text size AAA

For decades, Crown leases in the prairie provinces have provided for the rights below the deepest formation proven productive of oil or gas in paying quantities to revert to the Crown at the end of the primary term of the Crown lease (deep rights reversion).  That these deep rights are available for lease by other energy companies has at all times been obvious to the energy industry because Crown lease information is publicly available and is included in the technical databases subscribed to by industry operators.  

Major corporate owners of freehold mineral rights such as EnCana Corporation have also included a deep rights reversion clause in the leases they use to lease their mineral rights to other industry operators for decades.  The energy industry is fully cognizant of the leasing practices of EnCana and other major corporate owners of freehold oil and gas rights.  Consequently, the availability of deep rights beneath shallow formations proven productive in leases granted by major corporate owners of freehold minerals is obvious to the energy industry.

In the third edition of his book, The Oil and Gas Lease in Canada, published in 1999, the late John B. Ballem, Q.C. had this to say about the deep rights reversion clause in the form of CAPL lease which he expected the industry to adopt (CAPL 99):

The reversion of undrilled formations to the lessor at the end of the primary term seems both logical and equitable.

...

This should be coupled with an undertaking to amend the lessee’s caveat as discussed under the next heading.

...

A knowledgeable oil company or broker, aware of the increasing prevalence of reversionary clauses, might make further enquiries and learn that certain rights were available. However, this is a haphazard process and not one the mineral owner should count on. The lessee’s caveat should be amended to show that from and after a certain date the lessee’s rights under the lease are limited to certain formations. This can best be achieved by filing a second caveat which in the claim amends the lease to include only the rights down to the base of the applicable formation.1 

Since FHOA was organized in 1999, the association has been recommending that individual freehold owners amend whatever lease agreement is offered to them to include a deep rights reversion clause.  FHOA has provided appropriate wording for such a clause on its website together with a clause requiring the energy company-lessee to amend or replace the caveat protecting its lease which is registered with Alberta Land Titles to reflect the fact that its lease no longer includes right below the deepest formation proven productive.

FHOA found it disturbing that land agents were advising FHOA members that there was no point in including a deep rights reversion clause in their leases because Alberta Land Titles refused to amend or register caveats reflecting deep rights reversion.

In an April 6, 2005 letter to Mr. Rae Runge, the then Executive Director of Alberta Land Titles and copied to Mr. Mike Ecklund, Assistant Deputy Minister of Energy by letter of the same date (see “FHOA as Your Common Voice”, “Correspondence” see Caveats), FHOA quoted Mr. Ballem’s text, advised that, so far as FHOA was aware, there was nothing in the Land Titles Act which limited what the Registrar included in the description of a caveat and that, based on conversations with senior Land Titles officials, the Registrar simply chose to keep the particulars in the summary of a caveat on title as brief as possible.  FHOA pointed out that as a result of this policy any party interested in a freeholder’s mineral rights had to go behind title and search caveats in order to determine whether the lease included a deep rights reversion clause.  FHOA pointed out that this had the effect of sterilizing the deep rights of any freeholder who succeeded in negotiating a deep rights reversion clause in his or her lease agreement and sought the Executive Director’s advice as to how greater transparency with respect to freehold deep rights reversion could be achieved.  

As Mr. Runge did not have the courtesy to reply to FHOA’s letter, FHOA repeatedly raised this issue during the meetings of the Multi-Stakeholder Advisory Committee on Coal Bed Methane which FHOA attended between 2004 and 2006.  FHOA succeeded  in having the following included in the Final MAC Report issued in May of 2006:

“The MAC was advised that the amendment or registration of caveats reflecting deep rights reversion on freehold owner leases was not allowed by Alberta Land Titles. As a result of this policy, any party interested in a freehold owner’s mineral rights must spend time doing research to determine if there are any available deep rights, adding to the cost of doing business on freehold lands for the oil and gas industry. Until deep rights reversion on freehold leases becomes more commonplace, most industry operators may not go to the trouble of searching multiple caveats to identify those mineral rights that are subject to deep rights reversion or zone specific leases. Given the competitive nature of the CBM/NGC industry, the MAC supports the principle of a level playing field and increased transparency of information related to caveats. 

Recommendation 9.7.1 

The Government of Alberta should require Alberta Land Titles to ensure as much transparency of information as possible is included on certificates of title to mineral rights.” 2  

The response of Alberta Government Services (the government department responsible for Land Titles) as found in the June, 2007 MAC Progress Update – Year 1 was as follows:

“Recommendation 9.7.1., to include additional mineral rights information in the Land Titles Registry, was considered by Service Alberta. Based on a review of liability and limitations on disclosing such terms, Service Alberta decided that no changes would be implemented to the existing database.” 3

FHOA strongly objected to Service Alberta’s response to Recommendation 9.7.1 in meetings of the MAC which were held to review progress on the Final Report recommendations.  FHOA asserted that it was ridiculous for Service Alberta to claim that changing the description of what a caveat protects from “Re: Lease” which is Land Titles current policy to “Re: Lease with Deep Rights Reversion” somehow would give rise to a liability issue or that the Land Titles Act limited the disclosure of such terms.  

The response of Alberta Government Services as found in the May, 2008 MAC Progress Update – Year 2 was as follows:

“Service Alberta advised that Land Titles Registry cannot require leaseholders to disclose lease terms and is not the vehicle to adjudicate or solve this issue.” 4

Based on this response Recommendation 9.7.1 was closed with “No Action”.

The issue is not Land Titles requiring leaseholders to disclose lease terms.  The issue is Land Titles refusal to disclose lease terms when the leaseholder requests such disclosure pursuant to the requirements of its lease.  There is nothing in the Land Titles Act which prohibits the Registrar from including such references in the particulars describing a caveat on a certificate of title.  What is included in these particulars is left to the discretion of the Registrar.  The effect of the Registrar’s inappropriate exercise of discretion is to essentially sterilize the deep rights of those freeholders who succeed in negotiating a deep rights reversion clause in their lease agreements.

The response of Alberta Land Titles to this issue mirrors the response of Alberta Land Titles to the split title ownership issue where the failure of the Registrar to fulfill its statutory obligation to transcribe exactly what is on a transfer agreement onto title arguably resulted in a loss of hundreds of millions of dollars for the owners of split title natural gas in Alberta (see "Petroleum/Natural Gas Ownership Dispute")

 

End Notes: 

1. The Oil and Gas Lease in Canada, Ballem J.B., 3d, 1999, University of Toronto Press, p. 147-48

2. http://www.energy.alberta.ca/naturalgas/gas_pdfs/macfinalreportjan06.pdf

3. http://www.energy.alberta.ca/NaturalGas/Gas_Pdfs/MAC2ProgressUpdateJune07.pdf

4. http://www.energy.alberta.ca/NaturalGas/Gas_Pdfs/MAC2ProgressUpdateMay08.pdf

Freehold Petroleum & Natural Gas Owners Association

"Freehold Owners Association"

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