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In 1976, the Government of Alberta amended the form of Crown lease used in Alberta so that the rights earned by an energy company-lessee were restricted to those geological zones above the base of the deepest geological formation proven capable of production from the lease. In 1983, the Government introduced further deep rights legislation which provided for the rights below the deepest zone proven capable of production in all existing Crown leases to revert to the Crown. Some energy companies that were forced to give up potentially valuable deep rights in Alberta Crown leases that they had acquired in good faith under pre-existing rules privately complained about the Government's violation of the sanctity of contract.
But the changes were accepted without court challenge and the oil and gas industry has now come to recognize that the "industry has benefited greatly by deep rights reversion regulation on crown lands in the different provinces."1, because a deep rights reversion clause does not allow the original oil company-lessee to monopolize all potentially productive zones with shallow production and frees up potentially productive deep zones for other industry members to lease and evaluate. British Columbia and Saskatchewan have both followed Alberta's lead with respect to deep rights reversion.

The deep rights reversion legislation in the western provinces applies only to Crown lands, however PanCanadian Petroleum Limited ("PanCanadian" now "EnCana Corporation"), the corporation that owns the majority of the privately-held mineral rights in western Canada, has included a deep rights reversion clause in its lease agreements for at least a quarter of a century. Other major corporations that own freehold mineral rights and lease these rights to industry operators also prescribe leases which contain a deep rights reversion clause.

At the request of the Office of the Farmers Advocate, the joint committee of the Canadian Association of Petroleum Landmen (the "CAPL') and the Natural Resources Section of the Canadian Bar that was responsible for drafting the CAPL 99 lease addressed the issue of including a deep rights reversion clause in the lease. According to the committee, "the first reason" for including such a clause “is the issue of fairness."2 This view was shared by the late John B. Ballem Q.C. In the 3rd edition of 'The Oil and Gas Lease in Canada' released in late 1999, Mr. Ballem states: "The reversion of undrilled formations to the lessor at the end of the primary terms seems both logical and equitable."3 The joint committee recommended that a deep rights reversion clause be included in CAPL 99.

According to Mr. Ballem:

"The reversion clause in CAPL 99 provides that at the end of the primary term the lease shall expire as to all zones beneath the base of the deepest zone completed for and capable of production of the leased substances."4

Unfortunately, somewhere between the time that Mr. Ballem apparently reviewed the joint committee's recommended lease form and the time the lease form was approved for use by the oil and gas industry, the issue of fairness fell off the table. The CAPL 99 lease, which was approved for use in the fall of 1999 almost concurrently with the release of Mr. Ballem's book, contains no deep rights reversion clause.

 

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End Notes:

1. The Suspended Well Clause in the CAPL Freehold Mineral Lease and Proposal for Deep Right Reversion, Moran, S.J., in Working with the Oil and Gas Lease, Insight Press, Toronto [1998] p. 187
2. Ibid, p. 185
3. The Oil and Gas Lease in Canada, Ballem J.B. [1999] University of Toronto Press, Toronto, p. 147
4. Ibid, p. 148

Freehold Petroleum & Natural Gas Owners Association

"Freehold Owners Association"

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