and Norvin D. Morgan, Sr. (landowners), the owners of the surface and 
mineral estate in certain lands in Campbell County and descendants and heirs of 
the original homesteaders, gave an oil and gas lease to W. R. Gibson, doing 
business as Powder River Oil Company, granting him the right to produce "oil, 
gas, and casinghead gas, and other minerals" and retaining a one-eighth royalty 
interest in the oil and "the proceeds from the sale of the gas, as such, for gas 
from wells where gas is found." Production occurred on those lands, and 
royalties were paid to the landowners.  In 1971, Meadowlark Farms, Inc. (Meadowlark), 
predecessor in interest to RAG (coal operator), began surface coal mining 
operations on state and federal coal leases in the area.  In 1974, Meadowlark 
entered into an Option to Acquire Real Property with the landowners which 
granted an option for it to acquire the landowners' ranch which consisted of 
approximately 1,560 acres together with "all coal and minerals co-mingled with 
coal owned by SELLERS."  The landowners owned the coal under 
approximately 200 acres of the property.  The option also provided that, upon 
execution, the landowners were entitled to lease the surface for farming and 
ranching purposes upon payment of a sum equal to the assessed property 
taxes.  
Meadowlark exercised the option and purchased the property.  The warranty deed 
conveyed the lands and "all coal and minerals commingled with coal that may be 
mined or extracted in association therewith or in conjunction with such coal 
operations" and reserved to the grantor "all oil, gas and other minerals except 
as set forth above."

 

[¶4]      Oil and gas 
production, coal mining, and ranching proceeded simultaneously without dispute, 
and the landowners received the royalties from all oil and gas production.  At some point in 
time, the oil and gas lease was assigned to Torch Energy Advisors (Torch).  In the early 1990s, 
techniques for the production of gas found within the coal seam, or coalbed 
methane, were developed and became commercially feasible.  Although unclear 
from the record, it appears that, by 1997, production of coalbed methane had 
begun with six wells located on federal coal lands and two wells located on the 
lands subject to the landowners' oil and gas lease.  Upon learning of 
the coalbed methane wells in 1997, Marshall Morgan, one of the heirs of the 
landowners, wrote a letter to Torch informing it of his interest in the oil and 
gas and demanding his share of the royalty payments.  On the basis of Mr. 
Morgan's claim, Torch began escrowing the royalty payments which apparently it 
had been previously sending to the coal operator.  As of September 1998, a total of $106,682.09 
had been escrowed.  
Ultimately, RAG, the coal operator, and Torch entered into an indemnity 
agreement wherein RAG agreed to indemnify Torch from all liability in exchange 
for its agreement to resume making royalty payments to RAG.  Torch assigned a 
portion of its interest in the oil and gas lease from the surface to 1,000 feet 
beneath the surface to Hi-Pro effective May 1, 2000. 

 

[¶5]      RAG entered into two 
surface use licenses and agreements for coalbed methane development with Hi-Pro 
which provided for coordination in the development of the coal and coalbed 
methane resources.  
In the agreement applicable to the lands subject to the landowners' oil 
and gas lease, RAG claimed "legal rights in certain coalbed methane gas wells, 
locations, [and] leases."  In exchange for RAG's allowing Hi-Pro access 
to the area, Hi-Pro agreed to pay RAG forty percent of the market value of the 
gas produced and agreed its rights were "subordinate to and subject to the 
continuous and uninterrupted right of RAG . . . to mine coal and 
conduct surface coal mining operations."  In the agreement applicable to other 
landspresumably the federal coal lands, Hi-Pro agreed to a similar 
subordination of its interests and a much lower price of one and three-quarters 
percent on gas from the Wyodak coal seam and two percent on coalbed methane 
produced from any other coal seam.  The agreements also provided for lengthy, 
detailed procedures and obligations to ensure the coalbed methane development 
did not interfere with RAG's coal mining operation.

 

DISCUSSION

 

[¶6]      The existence of 
coalbed methane has been well known for over a century.  Paul N. Bowles, Coalbed Gas: Present Status of Ownership Issue and Other 
Legal Considerations, 1 Eastern Min. L. Inst. § 7.03 (1980).  In fact, flash 
fires occasionally occurred on drilling rigs for many years when wells were 
drilled through the coal seam, and ventilation of underground mines was 
necessary to prevent fires and explosions.  Michelle D. Baldwin, Book Note, Ownership of Coalbed Methane Gas: Recent Developments in 
Case Law, 100 W. Va. L. Rev. 673 (1998). Historically, coalbed methane "had 
long been considered a dangerous waste product of coal mining."  Amoco Production Co. v. Southern Ute Indian Tribe, 526 U.S. 865, 871 (1999). 

