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During the early 1990's, the owners of 21 tracts of freehold mineral interests in Alberta initiated law suits alleging, amongst other things, that they had been denied their rightful share of royalties on gas produced, or deemed to be produced, from their lands, and that their energy company-lessees had paid these royalties to the Canadian Pacific Railway Company (the CPR) or its successor PanCanadian Petroleum Limited ("PanCanadian" now "EnCana Corporation"). In the spring of 1997, legal counsel representing the freehold owner-plaintiffs applied to the Chief Justice of the Court of Queen’s Bench of Alberta for an order that 6 of the 21 actions be tried concurrently as test cases. The test cases had been selected so that all of the principal legal issues in dispute could be adjudicated in the specific factual circumstances of the individual cases. This application was opposed by counsel to the defendant oil companies who sought a trial on a number of preliminary issues of law. The Chief Justice ordered that a trial be held on the preliminary issues of the ownership of hydrocarbons produced from a well on split title lands and the duty of an energy company-lessee to account for this production.

Although the Court of Queen’s Bench of Alberta has an inherent right to control its own process, trials of preliminary issues are usually only granted when a determination of the particular issue will dispose of the underlying legal action or actions. The ownership of hydrocarbons produced from a well on split title lands was a common issue in 16 of the 21 legal actions, but its final determination would not dispose of these actions.

The Ownership Trial was held for 6½ days in December of 1997.

At trial, it was common ground that the 1953 decision of the Judicial Committee of the Privy Council in Borys v. CPR and Imperial Oil Limited1 was applicable and binding authority. Counsel for the freehold owner-plaintiffs asserted that Borys was authority for the ownership of hydrocarbons produced from a well on split title lands to be determined based on the phase state of the hydrocarbons as they emerge from the reservoir at the bottom of a well from time to time. Each of the 17 lawyers who represented the PanCanadian and the other involved oil companies asserted that Borys was authority for ownership to be determined based on the phase state of the hydrocarbons as they existed in the reservoir prior to human disturbance.

The trial judge’s reasons for judgment in the Ownership Trial were released in July of 19982. Her Ladyship ruled that ownership was to be determined based on the phase state of the hydrocarbons as they existed in the reservoir prior to human disturbance. As a result, individual freehold owners of all mines and minerals except coal and petroleum own any hydrocarbons produced from a well on their split title lands that were in gaseous phase in a pool prior to human disturbance, including gas cap gas and the condensate and natural gas liquids contained therein, and the CPR’s successor corporation (now EnCana) owns any hydrocarbons produced from a well on split title lands that were in liquid phase in a pool prior to human disturbance, including any gas that evolves from petroleum in the reservoir as the result of production-induced reservoir pressure decline (referred to by the trial judge as ‘evolved gas’).

The trial judge’s decision turned “largely on an analysis and interpretation of Borys3.

Borys was the last Canadian case to be appealed to the Judicial Committee of the Privy Council in Great Britain - the Supreme Court of Canada now represents the highest court of appeal available to Canadian litigants. The Privy Council decision in Borys was delivered by Lord Porter who ruled that the judgment of the Appellate Division of the Alberta Supreme Court was “right in all respects4. According to their Lordships, the Appellate Division had decided that ownership of hydrocarbons produced from wells on split title lands was to be determined based on “the condition of the substance as it emerges from time to time from the reservoir.5

The trial judge found that the freehold owner-plaintiffs were wrong to have relied on the Privy Council’s summary of the Appellate Division decision it upheld. Her Ladyship described the circumstances as follows:

“CPR and Imperial wanted a wide interpretation of the word petroleum, to include “all kinds of hydrocarbons whether in liquid or gaseous form”; Borys favoured a narrow interpretation, such that “gas is gas whether in solution with oil in a liquid form or in a gaseous state” (P.C. 554). Lord Porter then attempted to summarize the decisions of the lower courts (P.C. 554):
“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.” (emphasis added by the trial judge) 6

According to the trial judge: “Lord Porter’s statement is troublesome”7... “an inaccurate description of Parlee J.A.'s (for the Appellate Division) decision”8 ... “flies in the face of Parlee J.A.'s reasons, is inconsistent with the remainder of Lord Porter's decision and, respectfully, is wrong.”9... “These words are an inaccurate attempt to summarize Parlee J.A.'s conclusion, rather than a considered interpretation of his decision, and are obiter.”10 (emphasis added)

