In most countries, governments have nationalized subsurface hydrocarbons, and there is no private or ‘freehold’ ownership of oil and gas. Only in the United States is most subsurface oil and gas owned by individual ‘freehold owners’ or ‘freeholders’. Canada is unique — the vast majority of known oil and gas reserves are owned by the provinces, but there is still some private ownership. In Alberta for instance, the oil and gas beneath approximately 10% of the Province is privately-owned. Although most of these freehold mineral interests are held by EnCana Corporation (“EnCana”), the successor to the Canadian Pacific Railway Company (the “CPR”), individuals who inherited or purchased farm lands from Alberta's original settlers own the oil and gas beneath approximately 4% of the Province (see “About Freehold Mineral Rights”)
When an energy company wants to acquire the rights to explore and develop oil and gas owned by a government or a powerful corporation such as EnCana, the form of lease agreement is determined by the government or corporation that owns the resource. In response to changing economic circumstances, governments or powerful corporations have modified their prescribed lease forms so as to extract maximum value for themselves, as owners.
The form of lease agreement used in leasing oil and gas owned by individual Canadian freehold owners has historically been determined by the energy company seeking to acquire the rights to explore and develop the freeholder’s oil and gas, not by the freehold owner. Canadian freehold lease agreements have also been modified on many occasions, but most changes to freehold lease forms have been designed to increase the protection for the energy company, not the return to the freeholder who owns the resource
Once a lease agreement is entered into, the interests of the energy company-lessee and the owner-lessor correspond to the extent that both parties profit from production. But to a greater extent, the interests are in conflict because the energy company-lessee can only profit after paying the costs of exploration and development and the owner’s royalty. While the freehold owner-lessor seeks to maximize royalties, it is in the energy company-lessee’s economic interest to minimize all costs, including royalties. In addition to this fundamental conflict, most energy company-lessees have other business interests which may come into conflict with their duties and obligations to owner-lessors under particular lease agreements. (see “Conflicts Between Lessees and Lessors”)
Governments and powerful corporations have the technical expertise necessary to monitor the activities of their energy company-lessees, and the legal and financial strength necessary to enforce the terms of their lease agreements. Individual freehold owners typically have little understanding of complex oil and gas field technical matters. Some freeholders assume that their energy company-lessee will protect their interests. Others assume that some government agency is protecting their interests. Unfortunately, this is not the case. For instance In Alberta, all aspects of oil and gas industry operations are regulated by the Alberta Energy Regulator (the “AER”, formerly knows as the ERCB or the AEUB). The AER has broad general powers to make any just and reasonable order considered necessary to effect the purposes of the Oil and Gas Conservation Act. Although one of the stated purposes of this act is “to afford each owner the opportunity of obtaining his share of the production of oil or gas from any pool”, the AER takes the position that it has no jurisdiction to become involved in disputes between freehold owners and the energy companies that have leased their oil and gas interests. According to the AER, such disputes belong in the courts (“see Role of Regulatory Authorities”). Few freehold owners can afford to engage in costly oil and gas litigation against powerful energy companies.
One might expect that Canadian courts would show some sympathy for the plight of individual freeholders who, having no oil and gas regulatory authority to turn to and being unable to afford technical and legal advice on a fee for service basis, retain technical experts and lawyers on a contingency fee basis in an attempt to protect their property rights. Not so!
In 2001, a Court of Queen’s Bench of Alberta judge ordered the freehold owner-plaintiffs in 21 law suits to pay approximately $600,000 in court costs to the energy companies the freeholders were suing. These costs did not relate to trials of the freehold owners’ individual legal actions, but to a 6 1/2 day trial of preliminary issues of law which had been imposed on the freehold owner-plaintiffs by the Court at the request of the energy companies the freeholders were suing. The trial judge’s ruling on the preliminary issue of law (she only ruled on one of the issues before her), did not dispose of any of the law suits but the judge considered it appropriate for the freehold owner-plaintiffs to pay the $600,000 “forthwith” or immediately because: “At least some, if not all, of the plaintiffs appear not to be paying the bills for this litigation”. According to the trial judge, had she ruled in favour of the freehold owners in the preliminary issue of law, her ruling would have had “serious implications” for “the oil and gas industry, its regulators, investors and bankers” (see “1990's: The Ownership Trial”).
What about the implications for freehold owners of a $600,000 forthwith cost award in a preliminary issue of law? One would have to be incredibly naive not to recognize that the likely effect of a judge ordering citizens of ordinary financial means to pay $600,000 to the same group of energy companies the citizens were suing, before the merit of the citizens’ law suits had even been heard, would be to put an end to the citizens’ law suits, to preclude an appeal of the trial judge’s decision in the preliminary issue of law, and to cause individual freeholders to think long and hard before ever again entering into a contingency fee agreement in order to advance a law suit against an energy company. Would this cost decision, which effectively impinges on the fundamental right of all Canadians to a trial of all matters in issue in a law suit, have been made if the trial judge had any understanding of the plight of Canadian freehold owners? FHOA, and presumably all Canadians who have faith in our judicial system, can only hope that it would not. Immediately following the trial judge’s cost ruling, she was elevated to the Alberta Court of Appeal.
The Canadian oil and gas industry supports a number of highly-professional, well-financed lobby groups which champion the industry’s viewpoint. For instance, the Canadian Association of Petroleum Producers (“CAPP”), whose mandate it is to advance industry views in the development of public policy, has a multi-million dollar annual budget. A healthy Canadian oil and gas industry is exceedingly important to the economy of western Canada and the views of the industry should obviously be heard. But should the oil and gas industry lobby be the only voice heard by industry regulators, governments and the judiciary? In FHOA’s view, it clearly should not.