 

[¶7]      In the 1970s, the 
value of coalbed methane was recognized, and government grants became available 
to encourage its development.  Id.  In 1981, the 
Solicitor of the Department of the Interior issued an opinion addressing the 
ownership of coalbed methane in federal coal deposits concluding the reservation 
of coal to the United States in patents issued after 1909 did not include 
coalbed methane.  
In reliance on that opinion, oil and gas operators began entering into 
leases to develop coalbed methane with individual landowners who owned the oil 
and gas.  Id.  In the early 1990s, techniques for 
efficient development of coalbed methane, specifically within the coal deposits 
in the Powder River Basin in Wyoming, were perfected. In 1991, litigation ensued 
between the federal government and certain Indian tribes which claimed the 
government's reservation of coal in 1909 and 1910 included the coalbed methane 
on lands originally owned by the government which now belonged to them.  Ultimately, that 
issue was resolved when the United States Supreme Court held coalbed methane was 
not included within the reservation of coal and overruled district and circuit 
court decisions which had concluded coalbed methane was owned by the owner of 
the coal.  Id. at 874.  

 

[¶8]      Commercial 
development of coalbed methane in the Powder River Basin began in the early 
1990s.  Prior 
to that time, coalbed methane escaped from the coal in the course of the open 
pit surface mining process, and no attempt was made to capture that gas as a 
valuable resource.

 

[¶9]      A brief discussion of 
the chemistry and the composition of methane and coal is in order.  Coalbed methane is 
chemically identical (CH4) to gas produced 
through conventional methods, and each is known as "natural gas."  Methane or natural 
gas originates from the decay of organic material over time under great pressure 
and temperature.  
Whether that process occurs in coal deposits or at greater depths, the 
result is the samenatural gas is produced.  The process which transforms organic material 
into coal is known as coalification.  

            
The coalification process generates methane and other gases.  Because coal is 
porous, some of that gas is retained in the coal.  CBM gas exists in the coal in three basic 
states: as free gas; as gas dissolved in the water in coal; and as gas 
"adsorbed" on the solid surface of the coal, that is, held to the surface by 
weak forces called van der Waals forces.  These are the same three states or conditions 
in which gas is stored in other rock formations.  Because of the large surface area of coal 
pores, however, a much higher proportion of the gas is adsor[b]ed on the surface 
of coal than is adsor[b]ed in other rock.  When pressure on the coalbed is decreased, 
the gas in the coal formation escapes.

 

Id. at 873 (citations omitted).

 

[¶10]   Natural gas or methane, whether located 
in a sandstone reservoir or a coal seam, is produced by creating a pressure 
differential between the well bore and the reservoir.  In the Powder River 
Basin, coalbed methane production involves the removal of water from the coal 
formation, which reduces the pressure and allows the gas to escape.  Likewise, methane 
will migrate naturally from coal seams, as well as from other reservoirs, to 
other porous or permeable strata depending on pressure differentials.

 

[¶11]   The issue to be resolved in this case 
is whether the parties to the deed in question intended the coalbed methane to 
be conveyed along with the coal estate or reserved to the grantor as part of the 
oil and gas estate.  
The parties agree the governing principle of contract construction is 
determination of the parties' intent from the language of the instrument 
itself.  As we 
stated most recently in the context of interpreting a mineral 
conveyance:

 

"According to our established standards for interpretation 
of contracts, the words used in the contract are afforded the plain meaning that 
a reasonable person would give to them.  When the provisions in the contract are clear 
and unambiguous, the court looks only to the four corners' of the document in 
arriving at the intent of the parties.  In the absence of any ambiguity, the contract 
will be enforced according to its terms because no construction is 
appropriate."  
Amoco Production Company v. EM Nominee Partnership 
Company, 2 P.3d 534, 539-40 (Wyo. 2000) (citations omitted).