It is a fundamental principle of the Canadian legal system that lower courts are bound by the words of higher courts, to the extent that the words are necessary for the higher court’s decision and form an integral part of the reasoning directed to the question decided. Such words are referred to as the ratio or ratio decidendi of the decision. Obiter or obiter dictum, has been defined as:

“Words of an opinion entirely unnecessary for the decision of a case. . . . A remark made, or opinion expressed, by a judge, in his decision upon a cause, "by the way," that is, incidentally or collaterally, and not directly upon the question before him, or upon a point not necessarily involved in the determination of the cause, or introduced by way of illustration, or analogy or argument. Such are not binding as precedent.”11

The trial judge provided no justification for her classification of the Privy Council summary as obiter, other than for her disparaging comments regarding the inaccuracy, inconsistency and ill-considered nature of their Lordship’s summary. In FHOA’s view, the fact that a trial judge does not agree with the comments of a higher court, does not make these comments obiter.

If the Privy Council decision in Borys is applicable and binding authority for how ownership is to be determined on split title lands, as the trial judge acknowledged, then how can the Privy Council’s summary of the lower court decision on ownership that it found to be right in all respects possibly be construed as an incidental remark not directed to the question before the Privy Council? Surely the summary forms a necessary and integral part of the Privy Council’s train of reasoning directed to the question it decided.

While it may not have been improper for her Ladyship to express her view that the Privy Council’s summary of the Appellate Division’s decision was inaccurate, ill-considered and wrong, in FHOA’s view, the trial judge exceeded her authority in ignoring this summary and effectively substituting her own interpretation of the Appellate Division decision for that of the highest court of appeal in the Commonwealth.

And does the Privy Council summary of the Appellate Division decision fly in the face of the Appellate Division decision?

There is no dispute that the ratio of the majority of the judges of the Appellate Division decision in Borys as delivered by Parlee J.A. is as follows:

“The trial Judge found that petroleum and natural gas were, by common usage, two different substances, and that conclusion ought not to be disturbed. I am, however, with respect, unable to agree with him that the reservation "petroleum" did not include gas in solution in the liquid as it exists in the earth. What was reserved to the railway company was petroleum in the earth and not a substance when it reached the surface. It is true that by change of pressure and temperature, gas is released from solution when the liquid is brought to the surface but such a change ought not to affect the original ownership.
In other words, petroleum includes oil and any other hydrocarbons and natural gas existing in its natural condition in strata.
In my opinion, all the petroleum reserved, including all hydrocarbons in solution or contained in the liquid in the ground, is the property of the defendants who are entitled to do as they like with it, subject, of course, to the observance of all relevant provisions and regulations.
All gas not included in the reservation of petroleum as indicated is the property of the plaintiff.”12(emphasis added)

The freehold owner-plaintiffs argued that Parlee J.A.’s statements stand for the proposition that petroleum includes gas in solution as it exists in the earth from time to time and that if the Appellate Division had intended petroleum to include gas in solution in the liquid as it existed in the earth prior to human disturbance (defined by the trial judge as ‘solution gas’), Parlee J.A. would have used the past tense of the verb ‘exist’, or he would have qualified the petroleum he was referring to as being at ‘initial reservoir conditions’.

The trial judge found the freehold owner-plaintiffs’ arguments about the tenses of the words used to be “without merit” because:

“The court was construing the meaning of "petroleum" in the reservation. There had been no production at the time of the initial reservation nor, for that matter, at the time of the trial. The well being drilled on Borys' property had not penetrated the pool; no hydrocarbons had entered the well bore; whatever existed in the earth continued to exist.”13 (emphasis added)

According to the trial judge, the freehold owner-plaintiffs were also wrong to have attached any importance to words not used by the Appellate Division. According to the trial judge, Parlee J.A. did not refer to “initial reservoir conditions”, “prior to human disturbance” nor “virgin reservoir conditions” in his decision because:

"the question for determination was the meaning to be given to "petroleum" in the reservation ... The reservation occurred prior to human disturbance and reflected initial reservoir conditions. At the time of trial, the well on Borys' property had not penetrated the pool nor commenced production, and the initial conditions prevailed. Parlee J.A. did not distinguish initial reservoir conditions from any other reservoir conditions because he had no need to ... His references to "in its natural condition in strata", "in the ground" (C.A. 495) and "in the earth" (C.A. 503) could mean nothing other than initial reservoir conditions.”14(emphasis added)

The trial judge is incorrect - the CPR reservation occurred prior to human disturbance, but it did not reflect initial reservoir conditions. The transfer form which gave rise to Mr. Borys’ mineral interests was drafted by the CPR. In this transfer form, the CPR could have reserved for itself all of the petroleum which existed beneath Mr. Borys land prior to human disturbance, or all of the petroleum under initial reservoir conditions, or simply all petroleum. The CPR did not. The CPR reserved unto itself all petroleum “which may be found to exist” within, upon or under Mr. Borys’ lands15. Furthermore, the Appellate Division did not rule that ‘all petroleum’ is the property of the CPR. The Appellate Division clearly stated that “all the petroleum reserved, including all hydrocarbons in solution or contained in the liquid in the ground, is the property of the defendants”. The only petroleum that the CPR had reserved was the petroleum ‘which may be found to exist’ beneath Mr. Borys’ lands.

