38
Law 543 Basic Oil and Gas Renke (Generic)
Law 543
Basic Oil and Gas
Renke (Generic)
Oil and Gas Conservation Act (OGCA)
• S.4 – to prevent the waste of the oil and gas resources of Alberta; they can tell you where you may drill your well; they can tell you the economic and orderly efficient rates of production for the public interest of Alberta; and, to afford each owner the opportunity of obtaining the owner’s share of the production of oil and gas from any pool
• S.12 – no well without a license
-so starting point is that we don’t care if you own the land, you need a license
• S.15(3) – you cannot apply for a license if you are looking to drill a well in the same spacing unit of another Spacing Unit
• In the absence of special circumstances, only 1 well is permitted in each drilling spacing unit (DSU). o MUST show that there is no other well AND that you have the right to the entire spacing unit…
• Presumptive DSU: 1 gas well per section, 1 oil well per 1/4 section. o Practical response: most farms were quarter-sections and gas is more fugacious
• Applications for a smaller DSU are considered only on technical considerations, such as reservoir characteristics. -“spacing unit” defined as: (1) area located to a well for the purpose of drilling for or producing O&G (2) area designated as one that will be allocated to a well if well is drilled (3) subsurface regions vertically beneath such area allocated or designated
�NOTE: these are presumptive rules, can be overcome Target Areas –Oil and Gas Conservation Regulations
• S.4.020(1) and s.4.030(1) of OGCR – the situation before 1981 • Before 1981 and still today in the non-agricultural areas, the target area for an oil well = centre of DSU.
o The target area for a gas = 1 of 4 interior LSDs (i.e. LSD 6, 7, 10 or 11). • For agricultural land, Target Areas were redefined in 1981 (to minimize disturbance on the land)
o GAS: Central part of the section (LSD 6) o OIL: NE corner of the 1/4 section, or LSD 6,8,14 or 16.
• Target Areas refer to where a well ends up (bottoms out), important b/c of horizontal wells and directional drilling. • Off target penalty s.4.060(1) – production penalty where you cannot produce as much (neighbour gets a bit more
and you get a bit less) – ensuring a fair share of the common pool… -s. 4.040(3) the Board can only reduce the size of the spacing unit if certain spacing criteria are met (not for convenience) -must be a justification that relates to increased production (a) improved recovery – more oil will come out (b) additional wells necessary to drain the pool at a reasonable rate and will not affect recovery (c) DSU is in a pool with already have other DSUs -some pools require smaller DSUs to be properly exploited (d) increased deliverability is necessary Pooling
• Pooling is the combining of tracts of land either voluntarily or via compulsion to achieve a DSU • Consider this possibility: section of land divided into 4 quarters in the NE section of their quarter – they drill a well
looking for oil, but encounter gas (therefore the wrong spacing unit) o S.80 of the OGCA – both in practice and conceptually, a number of issues arise when you force such:
� One’s conservationist desires cannot overcome the pooling order; forced to become part of the DSU
o S.80(4)(b) – the Board has to decide who the operator is going to be o S.80(4)(c) –each owner gets fair share of the common pool; otherwise the discoverer is unjustly enriched
� Participation factors are based on surface area unless reservoir mapping shows no gas below o S.80(7)(a)) – where pooling occurs, no other wells may be drilled: deemed production on the other land
� Can be problematic for leases that may expire of no production, but s. 7(a) deems production anywhere on the lands encompassed by the pooling agreement to be production on lands that aren’t under production
� By definition, it only applies to compulsory and not voluntary pooling • So if you want it to apply to a voluntary pooling you must draft it in a K
• What about the wrong well? Don’t produce and drill in the proper target area OR incur production penalty • EUB will not grant a variation for convenience sake, only with geological evidence of unique reservoir conditions
Unitization -can only occur through a voluntary agreement
• Goal: Produce more gas in 1 well in 1 DSU far more efficiently than having neighbouring DSUs produce as well
• Definition: Via contract, combine DSUs and create a field and only have 1 well the drain the reservoir o Voluntary: 6 DSUs = 1 field and operates as a single unit (6 DSUs could involve 24 landowners) o Because it is done via contract, the participation factors will have to be agreed upon o Negotiating becomes difficult for the landowner: must evaluate cost and benefits of finding an operator
• No statutory intervention on this issue… S.84 – compulsory unitization (NOT proclaimed) Monopolization through the Control of Support Facilities
• Part 9 of the OGCA: Common Carriers, Common Purchasers and Common Processors
o Common Carrier – access to the pre-existing pipeline (s.48) � Prevent the monopolization of the major oil company from draining the resources as fast as they
can; cannot arbitrarily deny service upon reasonable request and cannot discriminate in price in favour of their own product (fair fees)
o Common Processor (s.53) � The gas plant may be a common processor so that it cannot discriminate in favour of own gas
o Common Purchaser (s.50) � Oil refineries were limited in the past… Imperial, for example, once had the only refinery � Requires a declaration that any person who acquires from any pool in Alberta, a common
purchaser and have to purchase all oil for sale without discrimination between purchasers… o Therefore, entitled to equal access
Introduction to the Ownership Issues
- Definitions: o Gas Cap Gas (Free Gas):
� Gaseous hydro-carbons existing at the top of the reservoir; remains gaseous throughout the production process and is a source of pressure to drive oil to the surface
o Solution / Associated Gas: � Gas that is liquid under the initial reservoir conditions, enters the well bore as liquid, but due to
pressure / temp changes in the well bore, changes to a gaseous phase and emerges at the surface as a gas
o Evolved Gas: � Liquid under initial reservoir conditions, yet changes to a gas in the reservoir upon human
intervention; enters the well bore as gas and emerges at the surface as a gas � Has similar composition to solution gas, so difficult to determine origins of each
- A Typical Reservoir:
o A typical pool of hydrocarbons will contain: � Oil reservoir � Free gas reservoir (gas cap) � Mixed reservoir – solution / evolved gas � Connate water at the bottom (also will have some gas dissolved in it)
- Problems:
o Upon penetration of the reservoir, and during oil production: � The ratio of G to O changes, � G is released from solution as pressure / temp decreases � Some solution gas will evaporate and enter the wellbore as “evolved gas” as a result of the
decrease in pressure o Therefore, difficult to determine how much of each substance belongs to O/G owners; we also must
decide who owns the free-gas and who owns the solution gas � Borys
CHAPTER 2: NATURE OF INTERESTS IN OIL AND GAS
1. Basic Ownership Theory Theories of Ownership of Oil and Gas—J.H. Laycraft and Ivan Head -most basic problem is the ownership of oil before its produced -difficulty b/c oil migrates, fugacious -when reservoir pierced oil percolates toward producing area to equalize pressure -American Theories: -Texas: interest created by a petroleum lease is separate and absolute fee simple
-defeasible fee, owner can lose oil if someone else withdraws from their property -Pennsylvania: ownership not absolute until oil brought to the surface and reduced
to possession, if escapes to another’s land it is lost -chattel real, profit a prendre, interest in land -qualified ownership subject to ejectment -Oklahoma: minority rule, no ownership in O&G, exclusive grants of rights to
explore, don’t convey an interest in land -cannot be owned until captured -English decisions: -Pickles: diversion of city’s water, land owner does not own the water percolating
under his land until he captures it -Trinidad: asphalt is a mineral not water, liability and damages assessed -Burma Oil: leased oil sites, no authority that has was the ptfs property before it
was reduced to possession �problem b/c possible to own flowing asphalt before reduced to possession b/c it is a mineral and water cases don’t apply, yet impossible to own gas until reduced to possession (despite it being a mineral) -Borys: if any oil or gas goes into anothers property the former land owner has no remedy, landowner has no ownership of O&G in place
-Canadian decisions: originally oil leases said to be proft a prendre, at first none decided whether there could be ownership of oil and gas in place -Borys: (ABCA) gas canot be owned without first being reduced to possession -findings inconsistent, statues contemplate that ownership possible -SK Landowners: oil and gas part of the land, belong to the surface owner unless
exempted from title, may transfer ownership, ownership before petroleum -Present Position: -theory of qualified ownership similar to Pennsylvania, AB percolating water
cases may cause some difficulty -may be conveyed as an interest in land -probably will adopt theory of ownership w/o possession -unvested title LANDOWNERS MUTUAL v. REGISTRAR (1952 SKCA)
• Landowners owned M&M and transferred to Keystone a 1/4 interest in "all petroleum and natural gas and all related hydrocarbons except coal and valuable stone". sent to registrar of LTO, registrar rejects, says cannot register the doc in the LTO b/c interests not fixed, substances are not susceptible of ownership
Decision oil and gas are minerals, allowed to be registered, ‘related hydrocarbons’ unclear and couldn’t be registered Analysis
• The problem with “owning” oil and gas and the analogies made with respect to it: o Oil and gas is “fugitive and vagrant in its habits”; no rights until possessed
� NOT Wild animals analogy – profit a prendre – seek and obtain if they can NOR water because it doesn’t move underground in the same way; everything is post-penetration
� Oil is incredibly stable and caught in a cage of a reservoir – there for centuries until disturbed o If mines and minerals are allowed, oil and gas should be allowed
the court looks at Mineral Taxation legislation (SK had enacted this) -failure to pay the taxes meant the confiscation of the minerals and gov issued a title to itself (shows that oil and gas are minerals, with capability of issuing a title)
o The court says that you can own oil and gas under the land; plus, right to transfer � There is no exclusive possession until obtained at the surface
• After this decision; a public policy concern erupted: (think about boiler avenue), the more often reservoir is penetrated, the less P&G can be extracted – classic case of the commons
Borys v. CPR (1953 Privy Council) Facts
• CPR reserved coal, petroleum and valuable stone, NOT natural gas; Borys is the surface owner • CPR granted a petroleum lease to IO who entered on the land and started producing oil • B claimed ownership over the solution gas, also objected to IO’s entry on his land
Issues What extent can IO work w/o an express reservation to do so? What is included under the reservation of petroleum? What right does B have to the gas-cap gas produced along side the oil?
Analysis
• How does Imperial gain right of access (without consent)? o Used to be a CL rule of entry w/o consent if you owned the minerals, replaced by s. 12 o S.12(1) Surface Rights Act – no operator has right of entry without the consent o BUT S.12(3) – Board may make an order to grant right of entry where there is a mineral right
� Compensation for loss production of farmland must be paid (tends to be generous) � cant get permission by giving a general lease to someone, needs to be a separate consideration
stated see s. 15(2), don’t lose right to forbid access unless they are being paid • Does he own the rights to the natural gas?
o Historical interpretation – vernacular test = prevailing vernacular at the time o They conclude that, in law, petroleum and natural gas are different substances because, applying
the vernacular test, the former being viscous and liquid and the latter being gaseous � This is despite the scientific problem that they are chemically identical substances � Look at what was intended to be included in the lease
o Imperial Oil gets gas that starts liquid and becomes gas at surface • The mineral owner has the right to exploit their mineral (in the course of ordinary and reasonable
methods of production) even if it destroys the minerals of the surface owner
• NOTE S.26(1): no scheme for (e) the concurrent production of oil and its gas cap can go without Board approval What is missing from full fledged ownership?
• In Canada, it is unclear whether or not we are an ownership state or not (capture) o Right to use it as they see fit: Limited by conservation legislation o Right of exclusion: Can’t exclude others from taking my oil and gas via legitimate methods on their own
property and merely as a result of pressure changes in the reservoir RESULT: B owns the gasp cap gas, but IO owns the solution gas because it was a liquid at the time of the lease/grant IMPLICATIONS: a. produce your gas -they will lose it to oil companies so motivated to produce -creates a problem b/c when gas removed less oil can be recovered b. need for legislative intervention -O&G Conservation Act s. 39 -prohibits concurrent production of oil and its gas cap without Board
approval, Board will never approve until all oil has been recovered 2. Evolved Gas Central Issue: If the has-cap owner does not have a right to compensation when the natural gas is flared off does he have any rights to compensation when the natural gas is captured, produced, and sold? Prism Petroleum v. Omega Hydrocarbons (1994 ABCA) Facts
• Omega produces both petroleum & solution gas; the free gas owners are concerned about such being produced o They are arguing that it is the state of the gas in the reservoir that matters; solution gas (via penetration,
turns into gas – “evolved gas”) giving the gas owners even more additional rights… Analysis
• Solution gas belongs to the petroleum owner and, therefore, the gas owners lose • Omega has the rights to produce all solution gas because, in reservoir conditions, it is in liquid form
• However, trial judge was clear that he was not talking about solution gas – a substance that has changed as it is being produced: evolved gas – this was ignored
Result CA: it’s the condition in the unitized zone in the reservoir, but they don’t clarify between pre and post-production
NOTE: the court emphasized that Borys was a contextual ruling and that the vernacular meaning must be taken into context in each lease/agreement, so petroleum and oil may change meanings depending on the lease Anderson v. Amoco (2004 SCC) Facts
• Argument: Borys did not state unequivocally what it meant by reservoir conditions • History: ABCA had quite the dilemma because of the poor Prism decision
Issue When you have a reservation of petroleum, at what point is petroleum defined? Decision Petroluem determined based on the original reservoir conditions, prior to human intervention Doesn’t matter if the gas changes, we are concerned with the initial state Analysis
• Borys becomes carved in stone in this case… • Why did the court decide on original reservoir conditions?