            

            
Assignments are contracts and are construed according to the rules of 
contract interpretation.  The determination of the parties' intent is 
our prime focus in interpreting or construing a contract.  If an agreement is 
in writing and its language is clear and unambiguous, the parties' intention is 
to be secured from the words of the agreement.  When the agreement's language is clear and 
unambiguous, we consider the writing as a whole, taking into account 
relationships between various parts.  In interpreting unambiguous contracts 
involving mineral interests, we have consistently looked to surrounding 
circumstances, facts showing the relations of the parties, the subject matter of 
the contract, and the apparent purpose of making the contract.  

 

Boley v. Greenough, 2001 WY 
47, ¶¶10-11, 22 P.3d 854, ¶¶10-11 (Wyo. 2001) (some citations omitted).  Although 
substantial disagreement exists over the meaning of the deed, neither party 
suggests the language of the deed is ambiguous.  Differing interpretations of contracts alone 
do not constitute ambiguity requiring extrinsic evidence.  Moncrief v. Louisiana Land and Exploration Company, 861 P.2d 516, 524 (Wyo. 
1993).

 

[¶12]   We must first examine the terms of the 
deed and give them their plain and ordinary meaning.  Wolter v. Equitable Resources Energy Company, 
Western Region, 979 P.2d 948, 951 (Wyo. 1999);  Pete Lien & Sons, 
Inc. v. Ellsworth Peck Construction Co., 896 P.2d 761, 763 (Wyo. 
1995).  Plain 
meaning is that "meaning which [the] language would convey to reasonable persons 
at the time and place of its use."  Moncrief, 861 P.2d  at 524. 

 

[¶13]   The language of the deed conveys "all 
coal and minerals commingled with coal that may be mined or extracted in 
association therewith or in conjunction with such coal operations" and reserves 
"all oil, gas and other minerals except as set forth above."  The first term the 
parties argue must be interpreted is "minerals."  We have little trouble concluding natural gas 
produced from the coal seam is a mineral under Wyoming law.  Amoco Production Company v. Guild Trust, 461 F. Supp. 279, 283 (D. Wyo. 1978), aff'd, 636 F.2d 261 (10th Cir. 1980); Union Pacific 
Land Resources Corporation v. Moench Investment Company, 696 F.2d 88, 93 (10th Cir. 1982); State ex rel. 
School Dist. No. 1 in Weston County v. Snyder, 29 Wyo. 163, 212 P. 758 (1923).  However, this 
conclusion does little to resolve this dispute because "minerals" are both 
granted and reserved.  

 

[¶14]   The determinative question is whether 
the parties intended "minerals commingled with coal that may be mined or 
extracted in association therewith or in conjunction with such coal operations" 
to include natural gas found in the coal seam.  We are unable to discern any unique meaning 
of "commingled" in the context of minerals.  The word "commingle" is defined by Webster's 
New World Dictionary as "to mingle together; intermix; blend."  Webster's New World 
Dictionary 285 (2nd C. ed. 1972).  The term does not 
suggest any sort of chemical change must occur to constitute commingling but 
only a mixing together.  Given the three states of coalbed methane as 
free gas within the cleats and matrixes of the coal, gas dissolved in water in 
the coal pores, and gas adsorbed onto the solid surface of the coal, it appears 
to be "mixed together" with the coal within the meaning of the terms of the 
deed.  

  

   [¶15]            
In addition to being commingled with the coal, the other "minerals" 
conveyed must be those that "may be mined or extracted in association" with the 
coal or "in conjunction with such coal operations."  Likewise, these 
terms must be given their plain and ordinary meaning to reasonable persons at 
the same time and place of their use; i.e., 1974 in the Powder River Basin of 
Wyoming.  The 
coal operator argues that production of gas has been considered "mining" relying 
on Coronado Oil Company v. Grieves, 603 P.2d 406 (Wyo. 1979), 
Amoco Production Company v. Guild Trust, 636 F.2d 261, 263-65 
(10th Cir. 1980), and the language of oil and 
gas leases, including those issued by the landowners in this case.  While those 
references certainly establish that oil and gas production through the drilling 
of wells has been considered "mining," they do not answer the question posed in 
this case because all agree that, in 1974 when the warranty deed in question was 
drawn, any gas found in the coal seam was not mined through a well bore but was 
ventilated or wasted while the coal was produced by excavation in the course of 
surface mining.  
In addition, the minerals conveyed by the language of the deed were only 
those mined "in association therewith or in conjunction with such coal 
operations."  
Webster's New World Dictionary confirms the ordinary meaning of "in 
association" and "in conjunction" to be "together."  No party contends 
coalbed methane is somehow captured together with the coal as it is mined.  Rather, it is 
released and escapes during the mining process.  Southern Ute Indian 
Tribe, 526 U.S.  at 873.  In the case of underground mines, it must be 
ventilated.  United States Steel Corporation v. Hoge, 468 A.2d 1380, 
1382 (Pa. 1983).  