The “which may be found to exist” wording in the Borys transfer is identical to the wording in the 16 transfer agreements that gave rise to the split title lands in issue in the Ownership Trial. The CPR drafted these transfer forms and, so far as the Freehold Owners Association is aware, the CPR used identical wording in the transfer agreements that resulted in all of the approximately one million acres of split title freehold in Alberta, the split title freehold that exists in Saskatchewan, and any split title freehold that may exist in Ontario, Manitoba or British Columbia.

If petroleum was a hard mineral, then a reservation of all petroleum ‘which may be found to exist’ within, upon or under a particular tract of land would be the same as a reservation of all petroleum. But petroleum is a fugacious mineral which is free to move about and change phase within the subsurface pool in which it is confined in response to production-induced reservoir pressure changes. As a result, any petroleum which may be found to exist within, upon or under a particular tract of land when a well is drilled on the land and encounters a pool of hydrocarbons may not be the same petroleum as existed beneath the land prior to human disturbance - if production has occurred from elsewhere in the pool, the petroleum which initially existed beneath the tract may have moved or may have changed phase to natural gas.

In the Borys case, the Leduc D-3 Pool that was thought to exist beneath Mr. Borys’ land had been on production for 3 ½ years at the time of the Borys trial, 280 wells had been drilled into the pool, and there were 10 producing wells on the section comprising his lands (see “1950 – 1953: Borys vs CPR & Imperial Oil Limited). At the time of the Borys trial, whatever existed in the earth beneath Mr. Borys’ lands prior to human disturbance could not have continued to exist and initial conditions could not have prevailed because the Leduc D-3 Pool is an oil pool with a gas cap (a ‘mixed pool’) and production from a mixed pool gives rise to an interchange of hydrocarbons between the oil leg and the gas cap. The trial judge knew this because it was common ground in the Ownership Trial that production from a mixed pool gives rise to an interchange of hydrocarbons between the gas cap and the oil leg16, and the decisions of all three courts in Borys make it clear that the Leduc D-3 Pool is a mixed pool that was on production at the time of the Borys trial. The Borys courts knew this because the CPR and Imperial had retained an “array of the world’s greatest living scientists17 to tell them. These experts not only advised the courts of the status of drilling and production in the Leduc D-3 Pool, but also described the phase behaviour of the hydrocarbons in a mixed pool and advised the courts that the hydrocarbon interchange phenomena that occurs in a mixed pool makes distinguishing petroleum from natural gas based on the phase condition of the hydrocarbons in the ground prior to human disturbance physically and practically impossible (see “1950 – 1953: Borys vs CPR & Imperial Oil Limited").

The trial judge acknowledged that the CPR had reserved for itself all petroleum ‘which may be found to exist’ in the reservations in issue in both Borys and the Ownership Trial 18, that “the only reliable way to find oil and gas is to drill a well19, and that “Ownership is based upon the original reservation20”, but did not comment on the effect of the ‘which may be found to exist’ wording.

In the opinion of the Freehold Owners Association, the learned trial judge erred in concluding that the references in the Appellate Division ratio to ‘in its natural condition in strata’, ‘in the ground’ and ‘in the earth’ could mean nothing other than initial reservoir conditions”, and in failing to give effect to the plain meaning of a reservation of all petroleum which may be found to exist within, upon or under split title lands.