o It is a problem to distinguish at the moment of penetration as to what was liquid and not; further, ownership is changing all the time and constantly changing as pressure constantly evolves
o This is the most practical approach, also fits with the logic of Borys o Look at the vernacular when the deed was made and this was adduced to the time of the original grant
and, therefore, ownership is at the time when such occurred which is before penetration and at original reservoir conditions
• The only exception could be where there is a conveyance after production begins… o Most likely these will be gauged at the time that the conveyance is entered into
What about the gas found in the water? (connate gas)
• ABCA: Gas owner doesn’t have a reservation over water (which cannot be reserved?) • All water is owned by the Crown; does the gas then belong to the Crown? • Still unanswered, but glossed over by the SCC • There is an industry presumption that the gas owners own this gas
NOTE:
- Rule of Capture: o Oil does not have to be reduced to possession to become the subject of ownership; this is evident from
Borys which declared that ownership exists before the reservoir is penetrated � This can be changed through contract
o The rule of capture does not apply to the division of ownership by phase as it does to divisions of ownership based on surface land ownership
� Applying this rule to parties who have agreed to divide their interest under the same tract of land would defeat the purpose of the contract
3. Gas over Bitumen Central Issue:
• Recovering the gas can limit the overall long-run recovery of bitumen via SAG-D o The nature of the problem is that, in order for SAG-D to work, you need the assistance of the gas cap
pressure to force the bitumen down and up the recovery well • The problem: (b/c public policy) government decided to lease bitumen and gas separately…
Alberta Energy Co. v. Goodwell Petroleum Corp. (2003 ABCA)
• Former owns the bitumen; latter owns the gas • G complained that AB produced a large amount of solution gas, while getting the bitumen out • Start complaint at EUB (ERCB) G says we have a gas license, AB doesn’t, they have a bitumen license, so the
complaint is that AB is exceeding the terms of its license o NOTE: EUB often used when wekare cases b/c less strict rules of evidence, direct appeal to CA
• In the combination of the EUB and ABCA decision; two issues are at stake
o Keep the gas cap in check to keep the pressure for bitumen recovery o While recovering bitumen, they are producing free gas as well… in high proportions…
• As a result of the shut-in – have the natural gas rights been sterilized?? Analysis
• M&M Act, s.53(1) – no person shall recover Crown minerals unless authorized under this act or via an agreement • Per Borys, bitumen lessee can produce free gas, incidentally, via its reasonable means of production
o contemplate that the use of the gas will result in compensation to G o Borys said that as long as the gas is used reasonably that compensation is not required o Percy thinks that if they were selling the gas then the assumption of compensation is fine, but if they are
really using it/wasting it to produce then shouldn’t compensate • The effect on Goodwell: the court says that there is a right of compensation; but the case doesn’t decide that and
AEC conceited that there was a right to compensation… o The court comments on this issue repetitively; is there a legal right to compensation? o There is no legal basis for this statement; for 40 years, gas cap owners have not been compensated o If the petroleum lessee in Borys is selling the gas, there should be compensation because of conversion
or unjust enrichment theory… o Compensation is for the delay in production, not necessarily a loss of production
• Crown lease is 3-dimensional – “oil sands below the top of the Viking FM to the base of the Woodbend GRP” o The reason: the Crown is concerned about a company tying up land by producing from shallow wells and
they never get down to exploit the deep deposits � Cujus es solem – is, therefore, not relevant in the oil and gas context anymore
�CA says that Borys applies in evolved gas or in gas over bitumen, treated as a fundamental principle in O&G law -in both cases the gas is required to extract the bitumen or the petroleum Gulf Canada Resource Limited Request for the Shut-in of Associated Gas, Surmount Area EUB Decision 2000-22, March 2000 Facts
• Gulf seeks an order to have 146 gas wells shut-in in the Surmount Area • Represented a 3 section buffer zone of its leases, concerned about pressure depletion would adversely affect the
SAGD bitumen recovery process • One gas owner (PetroCan) agreed, while SPG thought SAGD technology was too uncertain/overreaction • Energy resource of the bitumen was 10 times that of the gas
Issue Should the gas owners be compensated for having the wells shut-in? How much? Decision Analysis
• The bitumen is potentially so much more valuable than the gas production such that all the bitumen should be produced before the natural gas is produced
• The regulator applies the precautionary principle… no one knows for sure whether this was necessary • There is no doubt that when Gulf produces bitumen, it will produce significant free gas as well…
o It could take up to 200 years to produce the bitumen, but its not reasonable to require leaseholders to commit to bitumen projects within a time frame b/c may discourage investments
• As a result, there is a significant issue from the natural gas owners: o EUB says that the shut-in gas lessees have rights to compensation o Per s.91 of the OGCA: if anyone is effected by the Board, Cabinet may create a compensation scheme
� This one was big enough to be referred to Cabinet for a compensation scheme o What’s the problem of figuring out the basis for compensation for these lessees?
� It is a deferred benefit… they will not benefit from the rights for quite a long period of time… � Do we buy them out or do we value it in some other way…
NOTE: Board unwilling to rely on re-pressurizing depleted gas zones b/c feasibility had not been demonstrated - Compensation for Shut-in:
o Gulf � Compensation to NG owners would take away the project’s economic feasibility
o SPG � If the value of project was sufficiently high to warrant shutting in G, those who expect to reap
benefits should absorb the costs � therefore, the NG owners should be compensated for loss of NG
o Board � The Board acknowledged the risk of unproven SAGD technology and was mindful of SPG’s view
that shutting in gas is overreaction � it would be irresponsible to possibly sterilize bitumen reserve by allowing NG production � Shut-in would have significant impact on NG producers but OGCA provides that the Board may
compensate persons who suffer loss by reason of any orders made pursuant to the Act - Conclusion:
o Continued production of associated gas presents a significant risk to the future bitumen recovery for Gulf’s oil sands leases
o Gulf’s request for shut in was allowed o Some of the gas wells are not ordered to be shut-in, as gas production in these wells was not associated
with the bitumen � But the Board will keep an eye on them
Authorization of Agreement between the Crown and Conoco Canada Resources ltd. et al. February 27
th, 2002, O.C. 83/2002
• 3 principles to pull out of this settlement: o Shut-in Royalty: Compensation for the gas that is shut-in for a long period or that will not be produced o Paid via royalty forgiveness – waived until the aggregate amount of the $85M is reached… o When the gas is produced eventually, there is a gross overriding royalty of 11%
• At this point, the only party that is left in the clear is Conoco (Gulf’s successor) – they are left laughing though because they can still produce the free gas that is obtained through oil production
o However, they agree to compensate $20M toward the $85M that is lost in royalty forgiveness � RECALL: Minimal royalty (1%) until the project achieves payout level, then 25% royalty � Conoco: after production costs done pay the $20M (fixed 2001 dollars); but no later than 2026
• Pay out of the net profits interest � If some wells are opened, Conoco is relieved of some of the payment
-rule that a well must be in production w/I 1 year of the lease will not be in effect in the shut-in period -SPG cannot sell its interest in NG wells w/o province’s consent, 3
rd parties to assume all K obligations
4. Coalbed Methane
Coal Bed Methane Science
- The process: o Decaying plant material settles on the bottom of swamps and is converted into peat; the peat then sinks
into the earth and chemical reactions increase the carbon content � coalification � This produces methane, and the porous character of coal permits the retention of this methane
- Composition: o CBM is similar in composition to gas-cap gas and exists in three states:
� (1) Free gas � (2) Dissolved in water in the coal � (3) Gas absorbed on the solid surface of the coal held there by Vanderwaal’s forces
• Coal pores have a larger surface area than other rock, so more gas exists in this state on coal
o There is a phase change during production: � CBM escapes as coal is mined and brought to the surface as a result of a decrease in pressure
• Recall, there is A LOT of gas recoverable in AB (110 trillion feet estimated recoverable) • no Canadian judicial guidance to speak of for coal bed methane • disputes centering around the titles given by CPR exempting coal and then ‘coal, petroleum, valuable stone • most resources went to Pan Canadian and then to En Cana who got lands subject to the reservation, En Cana
wants the coalbed methane gas under its title • Central Issue: Does coalbed methane belong to the coal owner or to the gas owner?
NOTE: in the US the dispute involves Tribes that had land given back to them by the US gov in light of the OPEC energy crisis where coal was thought to be quickly dissipating
Amoco Production Company v. Southern Ute Indian Tribe et al. (1999 USSC) NOTE: this is the only coalbed methane case that Percy knows of Facts:
• Settlers that owned all the land except coal; the tribe said that they own the coal AND CBM • Gov gave back land to some Tribes as well as gave them the previous gov reservation of coal • Later
Issue Does coalbed methane belong to the coal owner or the owner of the remaining mines and minerals, petroleum \ and natural gas? Decision Gas owners win Analysis
• 1909/1910 – an ordinary person in the vernacular would understand coal and the agreement made at that time • The ordinary person in that time would understand coal to be the “solid black stuff” – not gas b/c it is vapour
o Essentially an unattributed and unthoughout vernacular test • Coal was a solid fuel; when reserved, you only get the black, rock-like substance (not oil, gas, or methane)
o Essentially coal is the hard black stuff and coalbed methane is the various gaseous forms • 8-1 split in the US SC is a success; the dissent echoes the view: it doesn’t seem fair to say that they assumed
liability for the dangers of the CBM, but now that it is valuable, they are denied any benefit • Percy thinks it is very significant that they stumble upon the same vernacular test as Borys
Based on the Borys decision and in the same situation, in Canada, who is likely to own the methane gas? NOTE: Percy thinks that a Canadian court will follow Amoco
• Borys: it depends on the state of the CBM in the original reservoir conditions prior to penetration (solid or gas) • However, Encana is the successor to AEC and took over title to the old CPR lands reserving coal; therefore, the
coal owner; used political clout and money to bully smaller co. – force settlement and lock-in a royalty… o The war develops because bigger companies are starting to obtain the P leases to the old CPR lands…
• Anderson v. Amoco – evolved gas applied to everything except gas dissolved in connate water (vested in the Provincial Crown); in many coalbeds, the methane gas is dissolved in water in the coal (the 3
rd possibility)
o There is a hint that it belongs to the Crown; just as water belongs to the Crown… • Does the coal producer own any duty to the CBM owner?
o You can waste whatever is reasonable given such ordinary and reasonable methods to extract o This, however, is the opposite of Borys: there may need a regulatory intervention – produce CBM first
• There is no rule to say that you cannot produce the coal until the oil and gas is produced…
Crown leases: s.53 says that you can only produce the mineral that you lease; therefore, coal lessee does not have the automatic right to produce CBM – what happens then? NOTE: the EUB has made a regulatory determination on this matter the same as Amoco, was appealed to CA but later abandoned (most likely due to standard of review concerns)
�in many parts of AB, coalbed methane exploitation is being started and the coal owners are being very aggressive (continue this and we will sue you unless X% royalty on production) � big gas owners have now become partners with freeholders, taking freehold gas leases and preparations for coldbed methane production, when they are threatened with being sue they say ‘bring it on’ these are both big parties who can afford the big law suits
NOTE: many reservations in AB exempt “coal, petroleum, and valuable stone” was has been deemed NOT to include natural gas �most likely coal bed methane in this situation would belong to the surface owner b/c not exempted
Other CBM Issues
- Recovery methods – hydro fracturing: o Water Contamination:
� Hydro-fracturing process involves disturbance of the coal seam with pressurized water; the water will migrate to the water course and will contaminate it
o Fracturing Coal: � CBM owners have to fracture coal to get at CBM; coal owners don’t like this – creates another set
of disputes. Is this reasonable recovery? Coal not destroyed, but is cut into “smaller pieces”
- Improper venting actions brought by G owner: o Litigation on this in USA at the moment:
� CBM owners are suing coal owners for wasting its G by venting; courts will likely be sympathetic because coal owners were liable for G explosions and therefore had to vent � they now shouldn’t be liable for venting
o Points for argument: � Borys says if it is part of ordinary scheme of recovery, then vent away; If CBM is more valuable,
potentially coal mines will be “shut in” until CBM is fully exploited – no leg yet
5. Interests Under Lease
• History: in AB, borrowed the American form of oil and gas lease to allow the in situ owner to grant such rights
• Lots of things happened on the assumption that it was a “lease” and “grant” • Grants to the lessee a smaller interest than a fee simple conveyance, yet confers a sufficient grant and term to
permit the operator to remove any discovered MMs • Gives original owner a continuing interest by reserving royalty • The characteristics of the instrument do not appear to be a “lease”:
o Conventional leases: � Contemplate the use of the leased property, which shall be returned to the owner in the same
condition subject to reasonable wear and tear o MM “lease”:
� The rights granted under a typical O/G lease are entirely different, as the “lessee” must have the right to possess and remove the minerals
Berkheiser v. Berkheiser (1957 SCC) Facts
• Testatrix devised the quarter section and negotiated a P&G lease for 10y “and so long thereafter as the leased substances or any of them are produced”; she died
• beneficiaries argued that the lease was not a lease, but a sale. As such, they argued further that an ademption had occurred – an implied revocation of a bequest
• in residual beneficiaries’ interest to find an ademption, as the ¼ section would then become part of the residuary (i.e. they’d get the rights to the O&NG previously leased)
Issue • Is the interest in P&G vested in respondent (residuary beneficiaries) or appellant (who inherited the surface)? • What is the substance of the instrument used to convey one’s interest in MM?
Decision Not a lease or a sale, but a profit a prendre Analysis
• Lessee’s interest is only in relation to the property; while title to the property itself remains vested in the lessor • Not a lease:
o normal lease, the lessor expects to get the property back in the same condition, subject to reasonable wear and tear (objective behind the lease is to preserve the property)
o In an O/G lease, the O/G is removed and there is no implied term that the property subject to the lease will be returned to the owner in the same condition
� Rather, there is total destruction / removal of the property � Furthermore, the terms of these “leases” are indefinite / uncertain
• Not a sale: o The original owners paid the property taxes, retained legal title, and held a reversionary right in an any
remaining O/G • Profit a prendre:
� Really, what we have is a license (to explore / exploit the minerals) coupled with grant (the right to carry them away) which are the hallmark traits of a profit a prendre
o If it is not a profit a prendre, then it is an “irrevocable license to search for and win the substance named” • Profit a prendre; lessee is able to fully exploit the property for its own use/production (interest in land)
• Result of this finding on the case:
o Since it is not a sale, but a profit, there is no ademption, and the interest in the ¼ section remains with the original devisee
• NOTE: s.79 of the Law of Property Act – AB had to pass legislation to say that lease under the LTA includes an
agreement that allows the right to take or remove minerals; P&G lease is DEEMED to be a true lease o So that all existing registered leases were not deemed void/invalid/unenforceable
6. Stored Gas
• Addressing seasonal demand: Store gas in underground reservoirs to even out seasonal supply and price o Consumers used to buy low in the summer and save until high prices in the winter
• Contingency cushion for demand spikes (good for guaranteed gas-supply Ks • Economic strategy: Add gas into the pipeline to capitalize on the high prices of high demand periods… • Also use empty reservoirs as storage bins, hold gas until prices were high
o Injection well to put the gas back in and a production well to take it out (seal it off when back in) o There is also liquefied natural gas brought in from eastern countries when prices high
• Central Issue: What happens when a gas owner, who had previous possession and control of the gas, reinjects the gas back into an underground reservoir?