 

[¶16]   Is the plain meaning of "extracted" the 
same as "released," "escaped," or "ventilated"?  It is obvious these words connote different 
actions, and the distinctions between them are crucial to determining the intent 
of the parties to this deed.  Webster's New World Dictionary confirms that 
difference by defining (1) "extract" as "to draw out by effort; pull out" and 
"to remove or separate (metal) from ore"; (2) "release" as "to set free"; and 
(3) "ventilate" as "to provide with an opening for the escape of air, gas, 
etc."1  Under the plain meaning of the terms chosen 
by the parties to the deed, we cannot conclude they intended to include coalbed 
methane gas as a mineral "mined or extracted in association therewith or in 
conjunction with such coal operations" when it can only be produced through 
wells as any other gas. 

 

[¶17]   We could end the inquiry at this 
point.  
However, because of the importance of the issue of the ownership of 
coalbed methane in general and the extensive consideration of this issue by 
other courts and commentators which we find helpful and consistent with our 
initial conclusion, further discussion is warranted.

 

[¶18]   The coal operator poses a creative 
argument suggesting that, because coalbed methane can most efficiently be 
produced in advance of the mining operations thereby reducing the water the mine 
must contend with and making the mine more economically successful, it is mined 
or extracted "in association therewith" or "in conjunction with" coal mining 
operations.  
Two problems exist with that argument.  First, the gas production does not occur 
automatically in the process of overburden and coal excavation and removal.  Instead, it only 
occurs when and if the coal operator decides to undertake gas well drilling in 
advance of the mine face.  Second, such "mining" techniquesthe 
coordination of well drilling and mine excavationdid not exist until twenty 
years after the deed in question was drawn which poses the broader question in 
this case.  How 
is the parties' intent to be determined when minerals become valuable long after 
a conveyance by (1) discovery of new methods of production; (2) changes in 
economics making production of a previously known, but unwanted, mineral 
profitable; (3) or discovery of the presence of minerals not previously known to 
exist?  
Obviously, the language of the particular documents involved affects the 
answer to this question on a case-by-case basis. 

 

[¶19]   In this particular case, no reference 
is made in the deed to coalbed methane, and no other language can be said to 
address the parties' specific intent with regard to it.  In circumstances 
like those present here, a search for the parties' specific intent produces 
little fruit because the identity, value, or feasibility of production was 
unknown to the parties at the time of the conveyance and, therefore, they likely 
had no intent at all with regard to the substance in question.  Consequently, we 
must focus upon the general intent of the parties, concentrating on the 
"purposes of the grant in terms of respective manner of enjoyment of surface and 
mineral estates."  
Comment, New Values Under Old Oil and Gas Leases: 
Helium, Who Owns It?, 62 Mich. L. Rev. 1158, 1169 (1964).

The intention sought should be the general intent rather than any supposed but unexpressed 
specific intent, and, further, that general intent 
should be arrived at, not by defining and re-defining the terms used, but by 
considering the purposes of the grant or reservation 
in terms of manner of enjoyment intended in the ensuing interests.

 

Eugene O. Kuntz, The Law Relating 
to Oil and Gas in Wyoming, 3 Wyo. L.J. 107, 112 (1949).  It can be said this 
approach would favor the conclusion that the coalbed methane, which 
unquestionably has the chemical composition of gas, belongs to the gas owner who 
is entitled to recover all gas beneath the surface wherever found unless, of 
course, specifically limited by the original conveyance.  Edward A. Craig, 
III & Marlee S. Myers, Ownership of Methane Gas in 
Coalbeds, 24 Rocky Mtn. Min. L. Inst. 767 (1978).  However, the coal 
owner argues that, because the gas is located within the coal seam, its right to 
mine, and thereby ventilate or waste the coalbed methane, implies 
ownership.  
Consequently, the court is faced with determining whether that right is 
tantamount to ownership or simply incidental to the right to mine.  Id. at 784.  