According to the trial judge, the Appellate Division decided:
"That original ownership would not be affected by the release of gas from solution when the liquid is brought up the well bore to the surface, due to changes in pressure and temperature (C.A. 495). Equally, in my view, that original ownership would not be affected by the emergence of evolved gas within the pool, due to changes in pressure.”21

The concept of ‘original ownership’ pre-supposed by the trial judge corresponds to ownership concepts applicable to the surface of the land or hard subsurface minerals such as coal - substances that can be owned prior to their being captured or recovered. Parlee J.A., for the Appellate Division in Borys, clearly recognized that it was necessary to apply different legal principles to fugacious subsurface minerals. In considering the issue of the CPR and Imperial’s right to work their petroleum, Parlee J.A. stated:

"The principles applicable to the support of the surface of the land should not apply to the rights to underground property such as water, oil and gas.”22;

then cited the remarks of the Chief Justice White of the United States Supreme Court in Ohio Oil Co. v. Indiana (1899), 177 U.S. 190 at p. 200, for the proposition that:

"gas and oil are substances of a peculiar character and decisions in cases of mining for coal and other minerals cannot be applied to them without qualification and that water and oil and still more strongly gas may be classed by themselves.”23;

then referred to the leading English cases on percolating water, and concluded:

“From these authorities these conclusions follow, that the reservation of the petroleum in the grant of the land enables the appellants to use all reasonable means to extract the petroleum from the earth; that gas in the earth may be likened to subterranean waters and they are subject to like principles of law”.24

One hundred years after the release of the United States Supreme Court judgment in Ohio Oil, Justice White’s decision remains a leading authority for the non- or qualified ownership theory of oil and gas law. Under this theory, oil and gas cannot be owned until they are captured or recovered. (see “About Freehold Mineral Rights” – “About ‘Owning’ Petroleum & Natural Gas”)

Parlee J.A. clearly stated that gas and subterranean water are subject to like principles of law. It has been settled law for more than 150 years that an owner of a fee simple interest in land has a right to recover subterranean water from a well on his lands but has no absolute ownership in this water before he recovers or captures it. How can Parlee J.A.’s statement that subsurface gas and water are subject to like principles of law possibly be reconciled with the trial judge’s interpretation of his decision as standing for the proposition that ownership of both gas and petroleum is determined prior to human disturbance?

In the opinion of the Freehold Owners Association, when Parlee J.A. spoke of the “original ownership” not being affected “by the release of gas from solution when the liquid is brought up the well bore to the surface, due to changes in pressure and temperature”, the original ownership he was referring to was the ownership which is established when the petroleum emerges from the reservoir at the bottom of the well bore and is recovered or found to exist.

In FHOA’s view, it is not the Privy Council’s summary of the Appellate Division decision which is ‘inaccurate’, ‘ill-considered’ and ‘wrong’, but the trial judge’s interpretation of the Appellate Division decision.

And is the Privy Council summary of the Appellate Division decision inconsistent with the remainder of the Privy Council decision as the trial judge found25?

The Privy Council began its decision by describing the fugacious nature of the gas, petroleum and water trapped in the Leduc D-3 pool:

“The substances are fugacious and are not stable within the container although they cannot escape from it. If any of the three substances is withdrawn from a portion of the property which does not belong to the appellant but lies within the same container and any oil or gas situated in his property thereby filters from it to the surrounding lands, admittedly he has no remedy. So, also, if any substance is withdrawn from his property, thereby causing any fugacious matter to enter his land, the surrounding owners have no remedy against him. The only safeguard is to be the first to get to work, in which case, 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.26

In this statement, the Privy Council clearly tied ownership to recovery of the substances, not to the location or phase condition of the substances prior to human disturbance.

The Privy Council then reviewed the nature of the dispute between the parties to the litigation and, after agreeing with the lower courts’ rulings that petroleum and natural gas were separate substances, stated:

"The substance which is found in the form of gas in situ is therefore not the subject of reservation and remains the property of the appellant [Borys].27(emphasis added)

In the opinion of the Freehold Owners Association, this conclusion of law decides the ownership issue before the trial judge - if the hydrocarbons are ‘found’ in liquid phase they belong to CPR or its successors and if they are ‘found’ in gaseous phase they belong to the owner of all mines and minerals except coal and petroleum. The rest of the Privy Council decision deals with whether Mr. Borys also owned gas which is found to exist in solution in petroleum:

“Gas, however, which exists in solution in the petroleum is a different matter and must be separately dealt with.”28 (emphasis added);

and whether the CPR and Imperial had the right to use or waste Mr. Borys’ gas in recovering their petroleum.

But, according to the trial judge, when Lord Porter referred to the “substance which is found in the form of gas in situ”, the term ‘in situ’:

can mean nothing other than initial reservoir conditions. Lord Porter was construing the meaning of petroleum in the reservation, which was prior to human disturbance. Both then and at the date of trial the substance was in position, in an untapped container, below ground.”29 (emphasis added)

Similarly, according to the trial judge, when Lord Porter stated that “petroleum means a substance formed from a hydrocarbon admixture in its liquid form when in position in its container under ground”30 the phrase “in position in its container under ground” could “mean nothing other than initial reservoir conditions.31

As set forth above, the CPR had reserved all petroleum ‘which may be found to exist’; the container had been tapped; and, the Privy Council knew that the substance was not necessarily in position. The trial judge dismissed the Privy Council’s use of the present tense both here and throughout its decision on the same erroneous basis32.

