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The Turner Valley controversy had involved the ownership of hydrocarbons produced by a subsidiary of Imperial Oil Limited from wells on split-title lands in Canada’s first giant field. When Imperial agreed to pay the Canadian Pacific Railway Company (the “CPR”) a 10% royalty on all of the gas and condensate produced from the well, this ‘polite dispute’ was apparently resolved to the satisfaction of the railway company (see “1920’s: The Turner Valley Controversy”). When Imperial Oil Limited completed Imperial Leduc No. 1 in February of 1947, it set the stage for a controversy involving the ownership of hydrocarbons produced from wells on split-title lands in Canada’s second giant field. This controversy was ultimately decided by the highest court of appeal in the Commonwealth - or so it should have been.

In 1906, Mr. Simon Borys, an immigrant from the Ukraine, had entered into an agreement to purchase a quarter section of homestead lands from the CPR in what was to become the Leduc D-3 Field. The CPR had reserved for its own account all coal and petroleum “which may be found to exist within, upon or under” the lands. Simon Bory’s interests in all mines and minerals except coal and petroleum came to be held by his son, Michael Borys. In 1949, Imperial entered into a petroleum lease agreement with the CPR and applied to the predecessor of the Alberta Energy Regulator (formerly known as the “Energy Resources Conservation Board”) (the “Board”) for a license to drill a well on Michael Borys’ lands. Over Mr. Borys’ objections, the Board granted a license for Imperial’s 250th well in the Leduc Field. Drilling operations on Imperial Leduc No. 250 were halted just before the well reached its intended target, when Mr. Borys was granted an interim court injunction preventing Imperial from producing natural gas.

In 1949, Mr. Borys initiated a legal action against Imperial and the CPR. In this action he acknowledged that the CPR had the right to the petroleum reserved from his title but alleged that petroleum and natural gas were separate and distinct substances to be distinguished based on their phase condition at surface. Mr. Borys also alleged that natural gas would be produced from any oil well on his lands and sought a declaration that he was the owner of this gas and a permanent injunction restraining Imperial and the CPR from removing, wasting or interfering with his natural gas.

Although historical CPR documents in the Glenbow Museum indicate that, during the mid-1920's, the CPR and Imperial were in substantial agreement that the CPR’s reservation of petroleum did not include natural gas and that the distinction between petroleum and natural gas should be based on the phase condition of the hydrocarbons as they were produced at surface from time to time (see “1920’s: The Turner Valley Controversy”), by the late 1940's both companies had adopted a different position. In Borys v. CPR and Imperial Oil Limited1, the CPR and Imperial argued through three levels of court that the CPR’s reservation of petroleum included all natural gas.

The Borys trial was held before Chief Justice Howson of the Alberta Supreme Court Trial Division in November of 1950. At the time of the trial, the Leduc D-3 pool had been on production for more than 3 1/2 years and was being produced through hundreds of wells. Imperial itself had drilled more than 280 wells, and there were 10 producing wells on the section of land which included Mr. Borys’ quarter.

At trial, the Chief Justice heard evidence from Imperial’s Western Division Engineer who described in detail the specific nature of the Leduc Field. With a series of maps and geological cross-sections through producing wells in the field, including those immediately adjacent to Mr. Borys lands, the Court was shown that within the D-3 formation there existed a layer of oil containing gas in solution which was bounded below by water and bounded above by a large gas cap. Based on chemical analyses of the subsurface hydrocarbon fluids, Imperial’s Engineer advised the Court of the volume of gas that was initially dissolved in solution in each barrel of oil in the ground. The Court was also advised of the estimated volume of gas in the gas cap thought to exist beneath Mr. Borys’ lands.

The scientific understanding of the hydrocarbons found in subsurface reservoirs and how these hydrocarbons behave during the production process has not changed in the last half century. In 1950, experts described by the CPR as “an array of the world's greatest living scientists2 explained these matters to Chief Justice Howson. Dr. Donald Katz, perhaps the 20th century’s leading expert in hydrocarbon phase behaviour, advised the Court that the petroleum thought to exist within Mr. Borys’ lands contained hundreds of thousands of different hydrocarbon compounds3, and that the natural gas contained the same hydrocarbon compounds, but in different proportions4.