 

[¶20]   Coalbed methane ownership has been the 
subject of litigation for the last twenty years in a variety of forums with 
differing results.  
1 Howard R. Williams & Charles J. Meyers, Oil and Gas Law § 219 at 
274.5 to 274.10 (2000).  As noted in the most recent and thorough 
discussion of this issue, "[t]he conflicting legal principles and the existing 
precedent . . . do not point toward any one of these solutions as 
necessarily or even probably correct, so a court could adopt any one of the 
approaches described below."  Jeff L. Lewin et al., Unlocking the Fire: A Proposal for Judicial or Legislative 
Determination of the Ownership of Coalbed Methane, 94 W. Va. L. Rev. 563, 
614 (1992).  
While no other case is on all fours with the facts herein, the approaches 
taken by other courts provide insight and guidance to our deliberations.  The earliest case 
occurred in Pennsylvania and favored the coal owner relying on the "ownership in 
place" theory of oil and gas ownership and on the specific language of the 
conveyance which reserved to the gas owner only the "right to drill and operate 
through said coal for oil and gas."  Hoge, 468 A.2d  at 
1384.  
Reasoning that the method of production of coalbed methane, which 
involved hydrofacturing, had the potential of causing damage to the coal seam 
and increasing danger in the underground coal mine, the court found the coal 
owner had title to the entire strata and all gas found within it.  Id.  At the time of the conveyance, coalbed 
methane was primarily considered a dangerous waste product that had to be vented 
to allow for the safe production of coal, and, consequently, the court found it 
unlikely the parties would have intended to reserve it.  Id. at 1384-85.  However, the opposite conclusion could just 
as easily be drawn; e.g., the purchaser would not likely intend to purchase a 
dangerous waste product.  Following established Pennsylvania precedent, 
the court concluded ownership of gas belonged to the owner in fee of the 
property wherein it was found to exist, apparently concluding that property was 
the coal seam.  
Id. at 1383. 

 

[¶21]   In Alabama, the courts have had several 
opportunities to consider the dispute over ownership of this mineral 
resource.  
Where the document reserving the oil and gas was "subject to the 
requirement that all coal seams located in said lands penetrated in such 
exploration or drilling operations shall be encased or grouted off," the court 
had no difficulty concluding the parties intended to separate the coalbed 
methane from the rest of the oil and gas present in other formations.  Rayburn v. USX Corp., Civ. No. 85-G-2661-W, 1987 U.S. 
Dist. LEXIS 6920, at *6 (N.D. Ala. July 29, 1987), affm'd, 844 F.2d 796 (11th Cir. 1988).  In a later 
Alabama case, Hoge was discussed at length, and its 
rationale was distinguished both on the specific 
language of the deed and by reliance on the "rule of capture" as opposed to the 
"ownership in place" rule.  NCNB Texas National 
Bank, N.A. v. West, 631 So. 2d 212 (Ala. 1993).  Under the rule of 
capture, a landowner acquires title to all the oil and gas which  could be produced 
even if some of the oil and gas migrated from adjoining lands.  Id. at 224 (quoting Hardwicke, The Rule of Capture and Its Implications as Applied to Oil 
and Gas, 13 Tex. L. Rev. 391, 393 (1935)).  Although the Alabama Supreme Court saw the 
rule of capture in that jurisdiction as significant, at the same time, it 
recognized those rules of ownership apply more to disputes between neighboring 
gas producers than conflicts over who has the right to recover coalbed 
methane.  Id. at 223; Lewin, 94 W. 
Va. L. Rev., supra at 592-93, 619.

 

[¶22]   Despite these distinctions, the Alabama 
Supreme Court found that a deed, which granted "all the coal and connected 
mining rights" but reserved "all of the gas," conveyed the coalbed methane 
located within the coal seam.  However, it did not include gas which had 
escaped into the material left after longwall mining was completed (the "gob 
zone").  The 
court seemed focused upon the bundle of property rights incident and necessary 
to the recovery of the coal and the potential for interference with those rights 
in the facts of that case.2  At the same time, the court found

 

no scientific or legal basis to support the proposition 
that coalbed methane gas should be treated as a resource separate and distinct 
from other natural gas, or from any other gas.  The fact that the coalbed methane gas is 
produced by, and stored within, coal seams does not require the conclusion that 
a grant of "all coal" includes coalbed methane gas, nor does it require the 
conclusion that a reservation of "all gas" does not include coalbed methane 
gas.

