Carbon County v. Union Reserve Coal Co., Inc.

Decision Date27 July 1995
Docket NumberNo. 93-426,93-426
Citation52 St.Rep. 529,898 P.2d 680,271 Mont. 459
PartiesCARBON COUNTY, a political subdivision of the State of Montana, Plaintiff and Respondent, v. UNION RESERVE COAL CO., INC., a Montana corporation; Red-Lodge Bear Creek Coal Partners, a limited partnership; and Norbert H. Kmoch; et al., Defendants and Appellants, v. FLORENTINE EXPLORATION & PRODUCTION, INC., a Montana corporation, Intervenor, Respondent/Cross-Appellant. . Heard and
CourtMontana Supreme Court

Anthony W. Kendall, Red Lodge; Joseph Mazurek, Atty. Gen., Clay Smith, Asst. Atty. Gen., Helena; James P. Healow, Sweeney & Healow, Billings (Florentine), for respondents.

Tommy H. Butler, Sp. Asst. Atty. Gen., Helena, for amicus Dept. of State Lands.

NELSON, Justice.

The plaintiff, Carbon County, initiated this suit to quiet title in all of the mineral and mineral rights, excluding the coal and coal rights, on certain lands within the county. Florentine Exploration & Production (Florentine) was allowed to intervene in the action, aligning itself with Carbon County. Following a bench trial, the District Court for the Thirteenth Judicial District, Carbon County, entered judgment for defendant, Union Reserve Coal Co. (Union Reserve), awarding Union Reserve nominal damages of $1.00. From that judgment, the defendant appeals and plaintiff and intervenor cross-appeal. We reverse and remand.

The issues on appeal, as framed by this Court, are:

1. Is coal seam methane gas a constituent part of the coal estate?

2. Did the District Court err in determining that Union Reserve has the right to produce coal seam methane gas from the coal lands?

3. Do the 1993 legislative amendments to § 15-1-101, MCA and § 82-11-101, MCA, and the enactment of § 82-1-111, MCA, constitute an unlawful taking of coal seam methane gas from the owners of coal or coal lands?

4. Did the District Court err in not granting punitive damages to Union Reserve?

FACTUAL BACKGROUND

Prior to October 10, 1974, Carbon County became the owner, through tax deed proceedings, of the entire mineral estate underlying the disputed property. On November 1, 1984, Carbon County executed and delivered to Red Lodge-Bear Creek Coal Partners The deed did not make any reference to gas in general, coal seam methane gas, nor any mineral or hydrocarbon other than coal. The deed reserved a royalty of $.10 "per ton of 2,000 pounds of coal produced and saved from said lands." The deed made no reference to any royalty on gas that might be produced and saved, nor any other mineral which might be extracted from the property.

Union Reserve's predecessor in interest, a deed which conveyed "[a]ll coal and coal rights with the right of ingress and egress to mine and remove the same from the following described acreage...."

On August 21, 1990, Carbon County executed and delivered to Florentine an oil and gas lease whereby Florentine received the right to operate for and produce from the disputed property "oil and all gas including coal seam methane of whatsoever nature or kind...." The lease was a standard Producer's 88 lease form, which provided for a royalty of 1/8 of the proceeds from any gas produced from the property. After obtaining the lease from Carbon County, Florentine solicited a protective lease from Union Reserve, but Union Reserve refused to provide such a lease.

On December 7, 1990, Carbon County filed a quiet title action against Union Reserve and various other named defendants, asserting Carbon County's claims to all of the mineral and mineral rights, excluding the coal and coal rights, on the disputed property. Florentine moved to intervene, asserting that it owned the oil and gas lease and that Union Reserve had no estate, right or claim in the oil and gas including the coal seam methane gas. (At the time of the lawsuit, Florentine had drilled three wells, one of which was in the coal owned by Union Reserve.) Florentine sought injunctive relief and quiet title to the coal seam methane gas.

In its answer, Union Reserve asserted that it was entitled to a judgment declaring that its ownership of the coal and coal rights included the right to extract the coal seam methane gas. In addition, Union Reserve sought a judgment canceling Florentine's oil and gas lease and monetary damages for Florentine's trespass on Union Reserve's property.