Hammonds v. Central Kentucky Natural Gas Co. (1934 CA Kentucky)
• Gas company, having produced gas from a Kentucky reservoir, uses the same reservoir for underground storage • Neighbour complains “trespass”; using neighbouring land for those same storage purposes
Analysis • The gas ceases to be owned by the company that injected it; the wild animal theory comes back into play • Hammonds can exploit the gas reserve: can now draw off gas under her land and any gas that migrates to her • Percy dislikes this case because the analogy is inappropriate, there is no intent to release the gas, assumes
abandoned ownership which is not really the case here • NOTE: this case destroyed the economics for gas storage until it was late overruled by Lonestar
Lone Star Oil and Gas Co. v. Murchison (1962 CA Texas)
• Murchison attempted to extracted gas from the reservoir similar to Hammonds • Gas had migrated to a neighbours land who then tried to draw it off (rule of capture)
Analysis • The Court “explodes” the underlying theory on which the Hammonds Case was based:
o Under the rule of capture, the gas becomes its property and remains such until ownership is abandoned o Court accepted the fact that when gas is produced it belongs to the person who captured it o ownership is not taken away b/c the owner chooses to store in its own reservoir
� it is a continued assertion of ownership rights • Lone Star has the additional problem; now, Lone Star is trespassing onto Murchison’s land
o So this case opens up the economics of storage but must be careful you have all the rights you need to put it there
o NOTE: Where do you get storage rights from? Mines and Minerals Act (amendments in 1994)
• S.57 sets out 3 groups of people that could own storage rights o Where P&G owner is 1 entity, it owns the storage rights o Where P&G are separately owned, the owners are co-owners of the storage rights o If the storage space is created by mine of another mineral (eg. coal), the coal owner owns storage rights
• In 1994, the legislation says that P&G owners have storage rights with respect to EVERY underground formation o BUT: Expropriation requirements: 1) express, 2) presumptive right to compensation, and 3) legislation is
not retroactive unless expressly stated to be
What about Caves?
- Why are caves different? o A mine is a space around a mineral; a cave is a space in the ground where gas could potentially be
stored, yet it is not a space around a mineral, and therefore not a mine - What is the theory behind ownership of caves?
o Edward v. Simms – the surface owner owns the portion of the cave that lies beneath his surface - The legislature did not deal with caves – did s. 57 take away the cave owner’s common law rights?
o Percy says no: � (i) In order for legislation to take away property rights, it must do so expressly, not impliedly � (ii) Furthermore, there is a presumptive right to compensation upon the removal of a property
right � (iii) Also, legislation is not retroactive unless it expressly indicates so
• The Alta legislature removed the words from the draft legislation “…was always deemed to have been the owner…”
o Therefore, since the legislature did not deal with any of these factors, it presumably did not revoke the cave owner’s rights
o
- Dealing with cave owners o In light of the legislatures lack of dealing with cave owners, we should not rule out the issue, that we may
have to also negotiate with surface owners when drawing up a gas storage agreement o Prior to 1993 where A owns surface, and B owns Mines and Minerals – in this scenario A owns part of the
underground cave o If they contain minerals they belong to B, if not, they belong to A
� Minerals defined in MM Act (includes limestone) so now post 1993 a cave would belong to the mineral owner if it is a limestone cave
7. Blowouts
• Blowouts are still occurring; Amoco blowout near Wabumen; Enoch reserve blowout just recently • Technology is better, but blowouts still occur
o Uncontrolled flow of gas, oil, or other fluids from a well which occurs when the pressure within the well exceeds the pressure in the borehole applied to it by the column of drilling fluid
o Also results in the release of toxic sour gas (H2S) Central Issue: Where does liability fall when there is a blowout? NOTE: there is no Canadian CL or statue to deal with this, all we have is American authority Elliff v. Texon Drilling Co. (1948 SC Texas) Facts
• P’s were freehold owners of the surface and royalty interests in the mineral estate underling two tracts of land upon which there was a producing well (Eliff No. 1)
• P’s land was situated over 50% of a large O/G reservoir of gas, and the remainder of the reservoir was located beneath P’s neighbour’s land
• TDC drilled an offset well on the neighbouring land (Driscoll No. 2) which blew out, caught fire, and cratered • O/G was released and dissipated, fissure around the well increased and caused No. 1 to blow out, catch fire and
crater, enormous loss of O/G, the P’s water wells, livestock and land was damaged Issue
Does the law of capture absolve TDC from liability for its negligent destruction of P’s O/G, recognizing that substantially all of the wastage occurred through the opening on TDC’s leased land?
Analysis
• Principle of capture only allows the respondent to drain oil and gas in a reasonable and legitimate manner; it doesn’t allow reckless drainage
o It becomes a rule of REASONABLE capture • Theoretically, they are recognizing that the people about the common pool or reservoir owe a duty to the reservoir
(a duty of protection); they cannot irresponsibly or recklessly drain it… o Each freehold owner acquires title to O/G which he produces from wells upon his land, though part of the
O/G may have migrated from adjoining lands o The freehold owner may thus appropriate the O/G that has flowed from adjacent lands without the
consent of the owner of those lands, without incurred liability to him for the drainage o The non-liability is based upon the theory that after drainage, the title / property right of the former owner
is lost o However, we do not grant immunity to the negligent waste / destruction of the O/G
• How much do the plaintiffs get and why? Depends on the tort being alleged: o Negligence – because you want to prove such for a causal connection to the result
� Negligence damages are based on the value of the loss incurred (the wasted O/G and unrealized royalties)
� The CA framed the damages under negligence: � The duty: all parties drilling into a common pool have a legal duty to exercise reasonable care to
avoid the negligent waste / destruction of the minerals o Trespass – you get the difference in the value of the land before and after the trespass
� Value of the land limits the recovery o Conversion – You get compensated for the wasted oil profits (wasted goods)
� Conversion damages are based on the highest value of the property that was converted from the time of conversion until the time of the decision
� So – highest market price of O/G multiplied by the amount of the P’s wasted share
- Application: o In light of the above, the P did not lose its right, title and interest in the O/G under the rule of capture
� At the time of their removal, they belonged to P, and the wrongful dissipation deprived the owners of the right / opportunity to produce them
o Irrespective of the opening from which the minerals escaped, they belonged to the P, and the loss was the same
� The O/G would not have been dissipated at any opening except for the opening caused by the wrongful conduct of the respondents
o As such, since TDC was responsible for the loss, they were not in a position to deny liability merely because the O/G did not escape through the surface of the P’s lands
- Ratio:
o Where drainage is done in a “reckless and irresponsible manner”, liability ensues o The duty: This is based on the principle that all parties drilling into a common pool have a legal duty to
exercise reasonable care to avoid the negligent waste / destruction of the minerals - Alberta Approach:
o Unsure – we have no case law; however, would likely use the negligence approach, based on the duty from Eliff (however, these claims have been discouraged from going to court (see info letter below))
The Atlantic Blowout
• March 8, 1948 and gushed oil for 6 months; then caught fire ruining all the neighbour farmland • Erupted via geysers in neighbouring land as well… • Atlantic response was to pour landfill into the well to try to stop the blowout… • The Oil and Gas Conservation Board took over and put Imperial Oil in charge for getting the blowout in control
o It’s mandate is to protect the reservoir; tossed Atlantic out and put Imperial in to plug the well • Although it was a disaster; it got the investment community interested in Alberta (due to publicity)
Atlantic Claims Act -a quantity of the oil was recovered and sold, the proceeds were used to fund the Act’s trust fund
• All the proceeds of the production from the well were put into a trust fund and used to do 2 things: o Pay the Board’s own costs to put the well in control o To compensate for claims resulting from the blowout
• S.3(2)(c) – allowed to compensate, etc. (avoids litigation) • S.5 – no person shall commence any action except with the permission of the Attorney-General
o This is becoming the one and only compensatory mechanism (avoids litigation) What about the conversion remedies…
• S.4 – the oil well was DEEMED to have overproduced a certain amount of oil (565K barrels); plus Atlantic is not able to drill additional wells and its existing wells are only able to produce at 2/3 capacity
o Such only happens until the compensation for the overproduction is satisfied via additional share in the common pool for the neighbours…
• However, this is a historical oddity because such hasn’t happened since… NOTE: the entire purpose of this Act seems to be to discourage litigation Interim Guideline for Resident Compensation During Sour Gas Well Blowout Emergencies -this is a policy developed by the Canadian Petroleum Assoc, Independent Petroleum Assoc of Canada, and the Pembina Agricultural Protection Association to address concerns of those in Pembina, AB
• Statement of General Policy – seeks out fair/prompt compensation and sets out 3 categories of costs… o Tier 1 – immediate out of pocket costs for the evacuation from normal residence (hotels, meals) o Tier 2 – direct costs (immediate and short-term) for the release of sour gas (eg. dead cows, etc) o Tier 3 – those associated with long-term impacts (requires investigation, negotiation, and settlement)
• Used when the loses are hard to quantify • It is very desirable to resolve these issues via ADR; but what about litigation?
o EUB is clearly discouraging litigation regarding costs of doing so -outlines the process is negotiation, mediation, arbitration, and litigation for difficult claims
Why does litigation not happen? • No individual has the resources to challenge an oil company • AB proclaimed its Class Action legislation 3 years after it was passed… the biggest opponent: oil companies…
NOTE: Percy thinks that this is selfishness by the industry, O&G does not want litigation b/c that leads to discovery etc which reveals information that the industry does not want leaked
8. Trespass Issues Champlin Refining v. Aladdin Petroleum (1951 SC Oklahoma) Facts
• Drilled wells assuming that they had a valid lease; were producing oil,years later A said they had to leave the land and give everything over to Aladdin; they gave up their wells and gave up all their profits – but they did retain the expense of developing and operating the leases…
o They only gave over the net proceeds to Aladdin, claim they don’t need to pay cost of production o A alleges that are entitled to the proceeds based on highest market value (action in conversion)
Issue Is A entitled to the highest market value in conversion? Is C entitled to offset the claim with reasonable costs of
production? Decision A not entitled to highest market value b/c waited too long. C entitled to offset costs, otherwise would be UE Analysis
• Conversion remedy = difference between market value before and after the conversion o Conversion is any distinct act or dominion wrongfully exerted over another’s personal property in denial of
or inconsistent with his rights therein o To get the conversion remedy: SCC said the litigation must be promptly commenced and energetically
pursued – too speculative otherwise o Plaintiff then gets: the actual proceeds less the reasonable costs of production (Champlin wins)
• Why does Champlin get credit for the reasonable cost of production? o Unjust enrichment? Not prevalent at the time o The real difference here: Aladdin cannot say that they wouldn’t spend their resources in that way: 1) they
have the mineral rights for a reason and 2) they asked for the proceeds of production • USA: Factors to consider: (subconscious application of the law of unjust enrichment)
o Unofficious Intervention – Champlin was an innocent/good faith trespasser, honest belief owned land o Incontrovertible Benefit – they have to have benefited from the oil well
� A claimed proceeds of production so cant reasonably deny costs of production o Champlin gets the reasonable costs back because of above – there was an undeniable benefit to Aladdin o Champlin got compensated for drilling a dry hole too… (Dissent disagrees on this point)
� Done in good faith and cost was reasonable and necessary Law of Property Act S.69 Improvement made on wrong land through error
(a) If an improvement is made one is entitled to a lien on the land to the extent of the amount to which the value of the land is enhanced by the betterment
(b) Entitled to retain the land if the court believes this is just in the circumstances NOTE: if they keep it they have to pay compensation as the court directs -also, a profit a prendre cannot be acquired through adverse possession
� This is a statutory unjust enrichment
Lac Minerals v. International Corona Resources (1986 ON HCtJ) Facts
• Corona had a portfolio of mining rights in northern ON; Lac approached Corona to create a joint venture • Lac looks at all of Corona records – the gold deposit seems to extend to the neighbouring lands, owned by
Williams – Lac goes and buys it • L spent $200M in developing the property and C spent $85M in developing its own mine and mill • Famous in Canada; Lac breached a duty of confidence when they acquired the property from Williams…
o Held as a constructive trust for the benefit of Corona Issue What compensation, if any, should L receive for its costs of developing the property, including the mill and mine? Decision Entitled to compensation Analysis
• When Lac handed the land back, they asked for compensation of the development of the mine & mill o Unofficious intervener?? “honest belief that Lac was the owner of the property” – YES
� Court finds it hard to believe that L would spend all that money if it thought the property would be lost
o Incontrovertible benefit?? By the time Corona gets the land, they had begun to develop their own land. The extent of the incontrovertible benefit was reduced from $200M to $150M
Result -allows a lien to the extent the land’s value is enhanced by the improvements -unlikely C would have built an additional $85 mil mill if hadn’t lost original property -court splits the difference, total expenditure was approx $290mil -if developed together would have been $240 mil, so $50 mil should be deducted from $200 mil -L is entitled to $150 mil lien in return for the transfer of the property
Land Titles Act
s. 190 – Power of judge to cancel, correct, etc., duplicate certificate of title - Judge has authority to correct certificates of title, etc in order to give effect to conveyances Unofficious Intervenors: 3 ways to be doing something wrong (mineral trespass) with an honest belief
o (i) Improper Title: � OilCo finds themselves on the right land, but failed to secure proper title (mistake at the LTO, etc) � Most common with:
• Crown MM’s: o Most Crown land falls under the Public Lands Registry (Deeds Record System,
not the Torrens system) o Furthermore, under Crown leases, the Crown does not expressly guarantee title
� To protect yourself, may have to do a historical title search to make sure you have good title • Freehold land is protected by the LTA assurance fund, however, the assurance fund
does not apply to MM o (ii) Improper Survey:
� Not as much of a concern today with the application of GPS
o (iii) Unexpectedly Terminated Lease: � This is the biggest and most predominant category � OilCo may be occupying / producing the land under a lease that is unexpectedly terminated
�So producing oil that does not belong to them 9. Geophysical Exploration � In order to discover substances under the ground, the uses of seismic exploration is used � Sound travels downwards into the ground and reflects back to the surface at different speeds, depending on nature of