 

NCNB Texas National Bank, N.A., 631 So. 2d  at 222-23 (footnote omitted).  In addition, the 
Alabama Supreme Court found the dissent in Hoge to 
be compelling when it stated:

 

"Given their awareness of the presence of coalbed gas in 
the stratum, the earlier described similarities between coalbed gas and what has 
commonly been referred to as natural gas', and the fact that the unrestricted 
term gas' was employed in the reservation clause, we believe the plain meaning 
of the term gas' would be too far subverted were we to exclude coalbed gas as a 
recoverable gas."

 

Id. at 226 (quoting Hoge, 468 A.2d  
at 1389 (Flaherty, J., dissenting)).  It appears to us the Alabama Supreme Court 
was convinced that coalbed methane was included within the term "gas" as 
utilized by the parties to the deed in question and, despite its statements to 
the contrary, was overly concerned about the possible conflicts if coalbed 
methane and coal were owned separately.  In addition, its conclusion which grants 
title to the coal owner of the coalbed methane recovered prior to mining through 
horizontal and vertical drilling but title to the gas owner of gas left in the 
gob zone after mining fails, in our opinion, achieves the certainty and fairness 
all desire.

 

[¶23]   In contrast, the Montana Supreme Court 
reached the opposite conclusion that the conveyance of "all coal and coal 
rights" did not include coalbed methane but did so by relying on the same 
ownership in place theory of oil and gas ownership which the Pennsylvania court 
utilized to arrive at the opposite conclusion in Hoge. Carbon County v. Union 
Reserve Coal Co., Inc., 898 P.2d 680, 685 (Mont. 1995).  Looking also to state statutes defining 
"coal" and "gas" and common meanings of the terms as provided by dictionaries, 
the Montana Supreme Court construed the plain meaning of the language of the 
deed in question as conveying only the solid mineralcoal.

 

[¶24]   Struggling to articulate clear rules 
for the resolution of this difficult issue, the courts, especially when these 
cases are considered together, displayed confusing and inconsistent 
reasoning.  
While lip service is paid to the role of the theory of ownership of oil 
and gas in the respective jurisdictions, the ultimate rulings do not depend on 
which theory of ownership applies.  In both ownership in place and rule of 
capture jurisdictions, courts have concluded the gas owner is entitled to all 
the gas it can capture, yet the coal owner owns the coalbed methane. We agree 
with those courts and commentators which have rejected reliance upon the nature 
of the ownership interest in oil and gas to resolve this question.  Lewin, 94 W. Va. L. 
Rev., supra at 563.  In addition, neither rule of ownership has 
been clearly adopted by this court to date, nor has the distinction been 
considered of any significant legal consequence.  Mark W. Gifford, The 
Law of Oil and Gas in Wyoming: An Overview, 17 Land & Water L. Rev. 401, 
404 (1982).3

 

[¶25]   The most recent ruling on the issue of 
ownership of coalbed methane involved determining the intent of Congress in 
reserving "all coal" from lands patented under the Coal Lands Acts of 1909 and 
1910.  
Reversing the Tenth Circuit Court of Appeals, the United States Supreme 
Court ended a long running controversy over ownership of coalbed methane in 
federal coal deposits.4  In doing so, the court did not follow the 
confusing array of state court cases and relied instead upon the plain meaning 
of the terms at issue to conclude Congress did not intend the term "coal" to 
include coalbed methane.  Southern Ute Indian 
Tribe, 526 U.S. 865.  While the issues 
raised by the deed in question in this case are not identical to those faced in 
Southern Ute Indian Tribe, the Supreme Court's 
reasoning is applicable and persuasive to determining the intent of the parties 
herein.  

 

[¶26]   The Supreme Court looked to dictionary 
definitions which defined coal as a solid fuel resource and methane as a 
distinctly separate substance.  Id. at 
874.

As these dictionary definitions suggest, the common 
understanding of coal in 1909 and 1910 would not have encompassed CBM gas, both 
because it is a gas rather than a solid mineral and because it was understood as 
a distinct substance that escaped from coal as the coal was mined, rather than 
as a part of the coal itself.