In the opinion of the Freehold Owners Association, the term in situ and the expression “in position in its container under ground” have no ‘prior to human disturbance’ connotation and must be read in contest. For example, in dealing with the CPR and Imperial’s right to use or waste Mr. Borys’ gas in working their petroleum, the Privy Council reviewed the different oil and gas ownership theories and stated:

"For the purpose of their decision their Lordships are prepared to assume that the gas whilst in situ is the property of the appellant even though it has not been reduced into possession, but the question is not whose property the gas is, but what means the respondents may use to recover their petroleum.”33

The Privy Council had already ruled that the substance which is ‘found’ in the form of gas in situ is the property of the appellant. If in situ means in location prior to human disturbance, why would it be necessary for the Privy Council to assume that gas in situ is the property of the appellant even though it has not been reduced into possession?

These are not the only questions raised by the trial judge’s decision in the Ownership Trial.

At trial, the freehold owner-plaintiffs called Dr. Robert Heidemann, former head of the Chemical and Petroleum Engineering Department of the University of Calgary, and Dr. Norman Wardlaw, former head of the Geology and Geophysics Department of the University of Calgary, as expert witnesses. Dr. Heidemann and Dr. Wardlaw spent 3 days explaining to the trial judge the nature of subsurface reservoirs, the fluids contained in these reservoirs, and how these fluids behave during production. The essence of these experts’ testimony was that the phase condition of hydrocarbons as they emerge from the reservoir at the bottom of a well bore from time to time can be calculated with reasonable certainty using the existing records of the Alberta Energy Regulator (formerly known as the “Energy Resources Conservation Board”) (the “Board”) or using downhole instruments; that there had been no change in man’s understanding of subsurface hydrocarbon behaviour since 1950; and, that it remained impossible in many oilfield circumstances to distinguish petroleum from natural gas based on the phase state of the hydrocarbons prior to human disturbance.

The trial judge characterized these highly-respected scientists’ testimony as “unnecessarily complicated and designed to highlight imprecision, emphasize uncertainties and cast doubts.34 The trial judge apparently preferred the testimony of the defendants evaluation expert. This testimony differed significantly from the sworn testimony given by the CPR and Imperial’s experts in the Borys trial (see “1950 – 1953: Borys vs CPR & Imperial Oil Limited”). According to the defendants’ expert, “we can pretty easily tell how much of the production is coming from the crude oil” - “if the GOR (the ratio of gas to oil produced at surface) is basically as expected, all of that gas would be attributable to the oil zone35. The expert did not explain how this ‘expected’ GOR was determined, but testified that “In the event that the GOR suddenly jumps up as a consequence of some form of gas invasion, perhaps from the gas cap, then I know that: Oh, oh, must have a gas cap, ...”36 Although the defendants’ regulatory expert, a former chair of the Board, testified that: “the Board recognizes that where you have an oil reservoir with a primary gas cap that some of the gas will come from the solution gas, will be evolved gas, some will be from the gas cap”37; that “it's difficult to determine sometimes that you have a gas cap”38; that the distinction between oil and condensate “is not known with certainty” by the Board; and, that the Board “relies on the industry operator to distinguish it”39, the trial judge was “satisfied from the expert evidence that evaluators can make reasonable engineering estimates of the amount of gas which existed in a primary gas cap, the amount of gas which existed in solution and the amount of gas which evolved from solution in a pool” and that therefore “quantification and measurement are otherwise irrelevant to a determination of ownership”40

Is it irrelevant that under a prior to human disturbance method of determining ownership, all gas produced from an oil well on split title lands is assumed to be evolved gas belonging to the CPR and its successors unless and until the GOR “suddenly jumps up”?

Is it irrelevant that under a prior to human disturbance method of determining ownership, the regulatory body whose mandate is, in part, “to afford each owner the opportunity of obtaining the owner’s share of the production of oil or gas from any pool41 can’t tell the difference between condensate and oil produced from a gas well on split title lands and leaves the distinction to an industry operator who may have a conflict of interest based on its obligation to pay royalties on condensate derived from gas cap gas to both the individual freehold owner of natural gas and the CPR or its successors?