substances it encounters, underground reserves are then mapped out In a case where the surface rights belong to one individual and the mines and mineral rights belong to another � whose permission must be acquired to do these seismic searches? Phillips v. Elliott (1957 USCA Fifth Circuit) � The explorer claimed that they only needed the permission of the surface owner � E owned mineral estate and asserted that his permission was needed Decision: � NO, it is not sufficient to have just the surface owners permission; because it may affect the value of the M&M � Tort: TRESPASS – M&M right = explore and exploit, but trespass requires physical entry
o Right to explore is attributable to the MM owner, not the surface owner (later change by statute!) � When there is seismic shock in the subsurface there is a direct invasion of the estate Remedy � Tresspass: req’s direct interference with property, remedy based on difference in value of the land
o Here direct interference b/c seismic waves physically shook minerals o Estate affected b/c presence/absence of oil discovered would increase/decrease mineral estate
� Waiver of tort: remedy says that instead of suing for tortuous measures of damages, PLT can sue for benefits wrongly received by the tortfeasor
o Liable to the extent that the trepass unjustly enriched the DF o The measure of damages was the reasonable cost was cost of gaining access to the PLT’s mineral
estate to conduct the seismic exploration Alberta � This case enumerates the necessity of permission from the mineral owner, but at CL is it not necessary to get the
permission of the surface owner (to date no Canadian cases on this point)
� Percy thinks there generally does not seem to be a privacy right in property, you can get information in many different ways such as aerial photos, satelittles, most O&G companies take the risk and do seismic anyway
Exploration Regulation s.3(1) surface owner’s permission is now required before they can explore s.3(3) if the CL requires someone’s consent, then it is still required (ex. MM owner at CL required) What if the surface owner’s permission cannot be acquired? � Surface Rights Act s.12(1) Rights of entry: does not give a right for exploration � There is NO way for forcing the surface owner to grant consent � Today, if the surface owner refuses to give permission, the exploration is done from adjacent land
o Can also seek out a municipal road allowance, modestly paid for Wasson v. California Standard Oil Co. (1964 ABCA) � The person known as the land man, comes to the house and asks for permission to cut a seismic line across the farm � The wife says: must wait till husband gets home; The company does not wait and goes ahead � It would be cheaper to pay the remedy of trespass then wait ABCA � Recognize the limits of the law of trespass and adds punitive damages � Pays the same amount of damages as if they would have had to pay for permission
o Principle of ‘rational self-maximizer’ meant companies would break the law if its cheaper, this sends a message that they cannot proceed like that
Phillips v. California Standard Oil Co. (1960 ABSC) � DFN setting of seismic survey in a neighboring yard, and then shockwaves destroy the PLT’s well (sulfurous water) Issue Is there a tort committed? Which one? Decision Nuisance committed, damages awarded Analysis � Nuisance: unreasonable use of adjacent land, impair use of PLT’s adjacent land
o So the further away we get the more likely it is to be nuisance o Careful b/c nuisance requires physical damage
� Trespass or nuisance, depends on the direction of the shockwaves � Downwards is a trespass; Across is a nuisance The Emergence of New Seismic Exploration � Traditional, 2-D SE used only two receiver lines � 3-D SE gives a cross-section cube image, showing very precisely what is underneath
o does not require exploration operations to take place on land being explored Whether or not the permission of the PLT to explore the PLT’s land? � Possible torts: nuisance (no damage, defining point), trespass (not direct interference from above) � Still, valuable information is being extracted � Possible ‘invasion of privacy’? � Think Victoria Park Raceway � peering into a neighbors land thru SE � Victoria Park says not actionable � Percy: it is a stretch to claim legal protection from the SE of your land from a neighbour’s land
CHAPTER 3: ACQUISITION AND CONVEYANCING OF INTERESTS IN OIL AND GAS NOTE: many leases are old and have survived a long time due to production, need to know the anatomy of these leases to avoid the problems that plague the old clauses (usually courts give a strict interpretation) 4 technical questions that Percy thinks people should know about O&G transactions 1. statutory provisons 2. oil and gas lease owned by an estate 3. tenancies in common 4. perpetuities 1) Statutory Provisions to be Aware of: Law of Property Act:
-Part 2 Common Parties Contracts and Conveyances
-reason for the act is that in O&G you frequently find a K which will say King parties are apparently King with themselves -unitize the properties and appoint the largest landholder to be operator of the unit -drills the wells, builds the plant, all pay the share of costs and get a share of net revenue -at CL if had 2 parties as the same, would say you cant have a K with yourself -to address this the AB legislature passes the Act s. 10(2) saying that it is valid and enforceable -as unit owner it looks like K with itself, but its really acting as an agent and K on behalf of others as well as itself NOTE: they do not want to be partners, problems with profits -Mineral Titles Clarification
-s. 56(1) AB declares what counts as a mineral -s. 57 if you can obtain these substances (clay and marl) from surface operations then they belong to the owner of
the surface and not the owner of the mines and minerals [prior to April 12, 1961 MM owner got clay and marl] -s. 58 sand and gravel is the same rule [since April 7, 1951] -s. 63 a right of first refusal to acquire an interest in land or an assignment of rents are equitable interests in land
-they are therefore registerable Devolution of Real Property Act (AB)
o Was designed to prevent the executor from tying up the property in long term commitments, contrary to the interests of the beneficiary
- s. 14(1) – The person representative may, from time to time, subject to the provisions of any will affecting the property, do any one or more of the following:
o (a) – lease the real property or a part of it for a term of not more than 1 year o (b) – lease the real property or a part of it, with the approval of the Court, for a longer term
� Therefore, we know that an OilCo can get a lease from an executor, although in most situations, it will likely require court approval
Minors Property Act -due to lack of sophistication in farmers dealing with their estates, minors have
ended up with interests in land -if there are mineral rights, how on earth can a minor lease it?
-court may approve a sale or other disposition of real estate held by a minor conditions are -s. 2(1) where necessary for maintenance or education of minor or minor’s interest will be substantially promoted
Devolution of Real Property Act (SK) -check notes on this as well 2. Oil and Gas Lease Owned by an Estate–When Does a ‘Lease’ Mean a PNG Lease? -How do you deal with mines and minerals interests that are in an undistributed estate? -courts generally reluctant to allow for the tying up of an estate by engaging in long term transactions without court permission under the devolution of property act Hayes v. Mayhood (1959 SCC) Facts
-executrix seeks court approval of 10 years O&G lease -deceased died in 1938, litigation not occurring until 1959 -will left ¼ interest to F and ¼ share to 8 named beneficiaries, and ½ to G -Percy thinks the 1/32 interest is what is problematic b/c you cannot register a title to a 1/32 interest
Issues Can the court under the devolution of property act approve her entry into an oil and gas lease? Is a PNG lease a “lease” under s. 14 of the DRPA such that the court has the ability to approve the conveyance to the OilCo?
Decision Yes – applied the Berkheiser reasoning to the DRPA
Analysis - Discussion of Berkheiser:
o Berkheiser was a SK case, and in Alta, we have the Land Titles Clarification Act, s. 2, which indicates that a PNG lease is a lease for the purposes of the LTA
o The SCC indicates that the word “lease” is not defined in the DRPA, but that when the word was used in s. 14, it must have been intended to include in its application leases of real property under the LTA
o Further, the two statutes have provisions that deal with real property in Alberta - Dissent:
o The DRPA requires that the court determine that the sale “is in the interest and to the advantage of the estate of the deceased and persons beneficially interested there-in”
o no evidence of the executor taking steps to get better offers, any research on the value of the estate, and the delay rental / shut in royalty clause heavily favoured the lessor, and the royalty rate was abysmal
- Criticism of this decision:
o LTA begins with the qualification, “for the purposes of this Act…”; therefore, it isn’t plainly obvious as the SCC seemed to suggest that the interpretation of the LTA could be applied to the DRPA
o This broader implications of this case: � That when the Alberta legislature amended the LTA in 1956 to include a PNG interest as a
registerable lease, that they amended all of Alberta’s statutes that used the term “lease” - Resulting Effect in Alberta:
o The Alberta legislature was alive to this issue and when they enacted the Landlord and Tenants Act, they included a qualification in section 2 indicating that “this Act does not apply to minerals held separately from the surface of the land or any dealings with minerals”
o Note that in provinces that do not have the LTCA, that it would seem that it would be impossible for an executor of an estate to grant a PNG lease, unless so empowered by specific legislation
NOTE: this is a strange decision Berkheiser says no lease if O&G, Land Titles Act says for the purposes of this Act that it is a lease, this decision says that for other purposes an O&G lease is a lease -Percy thinks that the court wanted to be able to approve it so its reasoning was dominated by the conclusion they
wished to reach (a better judicial answer is to say court cant approve and force an amended Act) NOTE: what other legislation did the LTA impliedly amend? -p. 135 Perpetuities Act -rule against Perpetuities doesn’t apply to renew a lease -the very odd reason for the decision above should cause you to stop and wonder
when you see AB legislation dealing with leases -now you need to ask if it includes or excludes an O&G lease 3. Life Tenants -95% of ordinary wills in AB set up a life estate for surviving spouse, after the death the property goes to the kids The Issue: - A life estate does not include a full bundle of rights
o Life tenant: � Generally, a life tenant is entitled to full use and enjoyment of his land, subject to the limitation of
wastage (complete use of an estate) � This hails from the principle that the life tenant has expressed an interest that the body of the land
be preserved for the remainderman � Entitled to the income from the estate but cannot commit waste
o Remainderman: � The remainderman is entitled to everything remaining after the life tenant’s interest ends � Entitled to the surplus capital of the estate
Re Moffat Estate (1955 SKQB) Facts
-H left everything to his W as life tenant, and the remainder to his kids -W and kids enter into a PNG lease, signing bonus, a delay rental payment, and royalty payments -M started getting cheques, G if a life tenant, doesn’t think M can spend that money
Issue Who, between the life tenant and the remaindermen are entitled to receive these moneys or the income from the lease?
Analysis - MM leased prior to death of the testator:
o Principle: Similar to an ademption under a will – leasing MM prior to the testator’s death shows an intention by the testator that the benefits should flow to the life tenant, and not the remainderman
o Therefore: � The life tenant is entitled to the payments from the lease � The life tenant cannot enter into any new leases, as this has the effect of wastage
- MM not leased prior to the death of the testator:
o Principle: The testator has expressed an intention that the property be preserved for the remainderman o Therefore:
� The remainderman is entitled to the payments from the lease � However, the remainderman is not entitled to possession until the life tenant dies, and to allow
the remainderman to execute a PNG lease prior to this event would destroy the life tenant’s property
o Problem Solved: � This problem is solved by allowing the lease to go ahead, and then placing the royalty payments
into a trust fund: � The life tenant then gets the interest income � The remainderman gets the remaining capital once the life tenant dies � Note: The life tenant has exclusive rights to the surface, so he would also be entitled to
compensation for surface access in this circumstance - Payments:
o The court considered that the royalty payments were in substitute for the oil, and thus the royalty payments had to be left in trust for the remaindermen
o However, the fruit of the estate, the interest from the royalty payments would go to the life tenant - Express Alteration:
o This above scenarios can be expressly altered by contract o Obviously, the law presents a great inconvenience in this area, so there is a strong incentive for the
parties to agree on the fate of the payments in order to solve any future problems NOTE: only analogy that is being used is that the substance of the estate must be preserved, minerals and mines are now replaced by money to substitute for the substance of the state �can deal with a life estate, better to get both remainder interests signing the lease, fate of the payments is the basic principle that the payments replace the land and the life tenant must live off of the interest �in this case the lease was entered into AFTER the death, if the testator enters into the lease BEFORE death then the LE tenant is entitled to the benefits of the lease 4. Perpetuities -lease issued for 10 years ‘and so long thereafter as there shall be production’ is put into O&G to protect the producer -lessee is never bound to drill, not required -can postpone any drilling by making an annual nominal delay payment -if there is no production within the primary term and no drilling the lease expires no matter how promising it may seem Perpetuities
• Why it is relevant? o Be cognizant of the fact that oil and gas companies are acquiring property in various provinces
throughout Canada; provinces deal with perpetuity issues differently o 1973 was 33 years ago, but there are still instruments that we are dealing with that pre-date the
legislation NOTE: the statute only applies to instruments that were created after July 1
st, 1973, so careful of older leases!
Perpetuities Act 17 – Options to acquire reversionary interest - (1) – The RAP does not apply to an option to acquire for valuable consideration an interest reversionary on the term of
a lease or renewal of a lease, whether the lease or renewal is of real or personal property o (a) – if the option is exercisable only by the lessee or the lessee’s successors in title, and
o (b) – if it ceases to be exercisable at or before the expiration of one year following the determination of the lease or renewal
- (2) – Subsection (1) applies to an agreement for a lease as it applies to a lease, and “lessee” shall be construed accordingly
- (3) – Subsection (1) applies to a ROFR or pre-emption as its applies to an option - (4) – The RAP does not apply to options to renew a lease of real or personal property 18 – Commercial transactions - (1) – In the case of a contract whereby for valuable consideration an interest in real / personal property may be
acquired at a future time, the perpetuity period is 80 years from the date of the contract, and if the contract provides for the acquisition of such an interest at a time greater than 80 years, then the interest may be acquired up to 80 years and not thereafter
- (2) – In particular and not so as to restrict the generality of subsection (1), that subsection applies to all contracts relating to a future sale or lease, to options in gross, rights of pre-emption or first refusal, and to future profits a prendre, easements and restrictive covenants
- (3) – This section does not apply to any provision in a will or inter vivos trust Perpetuities Clause - Limitation on right of acquisition
o NWST anything elsewhere herein contained, but subject always to the Regulations relative to the laws of perpetuities as they relate to the joint lands, the right of any party to acquire any interest in the joint lands from any other party hereto shall not extend beyond 21 years after the lifetime of the last survivor of the lawful descendants now living of Her Majesty Queen Elizabeth II
Canadian Export v. Flegal (1977 ABSC) Facts
• There was a 10-year lease with an option to renew; such that the renewal is on all its terms including a new option to renew clause – it was perpetually renewable (under the common law rule)
Issues Does this lease violate the rule against perpetuities?
