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In the early years of oil and gas exploration and development, the ‘rule of capture’ (see “Frequently Asked Questions” – “What is the Rule of Capture”) caused energy companies to drill large numbers of wells into subsurface oil and gas pools and produce these wells as rapidly as possible in order to extract the pool’s reserves before someone else could.  This seriously impaired the ultimate recovery of oil and gas from many pools.  Oil and gas conservation legislation was introduced to curtain the effect of the rule of capture and halt this ‘race to waste’.  

Spacing units were one of the principal tools used by oil and gas regulatory authorities to prevent wasteful practices.  In most oil and gas producing jurisdictions, a spacing unit was effectively defined as the smallest area within which no more than one well could be produced from any particular pool. The area of the spacing unit for each pool was determined by regulatory authorities to approximate the drainage area of a well producing from the pool.  Once the area of the spacing unit was defined by regulatory authorities based on the type of oil or gas and the nature of the subsurface reservoir rock comprising the pool, only one well could be drilled within that area to produce from the particular pool. 

Gas moves more readily than oil through subsurface reservoir rocks and consequently the drainage area of a gas well is typically much greater than the drainage area of an oil well.  The normal spacing unit for natural gas production in the prairie provinces is one section (640 acres or 256 hectares).  For oil production the normal spacing unit is a quarter section (160 acres or 64 hectares) in Alberta and one legal subdivision (40 acres or 16 hectares) in Saskatchewan and Manitoba.  The differences in the size of the normal oil spacing units (referred to as drainage units in Saskatchewan) relates to the fact that light oil moves more readily than heavy oil through subsurface reservoir rocks and lighter grades of oil are more common in Alberta than in Saskatchewan and Manitoba.  Regulatory authorities in the prairie provinces may vary the size of the spacing unit for any pool from the normal in situations where the technical circumstances so warrant. 

Pooling agreements arise from the fact that oil and gas conservation regulations in each of the prairie provinces require an energy industry operator that wishes to produce oil or gas from any well to have the right to produce from the entire spacing unit for the pool within which the producing interval of the well is located.  

Most freehold owners hold title to less than a full section of freehold mineral rights.  In consequence, to produce natural gas from a well in a pool subject to normal one section spacing beneath freehold mineral rights, the well operator must typically secure the right to produce gas from more than one tract of freehold minerals.  The operator can secure this right to produce by leasing each of the individual tracts or by entering into agreements with other energy companies that have leased these rights.  In either instance, the issue of how to allocate the production from the well on one of the tracts within the section to all of the tracts within that section becomes critical.  In some instances, the existence of other wells on and adjacent to the section could be used by technical experts to estimate the reserves of gas beneath each of the tracts and the production could be allocated on the basis of the estimated reserves beneath each tract.  However oil and gas reserve estimation is an inexact science and technical experts seldom agree on the reserve distribution within even the simplest subsurface pool.  Presumably to avoid the disputes which would arise under reserve-based pooling, the vast majority of freehold leases in western Canada, including all CAPL freehold leases, provide the energy company-lessee with the right to pool the freehold owners mineral rights with other mineral rights within a spacing unit on the basis of the acreage contributed to the spacing unit by each tract within the spacing unit.  In FHOA’s view, acreage-based production allocation within a spacing unit is a fair and reasonable method of resolving an otherwise contentious issue.

The oil and gas conservation legislation in each of the prairie provinces contains provisions for forced or compulsory pooling in situations where voluntary pooling cannot be accomplished due to an untraceable freehold owner or a freehold owner who refuses to lease his or her minerals after having been provided with a reasonable offer by an energy company seeking to produce oil or gas from a spacing unit including the freeholder’s mineral rights. 

The pooling clause in early freehold lease forms provided that production of a well within the pooled spacing unit would continue all of the freehold leases within the pool as if the producing well was on each of the individual tracts.  But many of these early lease forms did not address the issue of shut-in gas wells and, in 1960, the Supreme Court of Canada struck down a lease within a pool which the energy company-lessee was attempting to continue with a shut-in well on another part of the pooled section1.  Furthermore, many of these early pooling clauses only provided for pooling when it was necessary to comply with regulation.  In 1961, the Supreme Court struck down another pooled lease based on the fact that there was (and is) no requirement for pooling in the conservation regulations of the prairie provinces2.  

It was only after these Supreme Court decisions were rendered that most oil and gas industry operators amended the pooling clause in the freehold lease agreements they were using in order to circumvent these issues.  Some freehold leases entered into prior to 1961 which have not been amended may arguably be invalid.  

The pooling clause in most freehold leases drafted after 1961 provides the energy company-lessee with the right to pool on an acreage basis provided that the pooled area does not exceed the area of one spacing unit (ie. there is no reference to complying with regulations) and for a shut-in or producing well anywhere within the pooled lands to continue all leases within the pool as if the well were on each of the tracts within the pool. 

Many pre-CAPL lease forms do not specifically require the energy company-lessee to provide the freehold owner-lessor with notice of pooling.  CAPL leases obligate the energy company-lessee to give written notice to the freehold owner-lessor describing the extent to which the freeholder’s lands have been pooled and describing the pooled spacing unit.  CAPL leases do not specify when this notice is to be given and many energy company-lessees presumably interpret this lack of specificity to mean that they don’t have to provide such notice until it is demanded. 

It is important for you to know what zones or formations are included in any pooling agreement pursuant to which the lease of your mineral rights is being continued and the extent of the pooled spacing unit.  This is because if any of the leases within the pooled spacing unit fail, the pool itself fails and, if the well which was continuing the leases within the pooled spacing unit is not on your mineral rights, your lease may arguably no longer be binding upon you.

If your mineral rights have been pooled you should request a copy of the pooling agreement from your energy company-lessee.  If the energy company refuses to provide you with the actual agreement and you have a CAPL lease, you should demand notice setting forth the extent to which your lands have been pooled and describing the pooled spacing unit.  Failure to provide such notice upon request is a default under a CAPL lease form. 

 

End Notes:

1. Shell Oil Company v. Gunderson S.C.C. [1960] 23 D.L.R. (2D) 81 

2. Shell Oil Company v. Gibbard S.C.C. [1961] 30 D.L.R. (2D) 386

 

Freehold Petroleum & Natural Gas Owners Association

"Freehold Owners Association"

901, 1000 5th Ave SW, Calgary, AB, T4P 4V1 Telephone: 403-245-4438