 

Id. at 874-75.  The Supreme Court also deemed it important 
that, although Congress was well aware of its existence, CBM was considered a 
dangerous waste product which escaped from coal as the coal was mined and this 
was confirmed by the fact that coal companies venting the gas to prevent its 
accumulation in the mines made no attempt to capture or preserve it.  The more gas that 
escaped from the coal once it was brought to the surface, the better it was for 
the mining companies because it decreased the risk of a dangerous gas buildup 
during transport and storage.  Id. at 876.  While the relevant 
time frame for determining the intent of Congress in this regard was 
significantly earlier than applicable to the conveyance at issue in this case, 
no significant changes occurred in the 1909 through 1970 interim period relative 
to the general knowledge of the existence and value of coalbed methane.  We can safely 
presume the parties to the warranty deed herein knew generally that methane 
existed in the coalbed, posed some safety problems although not as significant 
as those posed in underground mines, and was not viewed as having independent 
value. 

 

[¶27]   At bottom, our role is to give effect 
to the general intent of the parties to the conveyance with regard to the 
exploitation of the mineral resources.  Rather than following some rigid rule of law, 
we believe this issue should be governed by the facts and circumstances 
surrounding the execution of this warranty deed.  This approach is consistent with that taken 
by other courts and recognized by the commentators as the most practical 
one.  Lewin, 94 
W. Va. L. Rev., supra at 638. 

 

[¶28]   In the case before us, we know the 
purpose of the mining company's purchase of the property was to allow the 
development of a surface coal mining operation.  On the other hand, the landowners were fully 
aware that their property had value for its gas development as they had 
previously leased their oil and gas interest and had received the benefit of 
royalty payments.  
Their purpose in executing the warranty deed was to realize additional 
value from the property through the sale of the surface and their limited coal 
rights.  The 
general intent which can logically be ascribed to these parties is that the 
landowners would retain any oil and gas found within the property and the coal 
operator would be able to fully exploit the coal resource.  Each of the parties 
involved in this situationthe landowners, the original gas lessee, the coalbed 
methane operator, and the coal owneroperated consistently with this 
intent.  The 
landowners, acting as the owner of the gas resource, leased all the right to 
produce oil and gas on the property with no distinction as to depth or source of 
the gas.  The 
original oil and gas lessee proceeded to drill and produce, without distinction 
as to depth or source, all oil and gas found in the conventional manner.  Twenty years later, 
when coalbed methane production became commercially feasible, the coalbed 
methane operator obtained an assignment of the oil and gas lease from the 
surface to 1,000 feet beneath the surface, under the obvious assumption that the 
coalbed methane was covered by the lease.  And, for over twenty years,  the coal owner 
operated its surface mine, venting whatever gas existed within the coal as it 
was mined, without objection or interference.  To conclude that the landowners intended to 
separate the coalbed methane and convey it along with their outstanding royalty 
interest through the language of "all coal and minerals commingled with [the] 
coal" is simply not plausible.

 

[¶29]   The coal operator argues it intended to 
acquire all minerals that were commingled with the coal in order to eliminate 
the possibility of conflicts between the development of those minerals and its 
mining operation.  
While that would be a logical conclusion to be drawn in the abstract, the 
potential conflict with oil and gas development would certainly not be averted 
in this situation by the coal owner also owning the private coalbed methane in a 
relatively small area of the mine, as conventional oil and gas development 
already existed throughout the mine area and the coal operator did not own the 
federal coalbed methane which existed throughout the majority of the mine 
area.  We also 
doubt conflicts with coalbed methane development per 
se, as distinct from other oil and gas development, were on the coal owner's 
mind at the time of the warranty deed since commercial development of that 
resource did not exist in this area.

 

[¶30]   The coal operator strenuously argues 
the broad language of the warranty deed, "coal and minerals commingled with 
[the] coal," was intended to allow it to release the coalbed methane during the 
mining operation without liability.  However, as noted by the Supreme 
Court:

 

The right to dissipate the CBM gas where reasonable and 
necessary to mine the coal does not, however, imply the ownership of the gas in 
the first instance.  
Rather, it simply reflects the established common-law right of the owner 
of one mineral estate to use, and even damage, a neighboring estate as necessary 
and reasonable to the extraction of his own minerals.

