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The concept of private property ownership is fundamental to modern democratic society.   Ownership of property is typically described as a ‘bundle of legal rights’.  The bundle includes the owner’s right to use and enjoy the property, the right to sell or rent the property to others, and the right to exclude others from using or interfering with the property.

Not surprisingly, when the potential value of subsurface oil first became apparent during the 1870's, ownership disputes developed. The fugacious nature of subsurface oil and gas presented the courts of the late 1800's with difficulties. For centuries, the legal maxim "cujus est solum, ejus est usque ad coelum et ad inferos" - the owner of the surface owns everything from the skies to the center of the earth - has applied to ownership disputes. But, due to the fugacious nature of oil and gas (see “About Petroleum and Natural Gas”), a neighbour could drill a well on his side of the fence and drain away an owner’s oil or gas.  How could someone be said to own oil or gas unless he or the state could prevent the owner’s neighbour from interfering with what he owned.  The difficulty was how to quantify the owner's loss. Then, as now, it is impossible to trace the oil and gas produced from a well so as to determine where it actually came from in the subsurface with any degree of certainty. This problem was especially acute in the United States because the 14th Amendment to the American Constitution specifically protects private property.

In 1900, the United States Supreme Court resolved the problem by enunciating what has come to be known as the 'non-ownership' or 'qualified ownership' theory of oil and gas law:

"Although in virtue of his proprietorship the owner of the surface may bore wells for the purpose of extracting natural gas and oil, until these substances are actually reduced by him to possession, he has no title whatever to them as owner. That is, he has the exclusive right on his own land to seek to acquire them, but they do not become his property until the effort has resulted in dominion and control by actual possession."1

The non- or qualified ownership theory is followed in three of the four major oil and gas producing jurisdictions of the lower forty-eight states of the American Union (California, Oklahoma and Louisiana).

In America, the decisions of the United States Supreme Court do not bind the state courts to the same extent as the decisions of the Supreme Court of Canada bind the courts of the Canadian provinces. A different oil and gas ownership theory known as the 'ownership in place' theory developed in the State of Texas and has been adopted in a number of states which produce minor quantities of oil and gas. Under the ownership in place theory, a landowner owns the oil or gas beneath his lands to the same extent as he owns coal or any other hard mineral, but his ownership is qualified by what is known as the 'rule of capture'. This rule provides that if the oil or gas beneath an owner's lands escape and go into the lands of another, his title is gone.2

One of the leading cases for the ownership in place theory, as it is applied in Texas, is Brown v. Humble Oil & Refining Co. (1935) Tex. S.C., 83 S.W. (2d) 935, where the Court at p. 940 stated:

"Owing to the peculiar characteristics of oil and gas, the foregoing rule of ownership of oil and gas in place should be considered in connection with the law of capture. This rule gives the right to produce all of the oil and gas that will flow out of the well on one's land; and this is a property right. And it is limited only by the physical possibility of the adjoining landowner's diminishing the oil and gas under one's land by the exercise of the same right of capture." (emphasis added)

The leading case for qualified ownership as it is applied in Oklahoma, is Rich v. Donaghey (1918) Okla. S.C., 3 A.L.R. 352, p. 355, where the Court, citing the Supreme Court decision in Ohio Oil, stated that fee simple owners of land have:

"... no absolute right or title to the oil or gas which might permeate the strata underlying the surface of their land, as in the case of coal or other solid minerals fixed in, and forming part of, the soil itself.

But with respect to such oil and gas, they had certain rights designated by the same courts as a qualified ownership thereof, but which may be more accurately stated as exclusive right, subject to legislative control against waste and the like, to erect structures on the surface of their land, and explore therefor by drilling wells through the underlying strata, and to take therefrom and reduce to possession, and thus acquire absolute title as personal property to such as might be found and obtained thereby. This right is the proper subject of sale and may be granted or reserved. The right so granted or reserved, and held separate and apart from the possession of the land itself, is an incorporeal hereditament; or more specifically, as designated in the ancient French, a profit à prendre, ..." (emphasis added)

One of the leading authorities for non-ownership as it is applied in Louisiana3, is Strother v. Mangham (1915) 138 La. 437, where the Court stated:

"The doctrine that the owner of the land has no property right in the oil and gas beneath the surface until he has reduced it to possession in no manner denies to such owner the exclusive right to the use of the surface for the purposes of such reduction, or for any other purpose not prohibited by law, but, to the contrary, concedes that right, as inherent in the title to the land, and subject only to the control of the state, in the exercise of its police power; and the right may be sold, as may any other right, and may carry with it the right to the oil and gas that may be found and reduced to possession." (emphasis added)

The principle that oil and gas cannot be owned absolutely until found and reduced to possession is recognized in all of the oil and gas producing jurisdictions of the United States. This principle was incorporated into Canadian oil and gas law by the 1953 decision of the Judicial Committee of the Privy Council in Borys v. CPR and Imperial Oil Limited where Lord Porter, for the Privy Council, stated:

"The substances are fugacious and are not stable within the container although they cannot escape from it. If any of the three substances (petroleum, gas or water) is withdrawn from a portion of the property which does not belong to the appellant but lies within the same container and any oil or gas situated in his property thereby filters from it to the surrounding lands, admittedly he has no remedy. So, also, if any substance is withdrawn from his property, thereby causing any fugacious matter to enter his land, the surrounding owners have no remedy against him. The only safeguard is to be the first to get to work, in which case, those who make the recovery become owners of the material which they withdraw from any well which is situated on their property or from which they have authority to draw."4(emphasis added)

However, when owners of split title natural gas asserted that oil and gas ownership theory prevented petroleum from being owned until it was reduced to possession, Justice Jack Major, for the unanimous Supreme Court of Canada, had this to say:

“This is the type of broad ownership theory that is not required to be determined in this appeal. Irrespective of any other rights the parties may have in relation to the hydrocarbons in the ground, they chose to divide their interest by contract. It is not open to later argue that division was meaningless on the basis that no rights can attach until the substance is reduced to possession. When the substance, which was not in their possession at the time of the contract, is reduced to possession, the date and terms of the contract govern their relative entitlement.” 6

Apparently the property interests in subsurface petroleum of the Canadian Pacific Railway Company and its successors are somehow superior to the property interests of every other owner of subsurface hydrocarbons in North America (see “The Petroleum/Natural Gas Ownership Dispute”, “The Aftermath”).

 

End Notes:

1. Ohio Oil Company v. Indiana U.S.S.C. [1900] 44 L. Ed. 729, par. 64
2. The Rule of Capture and its Implications as Applied to Oil and Gas, Hardwicke, R.E., 1935, Tex Law Rev, 401
3. Summers Law of Oil and Gas, 1938, sec. 62
4. Borys v. CPR and Imperial Oil Limited J.C.P.C. [1953] 7 W.W.R. (NS) p. 550 -551
5. A Treatise on the Law of Oil and Gas, Kuntz, E., The Institute for Energy Development, 1976, c 4.1, 92
6. Anderson v. Amoco, S.C.C. [2004] 3 S.C.R. 3, par 36

Freehold Petroleum & Natural Gas Owners Association

"Freehold Owners Association"

208, 1235 17th Ave SW, Calgary, AB T2T 0C2 Telephone: 403-245-4438