Decision Yes, CL exception to leases does not apply since an O/G ‘lease’ is actually a profit a prendre Analysis
• At common law (now in the AB statute the Perpetuities Act), if this had been a standard real estate lease, as opposed to an oil and gas lease, it would be exempt (b/c options to renew are exempt)
o However, there is a good reason for such (Percy): the major reason against such is to prevent vesting of land or property without living direction, we already know where it will vest if it’s a renewal option
o Stevenson says that the real purpose is to avoid the sterilization of the land and, therefore, finding that the renewal option violates the rule and furthers this rationale
o Remember, O&G leases are really profits a prendre so the option to renew exception doesn’t work o Court says that the Land Titles Clarification Act should not be interpreted to mean O&G leases are leases
for all purposes, especially to override the application of a CL rule • Had this 10-year lease been entered into after 1973, what would the result have been?
o Apply the wait-and-see rule. We can have up to 7 renewals of this lease before it violates the statute o We have an 80 year wait and see period
• After this case came out, an oil and gas text attacked the decision because of the rationale for true real estate leases
o The interest could continue indefinitely by production… the interest was vested at the outset • NOTE: S.17 – the Perpetuities Act does not apply to the option to renew a lease… • NOTE: differing policy options: perpetual renewal of a lease stimulates development whereas perpetual renewal
of a profit a prendre sterilizes the land (allowing the owner to only get minimum annual payments) • NOTE: to stop it from being a perpetual lease in a common law jurisdiction you just have to put in a life in beings
clause PanCanadian Petroleum v. Husky Oil Operations (1994 ABQB) Facts -Husky has a shallow and a deep/mineral lease for 25 years so long after as substances produced -lease entered into in 1967 -no production has taken place on the deep lease, shallow lease had produced enormous quantities
• In year 24, Husky attempts to exercise the renewal option by sending cheques; PanCanadian attempts to argue that the deep and shallow lease violate the rule against perpetuities
o The problem is also that the interest created by the option to renew is vested after the 21 year period; on its face, it violates the common law rule
Issue Do these leases violate the rule against perpetuities? Decision No Analysis
• For the shallow lease, no concern b/c it has already vested, option to renew is not needed because there is production going on
o The production on the shallow lease is insufficient to keep the deep lease going so look separately o Prevent typing up of profitable land for long periods of time
• Husky loses all its interests or rights under the lease because it seeks to vest its interest after 21 years • Interest is not vested because it is conditional; if the estate had been unconditionally vested in 1969, it would have
been okay; the existence of conditions in common law made such not completely vested o the lease had a right of renewal with the same terms for another 25 years and another option to renew, so
we have an infinitely renewable lease that can last forever and sterilize land o Hs only defence is to argue a condition subsequent
� condition precedent means no right until you first fulfill these conditions � condition subsequent means you have the right but it may end when something happens � difference matters b/c of vesting, H argues that the vested right lasts until something happens
such as a failure to renew, even though it may not violate the rule against perpetuities technically it does violate it in spirit
• so decided against H and upheld the Flegal decision • Ex post facto, what is the easiest way to ensure that this doesn’t happen?
o Remove conditions and make such renewal automatic o Make it a 20-year lease o Toss in a life-in-being clause: the Perpetuities Clause:
� Life in being = The last survivor of the lawful descendents now living of Her Majesty Queen Elizabeth II
Top Leases: -problem with regular leases that there were fatal defects -ex. I lease my land for 10 years or until production stops -don’t worry about why there are defects, it is always exposed by litigation -happened to many of the Shell leases -“if your Shell lease will fail then you will lease the property to me and I will pay you for this option” -also action to invalidate Shell lease must be taken, new company would pay for the action -these new agreements are called top leases -option that if the existing lease fails then new agreement with the new company -so the land is tied up at the end of the Shell lease -when a company is ‘topped’ it is in a difficult position, makes it hard to improve the situation -companies who were topped fought back
-tried to argue that the original lease might last a long time (10 years or until production ends and top lease may not vest for a great deal of time in the future) -so argue top lease violates the rule against perpetuities
Pan American Petroleum v. Potapchuk (1964 ABSC) Facts
• would shut in the well without producing the gas b/c not worth anything due to low prices, pay a shut in payment to the lessor to keep lease alive
• Shell has leased the lands and then pooled them to create a drilling spacing unit, primary term of lease expires in 1961, 1956 M had signed a top lease, tries to exercise option
• M writes back and says not entitled to the money b/c agreed with S to modify the lease, in 1960 M agrees with S that the land next door will satisfy ‘the said lands’ and will count as a producing well
Issue What happens when the lease expires? Does the option offend the rule against perpetuities? Decision Lease expires and D’s options prevails, scheme does not offend rule against perpetuities Analysis
• Shell’s successor alleges that the option may vest after the perpetuity period; however there was a termination date on the option and had to be exercised 5 years after the date of the grant
o In 1956, the top lease option was entered into knowing that the primary term ends in 1961 – so they gave themselves a limited duration for which to exercise the option…
• There would have been a problem if it took effect at the expiration of the original lease… • This case is important in another way: it illustrates the fatal flaw of the Shell lease of the 1950s
o P.153 – called for shut-in royalties on all wells on the said lands; the problem is that they pooled the lands and paid shut-in royalties on pooled lands (therefore, there weren’t wells on the specified lands and the lease failed)
o In this case, in 1960, Shell had made an agreement with Moser – he agreed with Shell that it would be deemed that shut-in production from the pooled lands would equal production on the said lands and they will accept the royalties
� Shell came after Potapchuk… � But by the time S had entered into the arrangement with M, a top lease had already been entered
into and registered on title (top lease only subject to the interests registered above it) • In the end, if the top lease potentially vests without a specified time period, it may violate the rule…
o Lease could have been continued via production for a long time o Even if the option was done 5 years after the eventual expiry of the original lease no violation of the rule
against perpetuities b/c it does not apply to options where the optionor has the right to terminate the option
Scurry-Rainbow Oil (Sask) v. Taylor (2001 SKCA) Facts
-1949 HT entered into lease with IO for 10 years (expiry 1959) -F approaches HT and offers $ that if IO lease is unenforceable in 42 years then you will grant a 99 year lease -IO lease expired in 1959, T executed the top lease, Taragon later became the holder of the lease -1993 began to negotiate a farm out agreement with M co. -Taragon lessee wishes to have a well built on the property, owns a lot of properties that want to drill, expensive to develop them all so enter agreement with M co. -farm out agreement means if you drill a well to a certain depth you will earn an interest of X%, traditionally it is a 50% interest in the property (lease) -1993 S sells its top lease to Tarragon, M co agrees in principle but wants to make sure that there is valid title, examines the lease, M says the lease is invalid, M runs to Taylor and asks for a top lease in their favour and agree to challenge the Taragon lease for being void for perpetuities
Issue Is Scurrys/Taragon’s top lease void because it violates the rule against perpetuities? Decision No, although it offends the 21 year perpetuities period, it does not violate the policy behind that period Analysis
• Invalidity issue: origin is the Freeholders’ top lease… o When does the top lease take effect?
� Ordinarily, it takes effect upon expiration of the original lease � In this case, the top lease said, “provided that it expires within a 42 year period” and, further, once
the lease was granted, the Freeholder lease would last for 99 years o The precise nature of the perpetuities problem?
� The Freeholders’ lease need not vest until 1992; therefore, it would not vest within 21 years of a life in being (and there is no lives in being clause identified for 42 years was double the 21 years!)
� By definition, it violates the common law rule of perpetuities o At CA, they changed the rule based on public policy
� The top lease is not found to violate the public policy because it creates competition and an incentive to drill; therefore, it is true that the top lease encourages the opposite of the sterilization of land because it encourages the current lessee to drill
• The problem here: in fact, once it serves the initial purpose, the top lease may tie up the land forever… • does a top lease encourage the tying up of property to the detriment of society?
o no b/c it encourages activity on the lands, works against sterilization o here the top lease was entered into in good faith and acted on for decades
NOTE: everyone in AB knew that these leases were void, there were legal education seminars on the topic (so not everyone acted on the assumption that it was valid) NOTE: Percy thinks that the court thinks the merit of the case is to keep the top lease valid and not letting the rule against perpetuities ruin it, court has decided to reform the rule against perpetuities right after the SK legislation in 1995 decided not to do it �interesting case that the winner of the CA case settles before it goes to the SCC, so then the precedent wont be overturned and so that they have insurance (Percy thinks this case is an oddity)
5. Tenants in Common Prairie Oil & Gas v. Allen (1924 US Circuit CA)
• The 90% owner enters into a lease for Good Lands 90% of the property; oil is drilled and produced giving Allen 10% of the net proceeds
• 90% interest then conveyed to POG who drilled producing wells without A’s permission Issue
Can a TIC lease a MM estate without the consent of the other TIC? How is the non-consuming spouse to be compensated?
Decision Yes can lease without consent, non-consuming spouse to get share proportionate to her interest Analysis
• One co-tenant cannot sterilize the interests of the other; one cannot be a holdout o They have the right to lease their 90% portion as long as the 10% gets their just share o Just share = all tenants in common justly share the costs as if they were leasing the interests themselves
• As a result, 10% of the net is her just share; if she doesn’t like it, partition and sale of the estate
• Distinguish between royalty (cost-free share of production) and mineral share (share in net proceeds); the lessor actually gets a gross overriding royalty once revenue exceeds production costs…
Effect: o As to who gets the best deal will depend on how lucrative the well is, and how much the production costs
are � Ex) If the well is very lucrative with low production costs, the holder of a mineral interest will see a
large profit, whereas the holder of the royalty interest will only see a maximum 12.5% interest � Ex) If the production costs exceed the market price of oil, then the royalty interest holder will still
get paid (12.5% of gross production), and the holder of the mineral interest will get nothing (no net profit – doesn’t have to pay for a loss)
CHAPTER 4: THE FREEHOLD OIL AND GAS LEASE The Oil and Gas Lease
• Granting clause o What is being conveyed? all petroleum and natural gas and all related hydrocarbons o Where is the land located? NE Q of s.12 in Township 2, Range 34, West of the 1
st
o What does the lessor get? lessor gets 2 things: a signing bonus and royalty • Here, the royalty comes from the leased substances produced and marketed from the said lands… which
indicates an interest in personalty rather than the property in the land • Royalty on what? “A amount equal to the current market value on the said lands”
o To get from the point of sale to the price from the “said lands”, must deduct the costs o Jumping Pound Formula in the case of Freehold Lands… (transportation, processing, etc) o Gas Cost Allowance in the case of Crown Lands… (legislated rate of costs to be deducted)
• Habendum Clause: “To have and enjoy…” o How long does the lease last? o The extended term, how long can it last after the expiration of the primary term? o Note: “and so long thereafter as the leased substances are produced from the said lands, subject to the
sooner termination of the said term hereinafter provided…” o difference between the extension by ‘production’ and extension by ‘operations’ o what does it really take to extend the lease beyond its 10 year period
-here there needs to be production -many leases have failed if there are things going on after the lease ends that are not production but other activities
• Delay rental clause – (Proviso 1) if operations are not commenced within one year, the lease shall terminate unless the lessee pays $160 on the anniversary date…
o The “unless” form versus the “or” form: � If use “unless” then must pay on the anniversary date or else it expires � If use the ‘or form’ failure equals a breach of contract (rather than leading to termination) – 60-day
notice period to rectify before the lease will lapse o Delay rental clauses only apply to the primary term o Must find the lessor and make the payment (not thankfully a depository)
o Terminates on the anniversary date, so must pay before it, problematic b/c 1000s of leases for one company
• Continuous operations clause – Lease can continue until the end of such drilling operations • Shut-In Wells Clause: (Clause 3) As a result of lack of or intermittent market, or any cause whatsoever beyond
the Lessee’s reasonable control… they can pay the delay rental and it is deemed to be a producing well o It is a shut-in royalty that achieves deemed production so as to extend the lease beyond its primary term o You can only shut-in for lack of market or beyond reasonable control o Recent trend to strict interpretation o Can also occur when you are drilling for oil and hit natural gas instead
� May not have the proper facilities or a good market readily available • Offset Well Clause (Clause 8) where there is commercial production in neighbouring lands…
o Lessee could lose the lease if: “Commercial production in any spacing unit laterally adjoining the said lands not owned by the lessor”
o Lessor can demand within 6 months that the lessee drill or surrender • Pooling Clause (Clause 9) Production on any of pooled lands shall be deemed production on the leased lands
o NOTE: pooling = combining of tracts of land to form a DSU whereas unitization is combination of DSUs • Default Clause (Clause 18) in the case of breach, non-observance or non-performance – the lessor has to give
notice of default and the lessee has 90 days to rectify o Default relates to non-performance not failure to exercise a right o fixed period to remedy a default o the lese will still be valid unless you give notice w/I 90 days saying that it hasn’t bee done o proviso 1, if operations are not commenced w/I 1 year the lease will terminate and be at an end unless
the delay rental is paid (it cannot be a default to fail to do something you are not required to do) o so a default clause is wonderful if the conduct we are looking at is a breach
-if no breach nothing for a default clause to latch onto -cannot take advantage of the clause to make the lessee give notice
-is a failure to make a shut in payment a default? -clause 3, sets out an obligation ‘shall pay’ -this would be a default if they fail to pay w/o 90 days notice being given
-but contrasted with the habendum, which says lease goes on if there is production, and there is no production unless the shut in royalty payment has been made, so without payment no production to extend the term
• Manner of Payment Clause (Clause 22) designated depository • Lessor’s Compensation
o bonus clause (immediately prior to habendum) o royalty clause (#2)
-valuation issues -on what price is your royalty calculated, here it is valued on market value of the said lands
-so there is a test to tell us the price on which the 12.5% is taken -the clause could have just as easily say ‘the amount realized by the lessee’ -when oil prices are volatile some companies address is by locking in their selling price, market price can be $147, but maybe locked in at $50 from a previous K -this creates a world of difference b/t the current market value and 12.5% on the amount realized which is 12.5% of $50 -the XX% “of WHAT” is what is the most important!!
