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A Mississippi Supreme Court Judge summarized the need for some control over the relationship between oil company-lessees and freehold owner-lessors as follows:

"The oil and gas industry is a business primarily concerned with making a profit just as other businesses are so concerned. It differs, however, in that it affects directly, in addition to the indirect benefit from taxes that all citizens receive, many, many royalty owners throughout the state."

and

"The profit motive is neither good nor evil per se. Like fire, when controlled and wisely used it is a benevolent servant, but when uncontrolled and unjustly exercised it is a destructive, dreadful tyrant."1

The oil and gas industry has always resisted outside control over its activities. In 1931, the president of a prominent western Canadian oil company went so far as to imply that the Premier of Alberta was a communist for having the temerity to suggest that the "natural resources belonged to the people" rather than the oil companies that had leased these resources2, and that the "greatest waste of natural gas taking place on the continent", the flaring of 2 billion cubic feet per day of gas from the Turner Valley Field, should be curtailed.3

Such invective has long ago been replaced by more politically correct and subtle messages. In recent years, the principal theme of the oil and gas industry lobby has been that oil companies are good corporate citizens and that de-regulation of their activities is essential to the economy of western Canada and the well-being of western Canadians. The industry's argument is persuasive. Most oil companies are, in fact, good corporate citizens who support worthwhile community causes and provide challenging and rewarding employment opportunities for western Canadians. The oil and gas industry is also one of the most important contributors to the economy of western Canada - In Alberta’s 2012 budget, the Government projected that 27.8% of the Province’s $40.3 billion estimated revenue in the fiscal year ending March 31, 2013 would come from non-renewable resources ($11.2 billion) 4

However several recent Alberta court decisions suggest that the oil and gas industry has succeeded in convincing at least some judges that the industry's support of worthwhile causes, its creation of employment, and its filling of provincial royalty coffers is sufficient reason to give the industry a carte blanche to "soldier on"5 and conduct its affairs on freehold lands in whatever manner it chooses.

In 1998, the Alberta Court of Appeal upheld a lower court decision in which the onus was placed on a freehold owner-lessor to prove that a his oil company-lessee had not mailed a delay rental payment prior to the lease anniversary date, when the oil company-lessee had a system in place to mail delay rentals on time but no record of mailing the particular freeholder's delay rental.6 It is settled law that a late delay rental payment results in automatic termination of an 'unless' type freehold lease (see "Understanding Freehold Leases" - The Drilling Clause) and for 50 years oil company-lessees have maintained lease records to prove timely payment. Because most freehold leases provide for delay rental payments to be made to depositories such as a bank whose record keeping system a freeholder cannot control, a freeholder can seldom prove whether a delay rental check was mailed on time. The obvious effect of the Appeal Court decision is to 'encourage' oil company-lessees to 'misplace' their records in situations where they have not made timely payment.

Also in 1998, a Court of Queen's Bench of Alberta judge found that there was no internal ambiguity in a royalty clause in which the freeholder had reserved a "gross royalty of seventeen (17) per cent of the leased substances produced and marketed from" his lands to be calculated based on "the current market value at the wellhead"7. The term "gross" means "without deduction"8, and the courts of the United States have come to radically different conclusions in interpreting the same words which the judge found to be unambiguous. The lack of ambiguity allowed the learned trial judge to ignore 50 years of oil and gas industry practice and find that costs to gather, treat and store oil prior to its sale were properly incurred costs which could be deducted by the oil company-lessee in calculating freehold oil royalties (see "Understanding Freehold Leases The Acanthus Decision").

Even more disturbing was a 1998 decision by an Alberta Court of Queen's Bench judge on the costs of a trial to determine, as a preliminary issue of law, the ownership of hydrocarbons produced from a well on split title lands and the duty of oil company-lessees to account for this production. The trial had been ordered by the Chief Justice of the Court at the request of the oil company-defendants in 21 legal actions initiated by freehold owners. The learned trial judge ruled that ownership was to be determined based on the phase condition of the hydrocarbons in the ground prior to human disturbance. As a result, the freehold owner-plaintiffs were found to be the owners of gas cap gas and the condensate and natural gas liquids contained therein. Although the trial judge had before her lease agreements in which the Canadian Pacific Railway Company (the "CPR") demanded royalties on these hydrocarbons, and although the freehold owner-plaintiffs had alleged in the 21 law suits underlying the preliminary issue of law that royalties on these hydrocarbons had been paid to the CPR and its successors instead of to them, the learned trial judge ruled that the defendant oil companies had "won" the preliminary issue of law. Her Ladyship ordered the freehold owner-plaintiffs to pay the oil companies they were suing approximately $600,000 in costs "forthwith" (immediately) and "in any event of the cause" (irrespective of who won the underlying law suits) (see "1990's: The Ownership Trial").

According to the trial judge it was "appropriate that costs be payable forthwith" because the freehold owner-plaintiffs "appear not to be paying the bills for this litigation"9.

The Alberta regulatory body charged with the responsibility of affording "each owner the opportunity of obtaining his share of the production of any pool" takes the position that it has no authority to become involved in disputes between oil company-lessees and their freehold owner-lessors and that such disputes belong in the courts (see "The Role of Regulatory Authorities"). Oil and gas litigation is exceedingly expensive. Due to the lack of regulatory control and because most freehold owners cannot afford the high cost of oil and gas litigation, contingency fee agreements with technical experts and lawyers represent the only way for many freeholders to protect themselves from unscrupulous oil company-lessees.

What is the message to be heard when a court orders citizens of ordinary financial means to pay $600,000 to the oil companies they are suing before the merit of their law suits has even been judged, because they appear to be pursuing legal remedies under contingency fee agreements?

Is the message that freeholders who cannot afford the high cost of oil and gas litigation are not entitled to the same treatment by the courts as those who can, or is the message that individuals who own freehold minerals should count their blessings and refrain from troubling the courts with complaints about the oil companies that are ostensibly responsible for our collective prosperity?

 

End Notes:

1. State Oil & Gas Board v. Mississippi Mineral & Royalty Owners Association, [1971] Miss S.C., 258 So. 2d 767, p. 777 and p. 781
2. Provincial Archives of Alberta, W.S. Herron Papers, 78.230
3. F.P.Fischer, 'General Report of the Proposed Turner Valley Agreement', Edmonton, 1932, p. 6
4. Alberta 2012 Budget Highlights
5. Anderson v. Amoco Canada Oil and Gas [1998] A.J. No. 805, Par. 139
6. Paddon Hughes Development Co. v. Pancontinental Oil Ltd. [1998] Alta. C.A., 223 A.R. 180
7. Acanthus Resources Ltd. v. Cunningham, Alta. Q.B., [1998] A.J. No. 25
8. Webster's Illustrative Encyclopedic Dictionary, 1990, Tormont Publications Inc., Montreal
9. Anderson v. Amoco Canada Oil and Gas [1998] Reasons for Judgment on Costs of the Honourable Madam Justice Fruman, December 23, 1998, Unreported

Freehold Petroleum & Natural Gas Owners Association

"Freehold Owners Association"

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