Dr. Katz explained the huge number of different hydrocarbon compounds in petroleum based on a discussion of the paraffin series of hydrocarbons and an explanation of isomorphism. Dr. Katz advised the Court that hydrocarbon compounds do not exist in isolation in nature; that these compounds are almost infinitely soluble in each other; and that, in nature, these hydrocarbon compounds exist in the form of complex liquid solutions containing gaseous hydrocarbons, and complex gaseous solutions containing liquid hydrocarbons. Dr. Katz and the other experts called by the CPR and Imperial also advised the Court that a complete compositional spectrum of single-phase hydrocarbon pools exists in the subsurface. The Court was provided with examples of dry gas pools, wet gas pools, retrograde condensate pools, volatile oil pools, conventional black oil pools and heavy oil pools. The experts also advised the Court that if more normally gaseous hydrocarbons are trapped in a pool containing petroleum than can be held in liquid hydrocarbon solution under the temperature and pressure conditions of the pool, the pool is described as being at its ‘saturation pressure’ and two separate hydrocarbon phases will exist in the pool, with the gas phase forming a gas cap overlying the oil leg.

The scientific experts explained the effects that pressure and temperature changes from the point of recovery at the bottom of a well bore to the point of production at surface have on the phase condition of the hydrocarbons produced. It was explained to the Chief Justice that the drop in pressure between the point of subsurface recovery and the point of surface production causes gas in solution in petroleum to evolve in the well bore and be produced as gas at surface. It was also explained that the drop in temperature from the point of subsurface recovery to the point of surface production causes hydrocarbon liquids dissolved in gas in the subsurface to condense from solution and be produced as liquid ‘condensate’ at surface. The extraction of further natural gas liquids from the produced gas by processing the gas at temperatures below standard surface temperature in gas plants was also explained.

Most critically from the standpoint of events that have occurred after the Borys case, the experts advised the Court of the effect that production has on the remaining hydrocarbon fluids in a pool.

The scientific experts explained that production from a pool normally causes the pool pressure to decline, unless pressure is maintained through artificial means such as water flooding, and the importance of maintaining pressure above the pool’s saturation pressure in a pool containing petroleum in order to maximize oil recovery. It was explained that once pool pressure declines below saturation pressure, gas in solution in the petroleum evolves from the petroleum in the pool and becomes free gas. Because gas can move more easily than petroleum through the tiny passages connecting the pores of subsurface reservoir rocks, once the pressure in a pool containing petroleum falls below the pool saturation pressure, some of the newly-liberated free gas will flow to the producing well bores in preference to petroleum. This has the effect of reducing the ultimate recovery of petroleum from the pool.

Whereas the pressure drop from the bottom of the well bore to the surface results in gas evolving from the limited amount of petroleum in the well bore and being produced at surface, the decline in pool pressure below saturation pressure results in gas evolving from the entire volume of petroleum in the pool. Not all of this newly liberated free gas flows to the producing oil wells. Some remains in the pool and, being lighter than petroleum, percolates upward within the pool to form a gas cap as production from the pool continues.

In the case of petroleum pools such as the Leduc D-3 that are at saturation pressure and have a gas cap prior to human disturbance, some of the gas that evolves from solution in the pool oil leg as the result of production-induced pool pressure decline becomes intermingled with the free gas in the pre-existing gas cap. Because the gas that evolves from the oil leg does not have the same composition as the gas in the pre-existing gas cap, once production begins from a petroleum pool with a gas cap, there is a continuous change in the composition of the oil leg and the gas cap. Furthermore, gas produced at surface has no ‘label’ and in petroleum pools which have gas caps prior to human disturbance, the free gas that evolves from the oil leg cannot be distinguished from the pre-existing free gas in the gas stream produced from an oil well.

Mr. James Lewis, an expert witness for Imperial Oil, provided the Court with a report, which he read into the record, in which he discussed the problems that would arise if the Court determined that petroleum and natural gas were separate substances. In discussing ownership determination based on the phase condition of the hydrocarbons in a pool prior to human disturbance, Mr. Lewis specifically referred to the problems which would occur in petroleum pools which are at saturation pressure with gas caps prior to human disturbance and advised the Court that:
If the condition specified was that in the reservoir as it occurred naturally before disturbed by man, ... in reservoirs containing a free gas cap with oil below, difficulties of separating ownership between the gas that was originally free and that which was originally in solution, would be physically and practically insurmountable5.

Mr. Lewis’ testimony on this point was not disputed. According to the staff of the Board6, the majority of oil pools in Alberta are at or near their saturation pressure prior to human disturbance.

In 1951, Chief Justice Howson ruled that petroleum and natural gas were separate substances to be distinguished based on the phase condition of the substances as they were produced at surface under standard surface conditions. He also granted Mr. Borys a permanent injunction preventing the CPR and Imperial from interfering with his gas7.