The majority of the petroleum lease agreements that were before the trial judge as evidence in the Ownership Trial require the defendant energy company-lessees to pay the CPR and its successors a royalty on all natural gas produced and marketed from wells on split title lands, or on all natural gas except dry gas. Under terms of these leases the defendant oil company-lessees also indemnify the CPR and its successors for any costs incurred in defending any legal action brought by the freehold owner of natural gas, and for any and all damages that a court might award against the CPR or its successors (see “Post-Borys CPR Petroleum Lease”, “CPR Petroleum Lease Amending Agreements”).

At trial, counsel for the freehold owner-plaintiffs argued that the contractual demands of the CPR and Encana for royalties on hydrocarbons not owned by them, and not an unbiased application of the law set forth in Borys, had determined how royalties on hydrocarbons produced from split title lands had been paid for the past ½ century.

According to the trial judge:

"the leases impugned by the plaintiffs are all between CPR and The British American Oil Company Limited, itself an oil company of substantial size, which had the business acumen, financial clout and legal savvy to negotiate a fair lease and resile from an agreement that did not reflect the state of the law.”42

In fact, these leases were all negotiated a number of years after the Borys decision and clearly do not reflect the ‘clear and uncontroversial’ state of the law which the trial judge found was set forth in Borys. Furthermore, the only evidence of resiling (drawing back) before the trial judge were the amending agreements under which the CPR continues to demand a royalty on hydrocarbons not owned by it.

To be ‘fair’ is to be honest and ethical. Is ‘fair’ the proper description for a lease agreement in which the CPR demands a royalty on something that the courts have already decided belongs to someone else, and indemnification for all court costs and damages in the event that the someone else objects?

According to the trial judge:

“Although the contractual arrangements with the defendants are largely irrelevant to this litigation, these leases are another small indication of settled expectations as negotiated by arms' length parties.”43

The concept of ‘settled expectations’ is based on the judiciary’s reluctance to overturn earlier court decisions because members of society may have made important decisions based on the settled expectations arising from these earlier decisions.

In a brief submitted to the trial judge immediately before the Ownership Trial, PanCanadian acknowledged that it did not own all gas produced from a well on split title lands. After the Ownership Trial, in response to a written query from the trial judge, PanCanadian acknowledged that it did not own the condensate and natural gas liquids contained in gas cap gas. If, as the trial judge ruled, “The meaning of Borys is clear and uncontroversial.44, how can a lease in which the CPR and its successor corporations demand a royalty on something that the Borys courts ruled does not belong to them, and which they now admit they don’t own, possibly be an indication of settled expectations arising from the Borys decision?

The trial judge also based her conclusion that “the Alberta oil and gas industry has the settled expectation that solution gas (including all gas which evolves from petroleum as the result of production-induced reservoir pressure decline) is owned by the petroleum owner” on the testimony of the defendant’s regulatory expert. The former chair of the Board testified that “the practices and procedures of the AEUB have generally reflected the premise that solution gas, produced with petroleum from petroleum reservoirs, is owned by the petroleum owner”. The former Board chair defined solution gas to be “gaseous hydrocarbons produced from a well at surface as the result of evolution from petroleum in the reservoir or in the wellbore.”45

Subsequent to the Ownership Trial, a request was made to the Board under the Freedom of Information and Protection of Privacy Act (“FOIP”) to review all documents in the possession of the Board dealing with how the Board interpreted the 1951 Alberta Supreme Court Trial Division, the 1952 Alberta Appellate Division and the 1953 Judicial Committee of the Privy Council decision in Borys. The Board was unable to find any relevant documents in response to this request, or in response to a further and better search ordered by the Information and Privacy Commissioner46. Clearly, if the practices and procedures of the Board ever reflected the ownership premise attributed to it by the defendants’ regulatory expert, there is nothing in the Board files to even suggest that this ownership premise was based on the judicial decisions in Borys and could give rise to a settled expectation.

A thin layer of water lines the gas- or petroleum-filled pores of the reservoir rocks in most oil and gas pools. In addition, many oil and gas pools are bounded below by reservoir rocks whose pores are completely filled with water. The trial judge referred to this water as ‘connate water’. Connate water contains gas dissolved in aqueous solution. Just as production-induced reservoir pressure decline causes gas to evolve from solution in petroleum, gas evolves from solution in connate water as the result of production from a pool. Just as the gas which evolves from petroleum in a mixed pool has no ‘label’ and cannot be separated from gas which was originally in the pool gas cap, gas which evolves from connate water in a pool cannot be separated from either gas evolved from petroleum or gas cap gas.