-for gas -will pay royalty based on the current market value of gas on your lands of the gas produced -gas is sold elsewhere at the end of the pipeline and that’s where the price of gas is achieve
-if value ‘on the said lands’ have to deduct the costs incurred of transport -that phrase buries in a hugely complex problem -gas connected to a gathering system, connect to a pipeline, processing plant, -how to determine what costs can be deducted? -in AB the formula is called the Jumping Pound Formula -tailgate price (-) transportation and processing
-entitled to deduct a portion of the capital cost of building a pipeline and the processing plant -entitled to a return on the capital invested or interest on money borrowed to build the above -there is NO regulation of these deductions -the companies decide on what capital costs and borrowing
costs that are deducted -usually wont do a project unless ex. 11.5% -so the price at the said lands can be very low compared to
market �so market value on the said lands is ok for OIL but difficult for GAS
A. THE HABENDUM AND CONTINUOUS OPERATIONS CLAUSE, UNJUST ENRICHMENT AND ESTOPPEL Canada-Cities Service Petroleum v. Kininmonth (1964 SCC) Facts
• No production until 10 years and 1 month after the lease was signed • Primary term expired in 10 years
o if no production after expiry of primary term and the lessee is engaged in operations then the lease shall remain in force so long as such operations are prosecuted (right to work the leased lands)
o there was a road ban in effect for a few months which meant couldn’t get to the site • Therefore, this lease is dead unless we can appeal to the continuous operations clause/proviso
Issue Can this lease be saved by the operations that were commenced prior to production and the expiry period? Decision No Analysis
• The fatal flaw: we have both the habendum clause and the continuous operations clause… o Habendum says that if the leased substance has not been produced, the lease is already dead o The continuous operations clause only applies where the primary term as already been extended
• The court interpreted the lease to be such: o Lease extended by production; then production ceases; then the company is able to continue operations
to get it back into production… • Therefore, only if the lease had been extended by production, it can be extended via continuous operations… • NOTE: the road ban wasn’t a real problem because everyone knows there are roadbans in the spring • NOTE: the court is basically saying that the habendum clause is supreme
o Took the industry by surprise o The huge windfall for the Ks was not addressed by the court, as long as they can meet the DSUs all they
have to do is basically turn on the tap Canadian Superior Oil Ltd. v. Murdoch (1969 ABCA) Facts
• The well was drilled within the primary term but the Board did not provide the shut-in provision until after; the shut-in royalty was not sent until the shut-in provision was provided as well
• lease granted in Apr 22 1950, Jan 26 1960 CS farmed out land to A, A began drilling March 12, April 20 they finished the well, May 16
th sent a shut in royalty cheque of $100, ordinary expiration of the primary term would be
Apr 21sr 11:59pm, after Apr 21 production is required to keep the lease alive, argued estoppel Issue Is the lease valid due to the contract? Decision Lease would have failed but the extension agreement in K saves it Analysis
• How did the Murdochs lose then? o In a settlement, they essentially contract out their right to treat the lease to be terminated… o Mrs. Murdoch also agrees that the lease is valid
• The lease was ratified irrespective of the operation of the habendum clause… • production occurs on May 16
th, deemed production is achieved by timely payment, so only when the payment is
made do we have deemed production • In this case, there were no intervening interests; if such were prejudiced, the opposite would have resulted • ABCA also talks about estoppel by deed (in obiter) where the parties entered into a formal contract and the
recitalist to the deed states some fact on which they are both relying (the whereas clauses) o The argument was raised, but not applied…
NOTE: SCC says they contracted out of their right to dispute the lease and we do not have to rely on estoppel, however, this estoppel life line has been grabbed onto by oil companies for decades (even though it was in obiter) NOTE: if a lease has lapsed it can be ratified by a contractual agreement between the parties, so long as there is no top lease then this will not be problematic for the lapsed lease Canadian Superior Oil Ltd. v. Paddon-Hughes/ (Hambly) (1969 ABCA)/ (1970 SCC) Facts
• Clause in lease said that could be extended beyond the primary term if drilling commenced in the primary term • Drilling completed, O&G produced, applied for and received shut in from the Board, but no payment given
• There is a fatal gap because they remove the rig and apply for shut-in but pay delay rental 5 days later (during the continuing operations period)
• Argues estoppel b/c accepted royalty payments for 7 years and often was asked to repair the well
Issue Is the lease still valid? Estoppel? Decision Lease is invalid, estoppel argument fails Analysis
• Once drilling is over, there is nothing further to keep the lease extended o There is no actual production and there is no deemed production
• The problem: the parties treated the lease as valid for 7 years (it wasn’t until later that they challenged its validity) • In litigation, the oil company concedes that the lease is terminated, but argues estoppel by acquiescence; or
promissory estoppel o Estoppel by acquiescence (silence) – Vanguard v. Voyager
� It is a rare case that one’s silence is going to estopp a party o Promissory estoppel (representation)
� Hambly’s conduct from 58 to 65 estopps him from denying the validity of the lease � NO, There must be an unequivocal representation that they will not invoke full legal rights (not
merely friendly notions of accommodation) � NO, further the oil company is not ACTING on the representation of the lessor; No reliance � NO, the alleged representations occurred after the contract was already terminated � NO, using estoppel to try and revive a dead lease (being used as a sword and not a shield)
NOTE: this case basically means that someone needs to be hovering with the cheque as soon as shut in is going to be enacted NOTE: this essentially leaves a completed gas well on the land, only a brief comment on UE but no action Sohio Petroleum Co. v. Weyburn Security Co. Ltd. (1970 SCC) NOTE: Percy thinks that if there was ever going to be an estoppel case then this would be it
• Production did not hit until after the primary term ended and the habendum said that it had to hit before lease end • However, Sohio made representations: W called S to drill the well, W reqested S to pay mineral taxes, W
accepted the royalties that S paid, and W permitted S to enter into a pooling agreement Issue Are there grounds for promissory estoppel? How to provide justice to the parties? Analysis
• Estoppel argument doesn’t fly because of the Hambly case rationale o Despite the very compelling behaviour, still fails for the same reasons: no unequivocal representations,
no reliance, no existing legal relations as the lease had expired • However, the court has to deal with the post-termination activities; particularly with the fact that the lessor has
received royalties for the span of 10 years o “Unconscious restitution” o In this case: the calculation was entirely arbitrary; all they know is that by the time the statement of claim
was served, Sohio was then covered for the costs of their production and drilling; however, to the extent that they are more than covered for production, they are now overcompensated…
• For compensation/splitting the loses court goes back to the date that the action starts o production 1959, law suit in mid 1960s, will only give anything earned after the action was started o recognition that giving the lessor all of the money earned from the invalid lease would be wrong o NOTE: this is a bad attempt at dividing the pie
� this is completely arbitrary, could have made a lot before the action started and very little after, we have no way of calculating in a sensible way -the date has nothing to do with anything, no calculation of why someone gets a certain amount while the other gets another amount
Percy: a better approach would be to ask to what extent S was enriched by its unauthorized production on the lands, no calculations were presented by counsel on the division of the pie issues
-probably due to the unrest in the development of the law of UE • Therefore, every single case has a potential unjust enrichment situation… but no one coming outright to say such
Cull v. Canadian Superior Oil Ltd. (1972 SCC) Facts
• The lease could be extended by operations or production; however, there is a gap between the end of operations and the start of production
• lease dated in 1947, drilling commenced Nov 1957, termination date Dec 29, drilling continued to Dec 3, Dec 29 they had production, put head on the well to stop the drilling, put a service rig on Jan 2, production capable Jan 7, commences again Jan 12-13, lease was able to be continued by production or operations, so there is a gap b/t the production and operations
Issue Is the lease valid? Decision Yes Analysis
• The lease lives: o Between the 7
th and 13
th, the lessee took the “necessary steps with reasonable diligence and dispatch”
o The lease itself says – the lease can be extended via drilling and operations… the continuous operations clause had the ability for the lessee to complete the well with reasonable diligence and dispatch…
o the gap b/t operations was unavoidable, you need a gap of at least a day as req’d physically � good oilfield practice with reasonable diligence and dispatch
o the literal interpretation of the clause is unworkable, so now if you bring it into dispatch within reasonable time then its ok
�first time that the SCC says that the lease cant mean what it says, a small example but historically it is a watershed case, more flexible approach of interpretation NOTE: this only works when actual production, not deemed occurs (shut in payment still needs to be immediate!) NOTE: court used a broad interpretation of drilling – includes ‘acidizing’ and ‘swabbing’
Voyager Petroleums Ltd. v. Vanguard Petroleums Ltd. (1982 ABQB) Facts
• Vanguard (lessor) assigns its royalty to Canada Permanent (12.5%) – royalty trust agreement • At year 7,Voy they didn’t pay delay rental b/c they thought the lands had been unitized (deemed production)
o The subject land was tract 21 of 28 and was assigned a tract participation factor of 1.4409816 • However, Vanguard failed to sign the unitization agreement (thought that Canada Permanent had to)
o The conduct of the Vanguard president (who is an oil and gas owner) is suspicious because he asked for direction from a non-legally trained person
o Gas was produced on the unitized lands, thought lease was exnteded by deemed production • The court holds that the unitization (unsigned) is invalid and the lack of delay rental payment is fatal…
o NOTE: legally, it makes sense to have lessor sign with all the additional rights that may be prejudiced Issue Is Van (lessor) estopped from denying that CPT acted as agent for it in signing the unit agreement? Decision Yes, estoppel by acquienece/silence aka equitable fraud Analysis
• The Court estops Vanguard from denying the validity of the unitization agreement • Estoppel by silence / Equitable fraud:
o Defined: Via your silence, you have committed a wrong to the other side… o 5 requirements (Willmott v. Barber):
� Did Voyager make a mistake as to its legal rights? • Yes
� Did Voyager expend money or carry out an act on the faith of its mistaken belief? • Yes tried to carry out the unitization agreement
� Did Vanguard know of the existence of its own right which is inconsistent with the right claimed by Voyager?
• Yes Van’s agent had practiced in O&G law for 22 years (now dead) � Did Vanguard know of Voyager’s mistaken belief as to Voyager’s rights?
• Yes, knew they were paying royalties � Did Vanguard encourage Voyager in the expenditure of money or carrying out of other acts either
directly or by abstaining from asserting Vanguard’s own legal right? • Yes by their silence and asking someone else to sign it
o On an exam, it is very likely not there unless you have a strong set of facts to support it • In the end, this is the only case where estoppel was successful in keeping the lease alive
o It is an unusual, but valid precedent to follow
NOTE: this case is unique because we arenot trying to revive a dead agreement, rather to show that this one cannot be relied upon, also different b/c other cases have an unsophisticated party (farmer) whereas here there is an expert Clifton v. Koontz (1959 SC Texas) Facts
• well pettering out for 16 months, the expenses of the well exceeded the revenue it created (lessor says), but the lessee says there is a tiny profit
Issue What is the meaning of “so long thereafter as the lease substances are produced’? When does production end?
Analysis • The test: the reasonably prudent operator
o Whether the reasonably prudent operator would continue to produce potential profit and not on mere speculation (can operate through some months with a loss if long term its profitable)
o A reasonable expectation of profitable returns o it doesn’t end when the well moves into deficit, that can happen for all reasons including low prices o Factors to consider: depletion of reservoir, market prices, profitability of wells in the similar area,
operating/marketing costs, net profits, lease provisions, speculation o NOTE: no judicial backing in Canada yet, but does appeal to your common sense
� Still must be wary of what YOUR individual lease says, some say that any production at all is production
B. OPERATIONS CONDUCTED UNDER AN INVALID LEASE AND THE GEOPHYSICAL TRESPASSER
Republic Resources Ltd. and Joffre Oils Ltd. v. Ballem (1982 ABQB) Facts
• The problem again is the fatal gap between the shut-in royalty/the deemed production and the end of drilling • 30-day renewal option; but, they didn’t bother pursuing such because they didn’t think there was a problem • SIDESHOW: Ballem (P&G lease author); waited until the end of the 30-day renewal period prior to filing
o Don’t file until a week after this renewal period expires Issue Were the lessors under an obligation to inform the lessees of the invalidity? Decision No obligation to inform, court consciously addresses UE Analysis -there is no case law that establishes a duty to inform, silence is not a representation that lease is still valid
• Republic hypothetically concedes the argument regarding the lease and argues that the Ballems should pay for the cost of the gas well (the restitution argument)
o Unofficious intervention – yes, they were innocent or were acting in good faith � Did not blatantly exploit the Bs right and mistakenly let the lease expired
o Incontrovertible benefit – this becomes an issue; uncertain benefit from the capped gas well AND whether there will be enough revenue to cover the drilling costs
� There is no free acceptance where there was knowledge of accepting the benefit o Ballems do not have to pay for the drilling costs because they have an unascertained benefit
� Close proximity to 13 other wells so unsure if costs are proportionate to the benefit • Before we can convince the court that the Ballems should pay, we have to be certain that they obtained a benefit
o You should only be forced to pay for something that is undeniably a benefit to you (per unjust enrichment) o Think about the window cleaning versus the paid property taxes
• UNJUST ENRICHMENT ARGUMENTS:
o Unofficious intervention – it is hard to imagine a situation when this would not be the case o Incontrovertible benefit – we are dealing with a specific benefit which was not specifically requested
� Successful situations: � The benefit is freely accepted by the beneficiary who had the opportunity of rejecting it (Sohio) � There is a category of recovery where a person receives a benefit because it satisfies an
expenditure which they would inevitably have been required to make (Lac Minerals) • The counter argument: the value of the mineral estate is now worth more than it was before (a mineral estate with
a proven prospect); the only question is WHEN (not if) will production occur… o It is only a question of remedy therefore with 3 possible solutions:
� Constructive trust in aid of the law of restitution; can look to equity to fashioning the appropriate remedy with an equitable lien – once production begins then deprived party gets paid
• Percy thinks that we should find that the enrichment happens once the oil is begun to be produced to a total cost of the drill
� Sue at the time when production begins; unjust enrichment does not begin until such � Law of Property Act s.69 – ENTITLED to have a lien on the land – drilling of an oil well is a fixture
• The well only benefits the mineral title and is actually a detriment to the surface • NOTE: this was not argued in this case
Lady Ivry Freyberg v. Fletcher Challenge Oil & Gas (2007 ABQB) Facts
• Lessee argued that a very productive well could be shut-in because there was an absence of an available market • Has paid shut-in payments for 21 years b/c other wells were more productive in the area and more lucrative • F owned a 2/3 interest and someone else owned a 1/3 interest
Issue Can the lessee shut in the wells for an absence of an available market? Decision No, then lease becomes invalid b/c no production, so lease lost sometime in 21 year period, when production
started later they were wrongly producing her gas Analysis
• Onus is on the lessee to prove that there is no economic market • Therefore, we are going to look closely at the lessee’s reasons for shutting in and, further, the onus is on the
lessee to discharge or justify such rationale • Percy: the real reason – the lessee also had neighboring wells and thought that they were able to draw down from
the reservoir rather nicely without such production on Lady’s well… • ABCA: if you don’t comply with the shut-in royalty clause, it is not a breach, it is a termination – it’s a choice…
NOTE: Lady F couldn’t allege trespass due to the split in ownership interest, only on co-owner has to give permission for the well to be drilled
NOTE: court didn’t think they could award UE b/c no trespass so takes a compensatory approach to see what would happen if the breach didn’t occur (she would be ina very strong bargaining position with leasee)
Montreal Trust Co. v. Williston Wildcatters (2004 SKCA)
• This is a habendum case (not a shut-in situation) • Extension by production or operations, were thawing a service line, building a fence around rig etc • Continue to produce from 1990-2001 when it should have ended sometime in 1990/1991
Issue Were there sufficient operations on the property to keep the lease alive?