 

Southern Ute Indian Tribe, 526 U.S.  at 879 (citing Williams 
v. Gibson, 4 So. 350 (Ala. 1888); Rocky Mountain Mineral Law Foundation, 6 
American Law of Mining § 200.04 (2d ed. 1997)).  Other courts which have considered this issue 
agree the right to ventilate gas, which is an essential element of the right to 
mine, is not equivalent to ownership.  NCNB Texas National 
Bank, N.A., 631 So. 2d  at 226.  No one questions the coal owner's right to 
ventilate coalbed methane in the course of mining.  "The grant of coal 
mining rights would be useless if it did not include the right to ventilate 
methane gas from the coal mining area."  Id. at 228.  

 

[¶31]   While we recognize that separate 
ownership of coal and coalbed methane may result in conflicts, we agree with the 
United States Supreme Court when it noted "[t]hat is not the issue before us, 
however.  The 
question is one of ownership, not of damage or injury," Southern Ute Indian Tribe, 526 U.S.  at 879, and the 
Alabama Supreme Court which stated, "The question before us is who owns the 
rights to coalbed methane gas . . . and not who should own those rights." NCNB Texas National Bank, N.A., 631 So. 2d  at 227.  Conflicts between 
owners of different mineral estates are relatively common in the history of 
mineral development and are typically resolved through normal business 
negotiation and, if necessary, litigation.  The surface use licenses and agreements for 
coalbed methane entered into between RAG and Hi-Pro clearly demonstrate that 
fact.  In 
exchange for access and other mutually beneficial promises, Hi-Pro agreed to 
numerous steps to avoid interference with RAG's mining operation and to 
subordinate its rights to RAG's.  In addition, Hi-Pro agreed RAG would not be 
liable for damages or loss of production on adjacent lands operated by Hi-Pro as 
a result of RAG's mining operations.  While the terms of this agreement were no 
doubt dependent on the respective negotiating positions of the parties, it 
demonstrates the potential for accommodation and the improbability of negative 
impacts on the development of either resource from different ownerships of coal 
and coalbed methane.  
In addition, the potential for conflicts between oil and gas development 
and coal mining exists in this situation irrespective of whether the gas owner 
also owns the coalbed methane as gas produced by conventional methods is 
separately owned.

 

CONCLUSION

 

[¶32]   On the basis of the unambiguous 
language of the deed and the surrounding facts and circumstances, we conclude 
the parties generally intended the coal to be conveyed and the gas, wherever it 
may be located within the property, to be reserved to the landowners.  Coalbed methane, 
being a gas, remained the landowners' property.  By this ruling, we do not intend to imply 
that, in all circumstances, the conveyance of coal excludes the conveyance of 
the coalbed methane.  
Parties can certainly sever the coalbed methane from the remainder of the 
oil and gas estate and convey it separately.  Such an explicit severance occurred in this 
case when the oil and gas lessee vertically segregated its oil and gas leasehold 
interest and assigned from the surface to 1,000 feet beneath the surface, which 
contained the coal seam, to Hi-Pro.  However, the warranty deed from the 
landowners to the coal operator in this case, which conveyed "all coal and 
minerals commingled with coal that may be mined or extracted in association 
therewith or in conjunction with such coal operations" but reserved all oil and 
gas, did not accomplish such a segregation. 

[¶33]   Reversed.

 

FOOTNOTES

  1The referenced definition of "ventilate" is one of 
several definitions but was chosen as the most appropriate to the circumstances 
of this appeal.

  2This dispute arose over an underground mine where 
coalbed methane was produced through both horizontal and vertical wells which 
were hydrofractured to enhance production and wells drilled into the mine area 
after longwall mining was completed and subsidence created a "gob" of rubble 
into which coalbed methane collected.  NCNB Texas National 
Bank, N.A., 631 So. 2d  at 215.

  3Mr. Gifford notes: "Ultimately, the determination of 
whether nonownership theory or ownership in place theory applies to interests in 
oil and gas in Wyoming is of small consequence" and provides as authority for 
that conclusion 1 Howard R. Williams & Charles J. Meyers, Oil and Gas Law § 
203.1 (1981).  
Gifford, 17 Land & Water L. Rev., supra 
at 404.

  4Only 200 acres of the coal owner's surface mine in 
this case involved private coal. The remainder, and the vast majority of the 
coal, consisted of federal coal.  Consequently, pursuant to the Southern Ute Indian Tribe case, in most of the mine in 
this case, the coalbed methane is not owned by the coal owner.