In 1952, the Appellate Division of the Alberta Supreme Court upheld the trial court’s finding that petroleum and natural gas were separate substances, but ruled that what was reserved by the CPR was a substance in the ground, not at surface. The Appeal Court also ruled that the CPR and Imperial had the right to work their petroleum irrespective of damage to, or waste of, Mr. Borys’ gas, provided that operations to recover petroleum were conducted in compliance with the Board’s regulations8.

In 1953, the Judicial Committee of the Privy Council found the judgment of the Court of Appeal to be “right in all respects9.

The Privy Council began its decision by stating as a general principle of law that because petroleum, gas and water are fugacious substances:

those who make the recovery become owners of the material which they withdraw from any well which is situated on their property or from which they have authority to draw.”10 (emphasis added)

The Court then summarized the ownership issue before it, the positions of the parties, the ruling of the Chief Justice at trial, and the Appeal Court ruling, as follows:

The difficulty of distinguishing between what is gas and what is petroleum is most easily seen when the ratio of what is fluid in the untapped container to what is gaseous is compared with the ratio of one to the other when the substance is stabilized on the surface. But the difficulty goes deeper because as the oil is extracted from the reservoir the ratio almost inevitably changes, the gas increasing as the pressure and temperature are reduced. If, then, a question arose as to the right of Mr. Borys to tap and recover his gas, a difficult problem might arise as to how much of the substance belonged to each party. The solution might be that what emerged as liquid was petroleum and what emerged in gaseous form was gas. But the appellant (Mr. Borys) has not tapped the gas and the question is what substance can the respondents withdraw and to what extent they can make use of the gas whether free or in solution.

The answer, say the respondents (the CPR and Imperial), is to be found in a wide interpretation of the word petroleum, which, it is maintained, includes all kinds of hydrocarbons whether in liquid or gaseous form. On the other hand, the appellant contends that gas is gas whether in solution with oil in a liquid form or in a gaseous state. The test is what is liquid and what is gas at the conventional figures of 60 degrees Fahrenheit and 4.65 pressure, i.e., its state at what is a mean temperature and a mean pressure on the surface.

The learned Chief Justice took the latter view, the Court of Appeal adopted a compromise, viz., the condition of the substance as it emerges from time to time from the reservoir.”

This conclusion, says the appellant (Borys), is wrong because it depends upon the scientific constitution of the material, and neglects the vernacular meaning.11 (emphasis added)

The highest court of appeal in the Commonwealth had stated that recovery and withdrawal of hydrocarbons from a duly-authorized well established ownership and had ruled that the Appeal Court was right to have found that ownership of hydrocarbons produced from a well on split title lands was to be based on the phase condition of the hydrocarbons as they emerged from a subsurface reservoir at the bottom of the well bore from time to time.

However this is not the basis on which royalties have been paid to the CPR and its successors or to the individual owners of split title natural gas by the oil companies that have leased split title lands over the more than half a century that has elapsed since the Privy Council decision in Borys was announced (see “The Borys Aftermath”).

 

End Notes:

1. Borys v. CPR and Imperial Oil Limited, J.C.P.C. [1953] 2 D.L.R. 65; affirming Alta. S.C. App. Div. [1952] 3 D.L.R. 218; reversing in part Alta. S.C.T.D. [1951] 4 D.L.R. 427
2. Borys v. CPR and Imperial Oil Limited, Alta. S.C.T.D. [1951] 4 D.L.R. 427, p. 444
3. Borys v. CPR and Imperial Oil Limited, Testimony of Dr. D. Katz, Trial Transcript, Alberta Provincial Archives, p. 509
4. Ibid, p. 512
5. Borys v. CPR and Imperial Oil Limited, Testimony of Mr. J. Lewis, Trial Transcript, Alberta Provincial Archives, p. 438
6. Petroleum Society of the Canadian Institute of Mining, Metallurgy and Petroleum Monograph, Determination of Oil and Gas Reserves
7. Borys v. CPR and Imperial Oil Limited, Alta. S.C.T.D. [1951] 4 D.L.R. 427
8. Borys v. CPR and Imperial Oil Limited, Alta. S.C. App. Div. [1952] 3 D.L.R. 218
9. Borys v. CPR and Imperial Oil Limited, J.C.P.C. [1953] 2 D.L.R. 65
10. Ibid, p. 68
11. Ibid, p. 71 - 72

Freehold Petroleum & Natural Gas Owners Association

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