Decision No, operations when undefined mean “activities directed to bring about the production of oil” Analysis
• Operations = activities directed at bringing about the production of oil • They also argued that there were matters beyond their reasonable control
o Unusually cold winter – this is part in parcel with Canadian oil industry o Road ban – this is a common place of western Canada; it is something that you have to plan for
-frigid winters in SK are commonly known • Court found a trespass but not a remedy for the proceeds of production
o at some stage in this period that MT decided and expressed to the lessee that they don’t mind them producing and paying royalties
o so produced with ‘leave and license’ of MT o although they might have been a trespasser they were producing with the permission of the landowner
�for the trespass, Percy thinks that the restitutionary remedy can apply only when the ptf had the ability to exploit the resources itself (remember that compensatory damages means that the lessee profits out of its wrong doing) -here could only exploit it as a Tee for the Bs b/c did not own it -this thinking precludes the idea of disgorgement for UE and doesn’t discourage wrongdoing and profiting, worst
thing that can happen is that they keep producing and the royalties get upped Xerex Exploration v. Petro Canada (2005 ABCA) Facts
-PC never had a lease to the property it exploited, X had the deep rights, PC had a license for the province to drill into shallow formation -PC also had additional 15m into the deep rights not to explore but to accommodate their logging tools and casing (to put stuff while drilling the well above it) and can take 3 samples at 5m intervals
-instead PC takes them at every 1m to get a good look around, discover suggests the presence of oil -PC misrepresents about whether they have drilled and other things and try to buy out Xs right to drill into the deep right in exchange for a 3% royalty
Analysis -PC began as an outright trespasser, didn’t think it had rights, became nosy, used the information to get a favorable deal and was declared in breach of fiduciary duty -they are relying on a tort remedy of misrepresentation
-if PC had not committed the wrong at the time they negotiated the royalty rate X would have gotten a very favourable deal (approx 50/50)
-Percy thinks the defs conduct is outrageous and they should ask for everything -they are trespassers who are not mistaken, they KNOW they don’t have any right to be there and yet they are still poking around -Percy thinks that we don’t have an unofficious intervener we have a very guilty trespasser who doesn’t even get to deduct the costs of drilling/overdrilling the well
-cant claim they had a right to do it -sadly b/c of X’s own argument to put us in the position we should have been in (tort remedy for misrepresentation) they understate their position
-should have asked for UE restitution -cant think of many reasons why they shouldn’t get it all
C. THE DRILLING AND DELAY RENTAL CLAUSE Texas Gulf Sulphur v. Ballem (1970 ABSC) Facts
• A simple delay rental dispute; dealt with the UNLESS clause • Has provision to pay lessor or depository • Paid by double registered mail, but bank didn’t pick up pay from post office until 2 days after expiry
Issue o When is delay rental due? Midnight of day before (the anniversary date is the expiry date at 00:00:01) o Applicability of mail rule?
Decision Made on time Analysis Payment due as soon as anniversary arrives
• in this circumstance mailing the payment would be sufficient (Percy thinks this is a stretch and generous), the fact that the bank didn’t pick up the cheque from the mailbox it was not the lessee’s problem, the cheque being at the bank was analogous to it being left in their mailbox
• NOTE: still look at what YOUR individual ease says wrt what is an appropriate method of payment Paddon Hughes Development Co. v. Pancontinental Oil Ltd. (1998 ABCA) Facts
-2 identical leases executed on the same day, T lease and the B lease, -B lease manner of payment clause states all payments shall be paid or tendered to lessor of the depository, all payments made by cheque mail or delivered, if mailed payments shall be deemed received as of date of mailing -T strokes out a number of clauses of the standard form lease, T manner of payment clause says at the address specified -payments mailed Oct 9, no evidence they were received by lessor by Oct 19
th, so there is a potential problem
Analysis • Dissent: There had been no payment made at the specified address by the due date • Majority: Payment by mail – by mailing, the lessee had complied with the lease…
o Parties lived in Calgary and San Francisco, lease didn’t explicitly allow for it but implicitly b/c there were address, zip code etc required
o Court says they are representing the true intention of the lease, not inserting a term Canadian Superior Oil Ltd. v. Crozet Exploration Ltd. (1982 ABQB) Facts
• Crozet was the top lessee; in this case, we had a very well drawn habendum “so long thereafter as operations are conducted upon the lands…”
• However, they farmed out the drilling operations to Surf Oils… o Farm outs: diversify the risk (have someone else drill the well; the drilling co. earns X% of the production)
• Original 5-year lease dated 31JUL75; what created the danger?
o 30JUL80 – they were making preparation to drill, but as of midnight, the drill bit had not broken the surface of the ground (spudding) – preparations for drilling is not drilling yet…
Issue Did the ground preparation constitute ‘operations’ allowing for an extension of the primary term of the lease?
Decision Yes, the COC was broadly worded and encompassed the ground preparations Analysis
• The court also said that they had taken proprietary steps with reasonable diligence and dispatch; they were proceeding with good faith and making more than a mere minimal effort
• These days the wording is more general and the reference goes to operations relating for the drilling of the well… o Here wording said operations was ‘drilling, testing, completing, reworking, deepning, etc, and operations
for or incidental to the foregoing” • Beginning with Cull, progressively less mechanistic… The courts are taking a more functional approach
D. ROYALTY CLAUSE
• The problems: o Lessee shall remit based on the CURRENT MARKET VALUE ON THE SAID LANDS o 2 areas of abuse: lower prices because you are selling to a related co. or because of a long-term contract o Not entitled to royalty based on oil and gas used on the said lands by the lessee
Royalties for GAS
• Rabson v. Shell Oil – the PUB said that they are going to use a formula: the Jumping Pound Formula: o Generate the price at the tailgate of the plant o Deduct the costs of transportation via the pipeline and processing costs that rendered it marketable o The concept is easy, however, the EUB has a rate setting process – we need to compensate the private
investor for building infrastructure? � Deemed return on investment � As well as covering borrowing costs
o The PUB then assumed that it was 50% borrowed money and 50% investment capital – WCC – 5.5% on D; 10.5% on E – 8% weighted cost of capital…
o NOW, who the lessee decides the allocation of costs; deduction of costs is an area of tremendous abuse � With class action lawsuits, more lessors may challenge the accounting assumptions of lessees
• For Crown leases: o Gas cost allowance (approx. 16-page accounting document); plus the ability to audit the company o Same principle; however, highly regulates the process to avoid abuse of the system o It is not the simple exercise of allowing the government to do all the work, the gas cost allowance is very
much LEASE SPECIFIC Royalties for OIL
• Sale of oil occurs at the pipeline connection • Compensation is based on the amount of refining required • Historically, surface costs and storage costs would not be deducted for royalty purposes
o Lessor would receive a royalty based on the sale price as on the leased lands • Then, accounting took over…
o 1990s, leading case: Acanthus Resources – lessee incurred substantial treatment costs – the lessor must bear his or her share of such costs
o Therefore, the idea behind the jumping pound formula relates to oil just as it does with gas • Could the lessor argue that the lessee is taking unnecessary steps or costs?
o The problem again is the information gap Prudential Trust Co. v. National Trust Co. (1964 ABSC) Facts
• Lease of a section of land that, at the time, was all owned by the lessor Issue
What happens when the lessor then sells the land to 4 separate owners? How is the royalty to be allocated? Decision Apply the entirety clause Analysis
• A widely accepted clause: the Entirety Clause
o If the leased lands are to be owned in separate tracts, the premises shall operate as a single lease and all royalties shall be treated as an entirety and shall be divided among the separate owners pro rata…
o Lessor has to notify the lessee indicate how the royalty payments are to be divided… • Here, it was a royalty trust; was there sufficient alienation to constitute an ownership in severalty • Court looks at the clause of the agreement and decides that they have SOLD their royalty interests
o In the 80s, the ABCA struggles with this similar clause (to be revisited later)
E. THE OFFSET WELL CLAUSE
- Purpose:
o This clause is inserted in most leases to prevent the circumstance where neighbours to the lessor that have operating wells that are depleting the lessor’s fair share
o The clause then allows a lessor to demand that a well be drilled on his land to allow him to capture the O/G that is escaping through the lessor’s neighour’s well
- Preconditions:
o Three conditions must be satisfied in order for the lessor to call for the drilling of the well: (i) The neighbour’s well must be on laterally adjacent property [not kitty corner]
• Although, modern leases allow the lessor to call for drilling when wells are operating on diagonally situated lands, giving more control to the lessor
(ii) Wells on the adjacent lands must be commercially producing • Remember, it is best that the lease define what constitutes “commercial production” • When the lease does not define “commercial production”, it is left to the discretion of the
lessee; although one could use the Koontz reasonable operator standard o Many OilCo’s who are reluctant to drill an offset well will often argue that the
neighbouring well isn’t “commercially producing”; especially when they are the owners of the neighbouring wells!
• Note that if there is no market for the gas, then the lessor’s right to demand an offset well is suspended until a market is available
(iii) Adjacent lands must not be owned by the lessor, or if owned by the lessor then not leased to the lessee
- Responding to the offset well demand:
o Upon the calling for a drilling of an offset well, the lessee has two options; it can either: (i) Drill the offset well within six months, OR (ii) Surrender the lease
o Some leases are broader, and may have more options including (iii) Pooling / unitizing the lands to include the adjacent well (iv) Payment of a royalty to the lessee in an amount equal to the amount that would be received
had the well been drilled
- Today: o At the moment, one of Canada’s largest OilCo’s is being very aggressive; they are acquiring the land next
to producing lands, and demanding that an offset well be drilled, or they pay the lessor to demand that the other OilCo drill an offset well
o However, today – there is no machinery left – and since the smaller OilCo’s will then not be able to respond to the offset well demand, this will have the effect of ending the lease!!
Albrecht v. Imperial Oil Ltd. (1957 ABSC)
• The only thing that made this case interesting is that there was no surrender option Issues
• How do you measure the damages for failure to perform a covenant to drill a well? Analysis
• Why is calculating damages difficult? How do you put the lessor in the same position as if the contract had been properly performed?
o The lessor seeks the $47K for the costs of drilling the well; however, it would have been dry and no net benefit later…so would have been a windfall
• Normally, the courts would provide the royalties that they failed to earned had they drilled the offset well because of the potential windfall…several offers made in term of lease so it was valuable at one point
• Where you have a covenant for exploration, you have a difficult problem because hindsight, by the time of litigation, you will have discovered what the results would have been… the courts have struggled with such
• Compensatory damages measure: o Can use either:
� (i) The value of the rents and royalties which would have been received by the plaintiff had the well been drilled
� (ii) The loss of the market value of the lease for O/G on the plaintiff’s land resulting from the failure to drill
o The court utilized (ii), and awarded the plaintiff $6K
F. THE POOLING CLAUSE AND THE SHUT-IN ROYALTY CLAUSE
Kissinger Petroleums Ltd. v. Grover (1983 ABQB)
• The lessee was worried about the fatal gap between drilling and shut-in • They pay in advance; but they don’t know how to characterize the payment – delay rental/shut-in royalty
o Neither: past the primary term and not a shut-in well yet Analysis
• Court said that you are allowed to pay shut-in royalty in advance or in anticipation of a potential shut-in well and deemed production
• Solvable fatal gap which may be mitigated by advance payment of a shut-in royalty o So long as well actually shut in and lessor accepts payment its good
• NOTE: a delayed rental payment can never extend the primary term of the lease Durish v. White Resource Management Ltd. (1987 ABQB)
• In this case, the lease was extended by production and during the extended period, the well was shut-in • Was the reason for shutting in the well good enough? • Looking at the lease itself, why did this particular lessee shut-in the well?
o There was an irreconcilable dispute with the lessor; they refused to pay their part of the transmission fees o How is that beyond the reasonable control of the lessee? Can we say that because we are not getting
along, we can shut-in the well? • In this particular case, the lease said: “any cause whatsoever which is in accordance with good oil field practice”
Analysis • The well is not shut-in validly; doesn’t include disputes over processing fees • Further, the lessee failed to pay shut-in royalties – they were in arrears (paid 2 years late) • The reason why the case is important because the court is investigating why the lessee shut-in the well… • NOTE: the SIR is not a covenant imposing an obligation, instead it is an option/privilege open to the lessee to
continue the life of the lease at his or her choosing 549767 Alberta Ltd. v. Teg Holdings Ltd. (1997 ABQB)
• A well that was shut-in for over 20 years; shut-in royalties are paid over the time period and the lessor is fed up… • Lessee argued that they couldn’t produce because there was no pipeline or gas plant available…
o Allege couldn’t negotiate reasonable carrying fees etc • Is a 20-year period reasonable?
Analysis • The court said that, within their control, they may take steps to fulfill these requirements in order to transmit and
process the gas o You better take such steps that are within your control… o Also under OGCA there are provisions to force proper carrying fees (transport/processing) o You must exhaust all options open to you (commercial and regulatory) in order to shut in for this long
• Percy: the real reason why this well was not being produced – the well was in fact over-encumbered
CHAPTER 5: THE NATURE OF ROYALTIES 1. STATUTORY PROVISIONS Royalties
• Risk mitigation or spreading… risk/reward – money sacrificed now for substantial reward later • It is easier to make payments out of cashflow than before such occurs; people accept them because of the
substantial payoff where production is successful • Prevents companies from drawing down on their accounts
The legality of royalties:
• Issues: properties changes hands rapidly; people need a degree of security that the royalty interest will remain valid and be paid
o If it is an interest in land and caveated, it doesn’t matter who then owns the land subsequently… o When and under what circumstances are royalties an interest in land and when not?
