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The legal distinction between the petroleum which was reserved by the Canadian Pacific Railway Company (the "CPR") for its own account in land sales to settlers during the 1906 - 1912 period and the natural gas which passed to the settlers together with the rest of the land is not made at surface where it might be relatively easily monitored by the typical individual freehold owner of natural gas. The distinction is made in the ground1.

Individual freehold owners are seldom trained in oil and gas reservoir engineering. As a result, most freehold owners of split title natural gas have historically relied upon their energy company-lessees to properly allocate production between themselves and the CPR or its corporate successors, as owners of petroleum. Other freehold owners assume that there is some government agency monitoring production to insure it is fairly allocated in split title situations.

What most freehold owners fail to realize is that for almost 100 years the CPR and its successors (initially Canadian Pacific Oil and Gas Company, then PanCanadian Petroleums Limited and now EnCana Corporation) have prescribed and enforced petroleum lease agreements on split title lands which require lessees of petroleum to pay the petroleum owner royalties on hydrocarbons which are owned by the natural gas owner and to indemnify the petroleum owner for any damages or costs that a court might award to an owner of natural gas who successfully challenged the effect of these leases (see "1920's: The Turner Valley Controversy", "1950-1953: Borys v. CPR & Imperial Oil Limited", "1990's: The Ownership Trial", “2002: Freeholders’ Appeal to the Alberta Court of Appeal”, “2004: Freeholders’ Appeal to the Supreme Court", “Post-Borys CPR Petroleum Lease”). These petroleum leases also penalize non-compliance with lease forfeiture and allow the CPR or its successors to acquire the producing wells of the petroleum lessee at no cost.

Very few wells are economic to operate if an energy company must pay two sets of royalty payments on the same production. Energy companies operating wells on split title lands face a dilemma - on the one hand is a large and powerful corporation demanding a royalty on something it doesn't own and penalizing non-compliance with lease and well forfeiture - on the other hand is an individual freehold owner who typically doesn't have the technical and legal background to know what he owns, nor the financial resources to enforce his ownership rights if he understood them.

To make matters worse there is no governmental agency monitoring production to ensure fair allocation.

Who do you think gets paid in most instances?

And what is most disturbing is the fact that the Alberta courts take the position that the energy industry’s compliance with petroleum leases which require energy company-lessees to pay royalties to the petroleum owner on hydrocarbons owned by the owners of natural gas creates the settled expectation that the petroleum owner actually owns the hydrocarbons in question and that this settled expectation should not be disturbed2!

 

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End Notes:

1. Borys v. CPR and Imperial Oil Limited, J.C.P.C. [1953] 2 D.L.R. 65
2. Anderson v. Amoco Canada Oil and Gas, Alta. Q.B. [1998] A.J. No. 805, Par. 154-155; Alta. C.A. [2002] A.J. No. 829, Par. 52

Freehold Petroleum & Natural Gas Owners Association

"Freehold Owners Association"

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