At trial, expert estimates of how much of the total gas produced from a pool could be attributed to gas which had evolved from connate water ranged from 0.34% to 1.50%47. The trial judge acknowledged that these small amounts could be significant to individual freehold owners, and then resolved the issue of the ownership of gas evolved from connate water and produced from wells on split title land as follows:

“What we are to look for in construing a reservation, Lord Porter told us, is the vernacular meaning of "petroleum". He found it difficult to believe that landowners, businessmen, engineers, the staff of CPR or Borys would have differentiated between oil and the gas in solution. "They would, in the view of the Board, have included in petroleum all the liquid substances in the mine. . . "(P.C. 557).

"Under initial reservoir conditions, connate water is liquid, as are hydrocarbons dissolved in connate water. Using Lord Porter's vernacular meaning, hydrocarbons dissolved in connate water under initial reservoir conditions, being liquid substances, belong to the defendants, the petroleum owners. 48 (emphasis added)

The trial judge has here misquoted Lord Porter and taken his Lordship’s comments out of context. When Lord Porter stated that petroleum included “all the liquid substance in the mine”, the liquid substance he was referring to was the oil and the gas in solution with that oil which ordinary people at the turn of the last century would not have differentiated between. Water is clearly a separate substance from petroleum and ordinary people have always differentiated between water and oil.

Twenty-four hundred years ago, a philosophy known as sophism was prevalent in Greek society. The sophists, who were specialists in the rhetoric of law and politics, believed that there was no fundamental truth and that any argument, no matter how fallacious, could be won if the debater had superior intelligence and language skills. Litigators are well paid to argue that black is white and it has been said that the difference between sophist and a good defense lawyer is in the eye of the beholder - to some Johnny Cochran who defended O.J. Simpson was a hero, not a sophist.

Was it reasonable or sophistic for the trial judge to use a misquote of Lord Porter’s statement as the basis for her astounding conclusion that the vernacular or everyday meaning of petroleum includes water or the gaseous hydrocarbons dissolved therein?

In recent years, Canadians have grown increasingly cynical concerning their political system. To date, this public cynicism has not been extended to the judicial system. The wrongful murder convictions of David Milguard in Saskatchewan and Guy Morin in Ontario abundantly demonstrate that the legal system can make mistakes, but these errors were ultimately corrected, and those involved were compensated, reinforcing Canadian’s deeply held faith in the integrity of their legal system and their believe that errors, when they occur, will be corrected. This faith is based, in part, on one of the fundamental safeguards in our legal system - the right to appeal an alleged error by a trial judge to a court of appeal.

In December of 1998, the trial judge ordered the freehold owner-plaintiffs to pay the oil company-defendants approximately $600,000 in costs forthwith (immediately), in any event of the cause (irrespective of who won the legal actions underlying the trial of the preliminary issue heard by the trial judge) and on a several basis (each freehold owner-plaintiff in the 21 actions was responsible for his proportionate share of the legal costs of each of the oil companies named as defendants in his particular legal action).49

One would have to be incredibly naive not to recognize that one likely effect of ordering citizens of ordinary financial means to pay $600,000 in costs to the same oil companies the citizens are suing, after a trial of a preliminary issue of law and before the trials of their law suits have even begun, would be to put an end to both the underlying law suits and the appeal of the trial judge’s decision in the preliminary issue.

The trial judge was not sympathetic to the “hint that ordering costs to be payable forthwith might end the litigation because of the plaintiffs’ limited financial resources”. According to her Ladyship, the freehold owner-plaintiffs “appear not to be paying the bills for this litigation50.

Why should individuals who cannot afford to advance their legal claims except under contingency fee agreements with lawyers and technical experts be treated any differently by the courts than individuals or corporations who can afford to pay on a fee for service basis?

The oil company-defendants’ regulatory expert advised the trial judge that although the mandate of the Board is, in part, to “to afford each owner the opportunity of obtaining his share of the production of oil or gas from any pool”, the Board assumes that lessees will look after the interests of freehold owner-lessors and takes the position that it has no jurisdiction to become involved in disputes between freeholders and their oil company lessees51. There are no other regulatory bodies or tribunals in Alberta that a freeholder can turn to if he believes that his oil company-lessee is not abiding by the terms of his lease agreement. A freeholder’s only recourse is to the courts.