• The legal approach is focused on one element: depends on the words that are used in the grant of that royalty o Literal approach v. functional approach
Bensette and Campbell v. Reece (1969 SKQB), (1973 SKCA)
• Subsequent owner of the land drilled wells on the Registrar mistake (failed to reserve only coal) • Previous owners had granted a 6% royalty to the plaintiffs
o D: says that all you had was a contractual right in the royalty o P: says that the caveat is good against all subsequent purchasers of the land
Analysis • The wording: “a 6% royalty in all the [minerals] acquired by Burke”
o In this case, giving to the precise and unambiguous words “sell, transfer, etc” – he is using words of conveyance to give to the plaintiff a fractional interest in the mines and minerals
• Therefore, the plaintiff got an interest in the land because of the use of real property conveyancing terms • At SKCA, the result is affirmed:
o “in” equals interest in land (Royalty in situ) o “on” equates to some kind of commission to which an interest in land is not inferable
Emerald Resources v. Sterling Oil Properties (1969 ABSC)
• This was a case of a geologist who is paid a low annual salary where it was agreed that he would be paid royalties on production that his employer receives a royalty
Analysis • Before the geologist gets an interest in land, the employer has to get an interest in land 1
st
o The wording: “conveys to Sterling 2% interest of Highcrest’s share ‘produced, saved, or sold’” � Grants a contractual share of the personal property ‘produced, saved, or sold’
• In the end, the geologist won because it was a contractual interest and it was sufficiently produced as such • The 1
st question to always ask:
o Does the original grantor of the interest; do they have an interest in the land? o Then, did they grant an interest in land subsequently in the royalty conveyance?
� Determine whether it is an interest contractually in oil produced v. oil in situ NOTE: here the original interest came from Montana leases and the court was not prepared to determine what type of interest this created NOTE: had this same arrangement happened in AB then likely it would not have been an interest in land b/c the terms indicated that the sale of the substances etc lead the the $, this shows its severable from the estate Saskatchewan Minerals v. Keyes (1972 SCC)
• Harvie owns an option to purchase; sold to Astral, who sold to SK Minerals • Astral had to deal with the fact that Harvie had an option to purchase; it gets rid of the option to purchase by
giving 0.25 royalty per tonne Issue Does SK Minerals take the option subject to A’s royalty? Decision No, no ministerial consent was obtained and anyway it was not an interest in land Analysis
• Majority: o 1. No Ministerial consent was obtained:
� Saskatchewan had a statute – Alkali Mining Regulations – which required that the lessee to obtain the consent of the Minister before granting any interest under the lease, including any options
� Therefore, the option granted to the Pl was flawed from the very beginning, and the Pl loses on this ground
� The rest of the case if then obiter
o 2. The RI was not an interest in land: � Clause 3(b) indicated, “a royalty… on all…salt produced and sold from the leasehold property”
� The Court indicated that this RI was not an interest in land because the terms of the instrument calculated the interest on the minerals in a severable state from the land, it did not grant a right on the in situ minerals
� The Court also indicated that had the instrument used the word “payment” that the Pl’s position would not be arguable
• The use of the word “royalty” in itself, was not good enough to create an interest in land � This is a strong application of Bensette and Emerald
• Dissent (Laskin J):
o 1. The RI was an interest in land: � A. Rebuttable Presumption:
• In absence of words to the contrary, when the parties use the term of art “royalty”, they intend to create an interest in land
� B. Words used: • So long as the words used are consistent with the granting of an interest in land, and do
not negate the granting of an interest in land, then we should find that the instrument creates an interest in land (goes along with the rebuttable presumption)
• Here, typical conveyancing language was used which is consistent with an interest in land
� C. Rent analogy: • The words in which the royalty is conveyed may indicate only a contractual interest • However, where the function of the royalty is akin to rental payments, at CL a rental
charge was an interest in land and therefore, we should find this interest to be an interest in land
• The fact that the royalty is fixed / calculable as a money payment based on production cannot alone be enough to establish only a contractual interest
o This approach is the most commercially reasonable approach � Parties RI’s are unattractive if they are not, as they can easily be defeated by BFP’s
o Therefore, Laskin’s steps: presume an interest in land; is the language consistent with such; is there clear contractual language (not just a simple method of calculation based on share in production and sold…)
NOTE: if ‘in mines and minerals in situ’ then royalty, if ‘for those produced, saved, and sold’ it is an interest in personal property so a mere K -there is no magic in using the word ‘royalty’ itself
3. ROYALTY TRUST AGREEMENTS NOTE:Benson v. Reese: deals with the lessor’s royalty -lease land for 12.5% royalty SK Minerals v. Keyes: deals with the gross overriding royalty �both types of royalties described as a cost-free share of production -gross overriding is carved out of the ‘working interest’ -it is a cost-free share of production NOTE: this became controversial in the 1980s when the Roytal Trust Agreement came into effect, this happens when a 12.5% royalty was taken and wanted to be sliced up into smaller pieces by transferring royalty to a trust company who issues certificates for shares in the owners royalty trust -can either given away, sell, etc.
• AB scheme to secure interests in 1948; Prudential Trust Co. started it • Farmers start diversifying their risks by swapping and not being overweight in their own land • Note: you Could not grant anything less than 1/20
th of the land interest
• Note: Securities Act legislation were required so ensure that these trust certificates were like share certificates and can only be transferred by registered dealers…
Guaranty Trust v. Hetherington (1989 ABCA)
• The oil company searches the title and finds the caveat for the royalty trust agreement; says that they should be paying the unitholders, not the new landowner
• 1948, A lands leased to Rio Bravo, 1952, A create a royalty trust agreement with P, trust certificates created, 1958, RB lease expires b/c no well drilled and no production, 1959, A sells to M, land ultimately goes to H upon the death of M, 1979, new lease on the same lands, gas well successfully drilled
Issue To whom is the royalty paid? To H or to the shareholders under A’s trust? Did the royalty agreement create an interest in land?
Analysis • At CA, they do not comment directly on the trial reasoning; instead, they focus on clause 25 (what happens in the
event that a new lease is entered into) o In this clause, the reservation on subsequent leases only applied if the existing lease was cancelled (not
simply expired) � This lease simply expired so the interest fails
o NOTE: in no freehold lease that we have encountered in this course, there is no cancellation clause; the CA implies that the clause applies in events that can never happen…
• Therefore, in the test case; the CA did not comment on the real issue AND there is a general misunderstanding of the operation of oil and gas leases (not understanding that leases practically cannot be cancelled…)
In the end, the test case proved fruitless: it doesn’t deal with the real issue and the cancellation clause is unique to the Prudential Royalty Trust Agreement – therefore, the industry still has no direction with respect to the trust agreements out there… NOTE: this case does not inform others because it does not talk about interests in land Scurry-Rainbow Oil Ltd. v. Galloway Estate (1993 ABQB) -this case is another test case where it was desperately hoped that RTA creating an interest in land would be answered Analysis
• QB starts at whether or not the lessor of the land had an interest to convey o Functionally, the lessor gets compensation in exchange for the right to exploit the lands; like RENT
� Whatever the wording, the lessor retains an interest in land at least akin to rent � In any event, the lessor always retains a reversionary interest, which is sufficient to allow the
lessor to create an interest in land at a later date • QB moves on to the issue: have the lessors transferred such interest in land to the trust company?
o Fundamentally disagrees with the trial decision in Hetherington; not enough weight was put to the words (verbs, descriptors, etc); taken together, the terms seem to describe an interest in perpetuity rather than a contractual right
o Goes to a functional interpretation; scheme doesn’t make sense unless a property interest is conveyed o Therefore, the suggestion in the industry is that all is well
• CA fails to address the critical issue AGAIN: the trial judge has made no reversible error In the industry, people start finding all royalty trust agreements all valid except for the form and using the facts of Hetherington… therefore, the only thing that makes such fatal is the cancellation clause (#25), where the existing lease had expired…
• However, the critical issue still has no position in the ABCA; is the approach literal or functional? • NOTE: once again this court fails to address the central concern of whether a RTA is an interest in land
Bank of Montreal v. Dynex Petroleum Ltd. (2001 SCC)
• Dynex purchased various oil and gas projects; each of the lands they purchased had a caveat protecting a gross overriding royalty (the lessor’s interest carved out of the working interest (cost-free share in production))
• BMO is realizing on D’s security in the properties and seeks to sell properties free of all the gross overriding interests
o They argue that they are not bound because they are not interests in the land Analysis
• SCC: the 1st reading of the decision suggests that the court is taking the same position as the ABCA; Major J.
seems to agree with what the ABCA has done o In no uncertain terms, an interest in land can be created out of an incorporeal hereditament; in some
cases, it is analogous to a rent charge o 2 reasons:
� Although case law held that royalties were not interests in land; they did not conclusively say that a gross overriding royalty CANNOT be an interest in the land (it is a fact-specific exercise)
� It appears reasonably clear that a royalty interest may become an interest in the land if:
• The language used is sufficiently precise and reflects that the parties intended to grant an interest in the land
• The interest, out of which the royalty is carved, is itself an interest in land
• Major’s judgment seems to promote the literal Martland approach even though he affirms the findings of the ABCA which follows the functional approach
Therefore, many royalties today continue to be suspect; we are none the wiser on an important question in the industry…
• Going forward, we either have to attach the royalty to the mines and minerals in situ or on the profit a prendre (latching on to a portion of the working interest) if you are looking to create an interest in land
• Avoid contractual language… ie. proceeds in production • “the lessee grants 2% of the working interest” – if you are dealing with a geologist, they do not even have the
analogy of a rent charge to go in their favour because they are not lessors o Therefore, in these cases, you want to transfer a percentage of the working interest, but you want to be
clear that it is a royalty interest of the working interest and free of costs of production Drafting Royalty Agreements Today:
- As a result of the SCC’s decision, many royalties that were commonly regarded as interests in land are now suspect
- In drafting a royalty clause today, in an attempt to create an interest in land, we must: o (i) Tie the royalty to the in situ MM, OR
� Ex) …reserving 12.5% of the leased substances… o (ii) Attach the royalty to the working interest, AND
� Ex) …2% of the working interest… o (iii) Dispel any notion that the royalty is tied to production of the minerals, AND
� Ex) Avoid “…saved and sold” o (iv) Try to use the word “royalty”
The Crown Lease
• How we get to the Crown lease: o Until 1962 – 21 year lease with favourable terms on a very large tract of land (encourage exploration) o 1962 – 10 years o 1976 – 5 years o In 1974, regulations were changed (OPEC crisis and prices began to rise) – government now wants a
real share of what the companies were making; Royalty rates to be determined by regulation • Regulating % ROI based on the market
• Accepted in Alberta because industry confidence that the government will not bite the hand the feeds it o This gives the oil companies significant political credit
• As such, the nature of the legal elements is less important with respect to the Crown lease because of the political context; WHAT IF the government gets tougher?
o Environmental topics o Accelerated write-off provisions (to promote investment in the oilsands) o Is the government being too generous? These are issues that are on the public agenda today…
License v. Lease
• License = short-term exploratory agreement AND only in an area where there was no established production o Segmented by duration: 2 years here, 4 years in the north, and 5 years in the foothills o If you find something, you would convert to a lease to profit on your finding o Nowadays, you can produce on the terms of your license – which essentially is analogous to a lease
• Only thing that gives you long-term tenure is a productive well, but with the following different limitation o If you drill a well, the lease continues, but only to the lowest productive zone – you have earned a lease to
the horizontal slice of the reservoir � The remainder is vested in the Crown
o Deep Right Reversion: you only get rights to the bottom of the well, enables others to come in and drill deeper wells for deeper prospects
• Note: you can potentially produce forever under a license… recall the need of unexplored area… The Process
• Obtainable essentially by auction (95% of them) o The industry decides; it may at any stage request certain lands be “posted for sale” o Some company submits a posting request (they have no prior rights to the land)
� The land is posted so that anyone in the industry may bid on it
o The submissions go to: the Crown Mineral Disposition Review Committee � If Crown land, ultimately, they say YES but they may identify limitations or technical restrictions
(seasonal or access provisions); environmental or habitat concerns • Controversy – there are growing concerns about ease of posting (neighbours and
conservationists) • Typically, we are dealing with some very sensitive lands, especially in the foothills
(adjacent to prime ranching ranges) o Proposal to post: one can seek up to 15 sections in the plains, 32 in the north, and 36 in the foothills
� Far bigger tracts of land under the public system than one would see in the private system � Tenures are relatively short-term and they require production after 5 years…
• Production: land posted, obtained rights and obtain a 5-year Crown lease o At the end of 5 years, one has to show that the land is in a spacing unit that is productive of oil and gas o Commercial production is not necessary; just “potentially productive” o If you prove productive potential, you can extend the lease a further year to bring it into production o If you are not productive within a year, all the rights revert to the Crown AND remember that you can only
produce to the deepest productive zone that you drilled The Devices
• S.1 Compliance with Laws Clause – one agrees to be bound by all of today’s laws and any future changes o Designed to prevent a holder to say that legislative action fundamentally changed the deal; you cannot
contract a right superior to the legislation here o Compare with the stability clause: when you enter into an agreement in a foreign country, especially
with political instability, you want to only be bound be laws at the time of agreement o FURTHER: With Crown tenures, your only option is to litigate (so, their rules and their courts)
� Internationally, there is significant effort over how to resolve dispute, under which laws, and where disputes will be decided (arbitration in a 3
rd country)…
o RECALL Suncor issue about starting a new project/extension to avoid 25% royalty • Government compensation: surface rental prescribed in the M&M Act (currently $3 or so per hectare)
o Royalty on all licensed substances calculated free of any deductions except the gas cost allowance • Clause 2(5) – you have not claimed to be exempted from any law in Alberta • The only significant difference: license says that you have rights to an initial term and then an intermediate
term (where you might have proved productive potential without a producing well) for a period until you have achieved actual production
• The legal limitation – good faith • Mobil v. Federal Government – the decision to approve of a “significant discovery” must be done in good faith…
Assignment and transfer of rights under the M&M Act
• There is no public policy reason why they shouldn’t be allowed to transfer; after all, they were made available via auction
• The only time consent of the Minister is required is when a transfer is partial o Department of Energy, a rudimentary registry system is set-up; 3 interests that can be registered:
� Transfer of a lease or license • M&M Act says that it is a race to register system with a notice gloss
� Security interest • If the oil company goes insolvent, the Bank can seize and sell the leases • Priority of the security depends on the date of registration as well
� Builder’s lien • Unpaid contractor or individual who works on the project and is unpaid • NOTE: oil companies typically pay after 90 days, but the Liens Act requires that the
interest be filed within 45 days from the “last day that you worked on the project” o Difficult decision on the part of the contractor o You cannot extend the 45 day period
• As soon as the lien is filed, any flow of financing stops
