text size AAA

Freeholders have two principal concerns with their royalty reports:

  • the timeliness of the reports; and 
  • the inadequacy of the information contained in the reports.


Many of the freehold lease agreements which were entered into prior to the introduction of CAPL leases in 1988 require the energy company-lessee to pay royalties to the freehold owner lessor on or before the 20th or the 25th day of the month following the month in which leased substances are produced and marketed from the freehold owner-lessor’s property. But, according to the late John Bishop Ballem, Q.C., a recognized expert in Canadian oil and gas law:

"The undertaking by the lessee to remit royalty on or before the twenty-fifth of the month following the month of production creates an unrealistically tight time frame and is seldom complied with in practice. In many instances, the lessee himself will not have received the proceeds of the previous month's production by that date."1

The current regulations of the Alberta Energy Regulator (formerly known as the “Energy Resources Conservation Board”) (the “AER (formerly known as the “ERCB”)”) require all operators of wells in Alberta to report to the AER (formerly known as the “ERCB”) on the volumes of crude oil, condensate, natural gas and water which they produce from, or inject into, wells in the Province on or before the 18th day of the month following production or injection. Similarly, all operators of batteries or plant facilities are required to report to the AER (formerly known as the “ERCB”) the volumes of crude oil, condensate, and natural gas gathered, and the volumes of these substances together with propane, butane, and pentanes-plus disposed of during the prior month, on or before the 18th day of the month following gathering or disposition2.

Information on the volumes of hydrocarbons produced and marketed from all wells and all facilities in Alberta is clearly available to all well and plant operators on or before the 18th day of the month following production or disposition. Information on the sales price of the oil, condensate, natural gas or natural gas by-products marketed in Alberta is also clearly available to the industry operator selling the hydrocarbons at the time of the sale. The foregoing information could be made available to all of the joint venture partners of these operators at the same time as production and disposition information is provided to the AER (formerly known as the “ERCB”). Furthermore, if the joint venture agreements between well and facility operators and their industry partners do not provide for the operator to report to its joint venture partners in a timely manner, the information required for royalty reporting can easily be estimated.

The concept that the oil and gas industry is justified in systemically breaching its contracts with freehold owners because some oil company-lessees may not have received their share of production proceeds from the operator of a well or facility at the time that royalty payments are due to the freehold owner can, at best, be described as hypocritical. Freehold lease agreements which require energy company-lessees to pay royalties in the month following production usually call for a 12 1/2% royalty to be paid. This royalty rate was agreed to many years ago under different economic circumstances at a time when the Crown’s royalty rate was at a similar level. The oil and gas industry reluctantly accepts the rights of Governments in the prairie province to retroactively change the royalty rates in existing Crown leases to reflect changing circumstances (see “Crown Royalties"), but the industry dismisses freeholders’ requests to renegotiate their royalty rates based on ‘sanctity of contract’ arguments. Apparently the rates specified in the royalty clauses of freehold leases are sacrosanct but the terms of payment specified in these same leases aren’t.

CAPL 88, CAPL 91 and CAPL 99 provide for royalties to be paid on or before the 15th day of the second month following production. Some oil company-lessees do not even abide by this contractual requirement.

Although freehold lease agreements typically provide for records relating to the leased substances produced to be made available to the freehold owner-lessor at the energy company-lessee’s office during normal business hours, most lease agreements are completely silent with respect to what information the energy company-lessee is to provide the freehold owner-lessor in conjunction with royalty payments. Some energy company-lessees provide no royalty reporting statements whatsoever. Most energy company-lessees provide freeholders with royalty statements generated by computer systems designed for reporting to joint venture partners or the Crown. These statements usually include the:

  • volumes of oil or condensate produced, or deemed to be produced, from the freeholder's property;
  • volumes of raw natural gas produced, or deemed to be produced, from the freeholder's property;
  • volumes of oil or condensate marketed, or deemed to have been marketed, from the freeholder's property;
  • volumes of residue gas (the gas remaining at the plant outlet after processing the raw natural gas) marketed, or deemed to be marketed, from the freeholder's property; 
  • volumes of propane, butane, pentanes-plus and sulphur recovered and marketed, or deemed to be recovered and marketed, from the processed raw natural gas;
  • gross revenue from the sale of each of the products;
  • deductions for transporting oil or condensate;
  • deductions for gathering and processing raw natural gas;
  • the net revenue for royalty calculation purposes; and
  • the royalty payable to the freeholder


Because these statements are designed for use by knowledgeable parties, they typically omit the units of volume measurement (oil, condensate, propane, butane and pentanes-plus are measured in cubic meters (m3), produced raw gas and residue gas are measured in thousands of cubic meters (103 m3), and sulphur is measured in tonnes) and often abbreviate the names of the hydrocarbon products produced and marketed. Most energy company-lessees do not provide per unit prices of products sold in freehold royalty statements. In order to determine these per unit prices, the freehold owner-lessor must divide the reported gross revenue received for each product by the reported volume of each product sold.