Inherently, the Canadian legal system favours powerful oil companies over individuals. For example, PanCanadian Petroleum Limited (now EnCana) had a large and competent technical staff but found it necessary to expend $83,000 on outside technical experts for the 6½ day Ownership Trial. PanCanadian had a profit of more than a billion dollars in 2000 and an expenditure of $83,000 was not financially material to it. Spending $83,000 for technical experts in a preliminary issue of law would clearly be material to the vast majority of individual freehold owners. So would paying the $200 - $400 per hour retainers of the “plethora of senior lawyers52 that the trial judge noted were retained by the “high profile clients53 who appeared before her during the Ownership Trial.

Clearly, the cost of oil and gas litigation precludes most individual freehold owners from advancing legal claims against their oil company-lessees on anything other than a contingency fee basis.

In her cost decision, the trial judge stated that, had she ruled in favour of the individual freehold owner-plaintiffs in the Ownership Trial, her ruling would have had “serious implications” for the “oil and gas industry, its regulators, investors and bankers54. The concept that a finding in favour of the freehold owner-plaintiffs would debilitate the entire oil and gas industry was a recurring theme in the arguments and comments of the lawyers who represented the defendant oil companies in the Ownership Trial. One of these lawyers was quoted in the August 10, 1998 edition of the Alberta Report to the effect that the trial judge’s decision in the Ownership Trial “has saved petroleum producers hundreds of millions of dollars and prevented a horrendous accounting and collection nightmare.

The trial judge was charged with adjudicating two preliminary issues – the ownership of hydrocarbons produced from a well on split title lands and the duty of energy company-lessees to account to the respective owners. Her Ladyship did not address the accounting issue.

Immediately following the release of her ruling, the trial judge was elevated to the Court of Appeal of Alberta.

 

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
3. Ibid, Par. 40
4. Borys v. CPR and Imperial Oil Limited J.C.P.C. [1953] 2 D.L.R. 65, p.79
5. Ibid, p. 72
6. Anderson v. Amoco Canada Oil and Gas Alta. Q.B. [1998] A.J. No. 805, Par. 67
7. Ibid, Par. 68
8. Ibid
9. Ibid, Par. 69
10. Ibid
11. Black’s Law Dictionary, 5th Ed. West Publishing Co., 1979, St. Paul, MN, p. 967
12. Borys v. CPR and Imperial Oil Limited Alta. S.C. App. Div. [1952] 3 D.L.R. 218, p. 230
13. Anderson v. Amoco Canada Oil and Gas Alta. Q.B. [1998] A.J. No. 805, Par. 55
14. Ibid, Par. 58
15. Ibid, Par. 41
16. Anderson v. Amoco Canada Oil and Gas Alta. Q.B. [1998] Agreed Statement of Facts, Par. 11
17. Borys v. CPR and Imperial Oil Limited Alta. S.C.T.D. [1951] 4 D.L.R. 427, p. 444
18. Anderson v. Amoco Canada Oil and Gas Alta. Q.B. [1998] A.J. No. 805, Par.10, 41
19. Ibid, Par. 26
20. Ibid, Par. 12
21. Ibid, Par. 61
22. Borys v. CPR and Imperial Oil Limited Alta. S.C. App. Div. [1952] 3 D.L.R. 218, p. 233
23. Ibid
24. Borys v. CPR and Imperial Oil Limited Alta. S.C. App. Div. [1952] 3 D.L.R. 218, p. 237
25. Anderson v. Amoco Canada Oil and Gas Alta. Q.B. [1998] A.J. No. 805, Par. 69
26. Borys v. CPR and Imperial Oil Limited J.C.P.C. [1953] 2 D.L.R. 65, p. 68
27. Ibid, p. 70
28. Ibid
29. Anderson v. Amoco Canada Oil and Gas Alta. Q.B. [1998] A.J. No. 805, Par. 70, Note 36
30. Borys v. CPR and Imperial Oil Limited J.C.P.C. [1953] 2 D.L.R. 65, p. 74
31. Anderson v. Amoco Canada Oil and Gas Alta. Q.B. [1998] A.J. No. 805, Par. 70, Note 36
32. Ibid, p. 76
33. Borys v. CPR and Imperial Oil Limited J.C.P.C. [1953] 2 D.L.R. 65, p. 77
34. Anderson v. Amoco Canada Oil and Gas Alta. Q.B. [1998] A.J. No. 805, Par. 153
35. Anderson v. Amoco Canada Oil and Gas Alta. Q.B. [1998] Trial Transcript, p. 625, l. 1
36. Ibid, p. 638, l. 26
37. Ibid, p. 817, l. 8
38. Ibid, p. 842, l. 10
39. Ibid, p. 765, l. 15
40. Anderson v. