Energy Development Corp. v. Moss, No. 31238.

• Court: Supreme Court of West Virginia
• Writing for the Court: MCGRAW, Justice.
• Citation: 591 S.E.2d 135,214 W.Va. 577
• Parties: ENERGY DEVELOPMENT CORPORATION, Plaintiff Below, Appellant, v. Nancy Louise MOSS, et al., Defendants Below, Appellees, West Virginia Coalbed Methane Review Board, Appellee.
• Docket Number: No. 31238.
• Decision Date: 20 November 2003

591 S.E.2d 135
214 W.Va. 577

ENERGY DEVELOPMENT CORPORATION, Plaintiff Below, Appellant,
v.
Nancy Louise MOSS, et al., Defendants Below, Appellees,
West Virginia Coalbed Methane Review Board, Appellee

No. 31238.

Supreme Court of Appeals of West Virginia.

Submitted September 23, 2003.

Decided November 20, 2003.

Dissenting Opinion of Justice Albright January 8, 2004.

591 S.E.2d 137

Richard L. Gottlieb, Esq., Webster J. Arceneaux, III, Esq., Lewis, Glasser, Casey & Rollins, Charleston, for Appellant

Donald R. Johnson, Esq., Roanoke, VA, for Nancy Louise Moss, Appellee.

Thomas N. McJunkin, Esq., Blair M. Gardner, Esq., Stephanie H.D. Mullett, Esq., Jackson & Kelly, Charleston, for GeoMet, Inc.

Darrell V. McGraw, Jr., Attorney General, Christie S. Utt, Assistant Attorney General, Charleston, for West Virginia Coalbed Methane Review Board, Appellee.

591 S.E.2d 136

MCGRAW, Justice

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,

591 S.E.2d 138

in more recent years coalbed methane has emerged as a useful, and thus valuable, source of energy. The specific question asked in this case is whether a standard oil and gas lease executed in 1986 conveyed to the lessee the right to drill into the lessor's coal seams in order to produce the coalbed methane. This is the only question that we address in this opinion

We note at the outset that West Virginia contains huge reserves of coalbed methane¹ and that the safe and efficient development of this resource can be of great benefit to the citizens of this state by increasing property values, jobs, royalties, commerce, and tax revenues. Moreover, the production (versus the waste) of coalbed methane can help reduce our national dependence on imported fuels, and can have a beneficial impact on the environment.² As we examine the legal arguments of the parties, the statutes, and applicable case law, we bear in mind that the state would benefit from the safe, efficient, and prompt production of this valuable natural resource.

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:

The process in which peat transforms into coal is referred to 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 "adsorped"³ 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 adsorped on the surface of coal than is adsorped in other rock. When pressure on the coalbed is decreased, the gas in the coal formation escapes. As a result, CBM gas is released from coal as the coal is mined and brought to the surface.

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).

I.

FACTS

The appellees in this case, Hall Mining Company, Inc., and several individuals,⁴ own

591 S.E.2d 139

two tracts of land in McDowell County, a 300-acre tract described by the lower court as the "Upper Slate Creek Tract" and a 340-acre tract described as the "Lower Slate Creek Tract." The appellees jointly own the surface and all the minerals under the land, including the coal, oil and gas. Although one of the appellees is a mining company, it appears from the record that all the appellees jointly own all the possible interests in the two tracts, and that there had been no severance of the coal or any of the other minerals prior to the events at issue in this appeal.⁵

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:

all of the oil and gas and all of the constituents of either in and under the land hereinafter described in all possible productive formations therein and thereunder within the definition and meaning of the term "shallow well" as set forth and defined in [the West Virginia Code].⁶

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.

591 S.E.2d 140

The circuit court conducted a bench trial on March 4, 2002, in which it heard testimony from both sides regarding the circumstances surrounding the execution of the leases and the knowledge or understanding the parties had with respect to coalbed methane at the time they entered into the leases.

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.⁷ The lower court found that Energy Development Corporation, as it drilled through the coal-containing strata when drilling its conventional wells, failed to take that opportunity to conduct any tests or observations before sealing off the coal-containing strata with concrete "casing."⁸ An expert witness for the appellees testified that this practice was inconsistent with the future production of coalbed methane. Testimony from both sides indicated that Energy Development Corporation did not conduct certain specific tests after the drilling equipment passed through the coal seams but before "casing" the well, which would have helped it evaluate the potential of the coal seams for the future production of coalbed methane.

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.⁹

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...