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In 1906, a settler from Montana named Michael Stoos purchased homestead lands from the CPR along the Sheep River in the Turner Valley area of Alberta. The railway company had retained the rights to petroleum. The shale beds along the banks of the Sheep River as it passes through the lands acquired by Mr. Stoos form a fold or anticline and gas seeps from these shale beds. This gas seep attracted the interest of William S. Herron who has been referred to as the “father of the petroleum industry in Alberta1. Herron applied to both the CPR and to the Dominion Government for leases in the area. In 1911, Herron reportedly fried eggs over the gas seep with R.B. Bennett2, a lawyer who then acted as the CPR’s Calgary solicitor. That same year, Herron purchased Stoos’ land for $18,000. In 1912, a group of prominent Calgary citizens, including Bennett, A.E. Cross, W. H. McLaws, J. A. Lougheed, and W. Pearce purchased a majority interest in Herron’s company, Calgary Petroleum Products Co. Ltd., and committed to spend $50,000 developing the properties which Herron had transferred to the company3.

On May 14, 1914, Calgary Petroleum Product’s first well, Dingman No. 1, discovered ‘wet gas’ on a Dominion Government lease adjacent to the Sheep River seep. Unlike dry gas, wet gas in the subsurface contains significant quantities of normally liquid hydrocarbons dissolved in gaseous solution. The temperatures in the subsurface reservoirs where natural gas is found are significantly higher than surface temperatures and the temperature drop associated with moving the gas from the subsurface to the surface measurable quantities of hydrocarbon liquids to condense from gaseous solution (an analogy can be seen if you blow on a window pane and the water vapor in your warm breath condenses on the colder glass surface). Dingman No. 1 initially produced approximately 1 million cubic feet per day of wet gas which, when passed through a surface separator yielded what was described by Calgary newspapers as “practically pure gasoline4. The next day, P.L. Naismith, Manager of the CPR’s Department of Natural Resources, described these hydrocarbon liquids as “oil” in a telegram to the CPR’s Montreal headquarters. In another telegram, three days later, Naismith described the scene in downtown Calgary as follows: “for two or three days the police have had to take charge of the crown on First Street west, the street being practically overcrowded with people endeavoring to get into various offices to purchase stock5.

Alberta’s first ‘oil’ boom dissipated with the outbreak of World War I. Calgary Petroleum Products drilled a successful follow-up well (Dingman No. 2) and spudded a third well (Dingman No. 3), but was unable to secure the financing necessary to fully develop its properties. Disaster struck the company in 1920 in the form of a fire which destroyed the plant it had built to strip gasoline from the gas produced from Dingman No. 1 and No. 2. R. B. Bennett then approached A. M. McQueen, Vice-President of Imperial Oil Limited, and arranged for the assets of Calgary Petroleum Products to be transferred into a new corporation called Royalite Oil Company. The former shareholders of Calgary Petroleum Products acquired 25% of the shares of Royalite, Imperial retained 75% and committed to spend $400,000 rebuilding the plant and drilling two further wells. Royalite Oil Company was incorporated in January of 1921 6.

Calgary Petroleum Product’s drilling in Turner Valley had been on leases of Dominion Government lands. Royalite intended to drill on the split-title lands which Michael Stoos had purchased from the CPR. The title to these lands, which Royalite had acquired from Herron, included “all mines and minerals except coal and petroleum”. But Royalite also had acquired a 1915 lease from the CPR to Calgary Petroleum Products on these same lands and the lease called for a royalty of 10% on gas and gasoline to be paid to the CPR. In the summer of 1922, Imperial approached the CPR to amend the terms of this lease.

In a July 3, 1922 memo to the President of the CPR, Sir Augustus Nanton, who was a member of the railway company’s Board of Directors and Chairman of the Board’s Advisory Committee, advised that “the question may be raised as to whether Gas is a Petroleum product or not” and recommended that the 1915 lease be canceled and a new lease be issued with “the royalty to be paid the Canadian Pacific being 5% on Gas and Gasoline as these commodities come from the absorption plant7. A new lease was issued on August 1, 1922 and, in September of 1922, Royalite No. 4 was spudded on the split-title lands formerly owned by Mr. Stoos.

In 1924, Alberta’s first giant field was discovered when Royalite No. 4 blew in while drilling in limestone beds stratigraphically below the productive zone encountered in Dingman No. 1. When Royalite No. 4 was brought under control it produced approximately 20 million cubic feet per day of wet gas. The gas produced from Royalite No. 4 was very rich in hydrocarbon liquids and, when passed through a surface separator, produced 600 barrels per day of “naptha”, or “water-white gasoline8.

Who owned the wet gas produced from a well on split-title lands or the hydrocarbon liquids contained in this wet gas? Did it really matter to the CPR who owned these substances, if appropriate contractual arrangements were in place?

The August 1, 1922 CPR petroleum lease which Royalite had negotiated prior to spudding Royalite No. 4 provided for Royalite to pay the CPR a royalty of “ten per cent (10%) of the current market value at the time and place of production of all the petroleum taken out of the said area” and “five per cent (5%) on the current market value of such gas and (or) gasoline at the place of production as the same is produced from the said plants9. Royalite initially paid the CPR’s Department of Natural Resources a 5% royalty on the liquid hydrocarbons produced from Royalite No. 4, asserting that what it was producing was gasoline10. This resulted in what P.L. Naismith described as a “little dispute11.

In March of 1925, the CPR’s Department of Natural Resources sought the advice of the CPR’s Law Department in Montreal. The CPR’s General Solicitor, W.H. Curle, advised that “‘Petroleum’ does not include dry natural gas”, but the “oil which is being recovered at Okotoks by the Imperial Oil Company, is, in my opinion, oil and not gas”. Curle apparently understood that a royalty of 10% was due on both gas and oil (see “Curle Legal Opinion”) and his opinion that “it makes no difference for the Imperial Oil Company to argue about this distinction” must be taken in context. Nevertheless, the issue of whether the CPR actually owned all of the gas which Royalite was contractually obligated to pay it a royalty on appears to have been irrelevant to the CPR’s General Counsel.

In a chilling harbinger of what was to come for individual freehold owners of natural gas on split-title lands, R. B. Bennett, representing Royalite, met with the Manager of the CPR’s Department of Natural Resources in April of 1925 and agreed that Royalite would pay a 10% royalty to the CPR. If a subsidiary of what was then the world’s largest oil company, represented by a lawyer who 5 years later would become Canada’s 11th Prime Minister, could not stand up to the CPR, who could?

Although the Royalite No. 4 controversy had apparently been resolved to the CPR’s satisfaction, Imperial sought further petroleum leases from the CPR on split-title lands in the Turner Valley area where title to all mines and minerals except coal and petroleum was held by individuals and not Imperial or its subsidiaries. In November of 1926, P.L. Naismith wrote to A. M. McQueen of Imperial advising that the CPR’s Board of Directors was concerned with the CPR’s potential legal exposure in such situations and asking whether Imperial was aware of any court rulings in similar circumstances12. In McQueen’s letter of response, he states:

... if the arrangement is agreeable to you that we should apply to Mr. (name omitted) for a lease of the gas rights to the land in question and pay him any royalties on gas due thereon. We presume that under such an arrangement the gas, whether dry as it comes from the well or naptha bearing, would belong to Mr. (name omitted) and that the naptha would belong to your company13.

Perhaps in the context of a “little dispute”, Mr. McQueen’s reference to paying a royalty to the presumed rightful owner of the gas is a subtle indication that Imperial would not be prepared to pay royalties to the CPR on this same gas, as it was required to do in the form of lease prescribed by the CPR on Royalite No. 4. McQueen’s letter does not address the CPR’s potential legal liability under this form of petroleum lease, but a December 7, 1926 memorandum of law in the CPR files at the Glenbow Museum does. This memorandum concludes:

“The Canadian Pacific Railway Company having conveyed to (name omitted) the natural gas cannot derogate from its own grant and confer on a lessee the right to drill for petroleum so as to destroy or injure the natural gas on the Lessee’s land.
It would seem that while the petroleum lessee would not be enjoined from drilling for petroleum he would be under obligation, if in the course of such drilling he struck natural gas, to take such steps as would prevent the gas from escaping or compensate (omitted) for the interference with the natural gas.
Under no circumstances would the oil lessee be justified in appropriating the natural gas.
The form of petroleum lease used by the Company seems to contemplate such a contingency as the present by the language of paragraph 17.” (emphasis added)

It is implicit in this legal memorandum, as it was explicit in W.H. Curle’s 1925 legal opinion, that the CPR did not believe that it’s right to petroleum on split-title lands included the right to all natural gas. Curle apparently recognized no problem in the CPR demanding a royalty on something it didn’t own, whereas the unknown author of the 1926 memorandum of law was clearly of a different view. How the CPR resolved this potential legal liability while still demanding a royalty on something it didn’t own appears to have had a profound impact on the oil and gas industry’s view of how ownership should be determined on split-title lands (see “The Borys Aftermath”).

It is also implicit in these legal opinions and throughout the correspondence between the CPR and Imperial that, during the 1920's, both parties held the view that ownership determination on split-title lands should be based on the phase condition of the hydrocarbons as they were produced at surface from time to time.

A quarter of a century later, the CPR and Imperial changed their tune (see “1950 – 1953: Borys vs CPR & Imperial Oil Limited”)

 

End Notes:

1. William Stewart Herron, Father of the Petroleum Industry in Alberta, Macleod, R.C., 1984, Calgary Historical Society
2. Corridors of Time, Kerr A., 1988, Friesen Printers, Altona, p. 54
3. Ibid, p. 32
4. Alberta’s Petroleum Industry and the Conservation Board, Breen D.H., 1993, University of Alberta Press, p. 15
5. Telegrams, Naismith to Dennis, Glenbow Archives
6. Corridors of Time, Kerr A., 1988, Friesen Printers, Altona, p. 35
7. July 3, 1922 Memorandum to the President, Glenbow Archives
8. Corridors of Time, Kerr A., 1988, Friesen Printers, Altona, p. 58 – 60
9. August 1, 1922 CPR Lease of Petroleum Rights to Royalite Oil Company Limited, Glenbow Archives
10. March 4, 1925 Letter from Royalite to P.L. Naismith, Glenbow Archives
11. March 24, 1925 Letter from P.L. Naismith to H. F. Osler, Glenbow Archives
12. November 22, 1926 Letter from P.L. Naismith to A. M. McQueen, Glenbow Archives
13. November 26, 1926 Letter from A. M. McQueen to P.L. Naismith, Glenbow Archives

Freehold Petroleum & Natural Gas Owners Association

"Freehold Owners Association"

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