Following a July 23, 1992, bench trial, the District Court entered Findings of Fact and Conclusions of Law which found that the coal seam methane gas was part of the coal estate and was included in the conveyance of coal and coal rights by Carbon County to Union Reserve's predecessor-in-interest. The court further held that Florentine did not acquire by its lease a right to drill and produce coal seam methane gas and that a trespass occurred which resulted in nominal damages of $1.00. The court ordered Florentine to remove its casing from the completed gas well sited on the disputed property.

On April 20, 1993, the District Court entered a Final Judgment and Decree consistent with its Findings of Fact and Conclusions of Law. Union Reserve appealed the District Court's judgment on the issue of punitive damages. Florentine appealed as to the ownership of the coal seam methane gas.

Subsequent to the District Court's judgment in this case, Senate Bill 294 was introduced to the 53rd Legislature of the State of Montana proposing changes in the statutory definitions of coal, oil and gas. Sections 15-1-101, MCA, and 82-11-101, MCA, were amended and a new provision, § 82-1-111, MCA, was added. These amendments will be discussed later in this opinion.

DISCUSSION

An explanation of the nature of coal seam methane gas and how it is produced and extracted is necessary in understanding the issues presented in this case. This discussion is derived from the following sources: 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 (Spring 1992); Jeff L. Lewin, Coalbed Methane: Recent Court Decisions Leave Ownership "Up in the Air," But New Federal and State Legislation Should Facilitate Production, 96 W.Va.L.Rev. 631 (Spring 1994); and NCNB Texas Nat. Bank, N.A. v. West (Ala.1993), 631 So.2d 212.

Coal seam methane gas, also called "coalbed gas" or "coalbed methane," is formed as a by-product of the "coalification" process. Carbon dioxide and water are incorporated into plants to form various hydrocarbon-based compounds which in turn decay to form peat. When peat is buried under other sediments, the pressure and temperature eventually convert it to coal, methane, and other gaseous byproducts.

Although it is not a chemical part of coal, coal seam methane gas has a weak physical attraction to coal. It can exist freely in the cracks or fractures within the coal seam, but pressure causes most of the gas to be adsorbed within the coal, adhering to the internal surface of micropores in the structure of the coal. Hence, the coal acts as a container for the gas. When the pressure on the surrounding coal is reduced, the gas is released.

Highly combustible and poisonous, coal seam methane gas must be ventilated from coal mines to protect miners from disastrous explosions or inhalation. Originally thought of as only a waste product of the mining process, technological developments in the 1980s and changes in federal law made the gas a commercially viable alternative energy source.

Extraction of coal seam methane gas from coal seams and surrounding strata is generally accomplished by one of three methods: vertical degasification wells, horizontal boreholes or gob wells. Vertical degasification wells are drilled from the surface directly into an unmined coal seam to extract the gas that is trapped or collected there. The release of coal seam methane gas from the coal seam into the well may be increased by various methods of "fracturing" the coal seam near the bottom of the well. Hydrofracturing is the forcing of fluids under pressure into the well so as to cause a fracturing of the coal seam. This process creates fractures in the coal which serve as conduits through which gas can flow to the well's shaft.

A horizontal borehole is a hole bored into the coal seam from a point within the coal mine itself. The coal seam releases some of its adsorbed or trapped gas into the borehole where the gas is then captured and extracted.

Finally, a gob well is a well drilled from the surface to an area near the coal seam. During the longwall mining method, a machine grinds into the wall of the coal seam tearing away the coal. As the machine grinds further and further into the wall, it leaves behind it a void into which the ceiling of the mine collapses creating a "gob" of rubble. Large quantities of coal seam methane gas collect in this area. The collapse of the ceiling of the mine also leaves the overlying strata unsupported, and gravity causes it to subside and to fracture as well, releasing more gas. Gas from the gob may travel upward into non-coal strata, where it may be collected and extracted through the gob well.

While the ownership of, and right to develop, coal seam methane gas are questions of first impression in Montana, courts in other jurisdictions have struggled with this issue for more than a decade. A brief examination of some of these cases is appropriate in resolving the issues presented in the case before us on appeal.

In 1983, the Pennsylvania Supreme Court was confronted with determining the ownership of coal seam methane gas in United States Steel Corp. v. Hoge (1983), 503 Pa. 140, 468 A.2d 1380. In Hoge, a 1920 severance deed conveyed to United States Steel Corporation's predecessors in title "all of the coal" contained in tracts of land owned by Hoge's predecessors in title. The deed conveyed the coal "[t]ogether with all the rights and...

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