Alberta Energy’s website includes historical data on the monthly average prices for light, medium, heavy and ultra-heavy oil sold in the Province. This information is contained in the Information Letters published monthly by the department (Alberta Energy’s website frequently undergoes changes – currently clicking on Information Letters provides historical Par Prices but the information is not user friendly and each month must be searched individually). We understand that Alberta Energy is attempting to resolve this problem. The ‘‘Par Price’’ reported for any particular month is a measure of average Alberta sales prices in the preceding month. You can compare the price which your oil company-lessee sold oil produced from your property to the Par Price published for the following month by Alberta Energy.

In Saskatchewan, average prices for heavy oil, south-west designated oil (Swift Current area) and non-heavy oil are published on the Saskatchewan Energy and Resources website. Under Shortcuts go to Oil and Gas Royalties; then “Crown Royalty and Freehold Production Tax Rate Formula Factors and Royalty Rate Calculator”; then “Royalty/Tax Factors” and choose Crude Oil. Saskatchewan is scheduled to switch to a reporting system integrated with the Alberta Petroleum Registry in the spring of 2012 and subsequently intends to publish average oil prices on a specific area basis.

In Manitoba, the Petroleum Branch of the Innovation, Energy and Mines Department publishes weighted average prices for two grades of oil produced in the Province on the website.

In comparing the oil price used in calculating your royalties with the average prices published on the websites of the Alberta, Saskatchewan and Manitoba Governments you should remember that these prices are averages and the location and quality of your particular oil may not be average (modest variations are to be expected, when the variation is significant you should ask your lessee for an explanation).

Alberta Energy also publishes weighted average prices for all natural gas, propane, butane, pentanes-plus and sulphur sold in the Province. These prices are referred to as ‘Reference Prices”. Currently this information is available online (historical reference prices for the period from 1994 to current are found at the bottom of the page together with average market prices for the years 1988 – 1993). In the event the website changes, a search of the site for ‘Reference Price’ of the applicable year and month may suffice. You can compare the price which your energy company-lessee sold propane, butane or pentanes-plus recovered from gas produced from your property to the Reference Price published for the that month by Alberta Energy, but you should be aware that Alberta Energy allows lessees of Crown land to deduct a transportation and fractionation allowance from the Reference Price for Crown royalty purposes.

The average price of natural gas in Saskatchewan is also published on the Saskatchewan Energy and Resources website. Under Shortcuts go to Oil and Gas Royalties; then “Crown Royalty and Freehold Production Tax Rate Formula Factors and Royalty Rate Calculator”; then “Royalty/Tax Factors” and choose Natural Gas.

Saskatchewan’s average monthly gas prices are currently published in $/1000 m3. It is more difficult to compare Alberta Energy’s published Reference Price for natural gas to the price at which your oil company-lessee markets your gas because Alberta Energy reports weighted average sale prices for natural gas in dollars per Gigajoule ($/GJ). A Gigajoule is a measure of heat or energy. The energy content of natural gas depends on the composition of the gas. Raw unprocessed natural gas is a complex solution consisting dominantly of methane gas but also containing natural gas liquids (ethane, propane, butane and pentanes-plus) dissolved in a gaseous solution (see "About Petroleum & Natural Gas”). The more natural gas liquids or NGL’s in the natural gas, the higher its energy content. Within Alberta, the volume of NGL’s in raw gas varies considerably - from almost none in coal bed methane (CBM) and some of the shallow gas produced in southeastern Alberta to 15% or more in areas of deeper gas production. NGL’s are removed from raw gas when the gas is processed in a gas plant. But gas plants are not 100% efficient and some NGL’s remain in the residue gas when it is sold at the outlet of a gas plant. Due to differences in gas plant efficiency and differences in the NGL content of the raw gas processed in the plant, the heat content of residue gas sold in Alberta varies from approximately 41 GJ/103m3 to 35 GJ/103m3 (shallow gas and CBM). Very few oil company-lessees report the heat content of residue gas sold in freehold royalty statements. If your oil company-lessee is producing shallow gas from your property, you can multiply Alberta Energy’s published Reference Price by 35 to arrive at a price in $/103m3 which can be compared to the sale price received by your oil company-lessee. Otherwise, ask your oil company-lessee to provide you with information on the heat content of the residue gas which it sells from your property, or multiply by an average value of 38 GJ/103m3.

There may be legitimate reasons why the price your oil company-lessee receives for oil, gas or gas by-products produced from your property is materially below the published average Alberta price. If so, your oil company-lessee should not object to explaining these reasons to you. If not, you may wish to seek professional help.

 

Please log in or become a member.

Join FHOA

 

 

End Notes:

1. The Oil and Gas Lease in Canada 3d, Ballem, J.B., 1999, University of Toronto Press, Toronto, p. 158
2. AER (formerly known as the “ERCB”) Directive 7, Sec 2.13, Sec 2.21 http://www.ercb.ca/directives/directive007.pdf

Freehold Petroleum & Natural Gas Owners Association

"Freehold Owners Association"

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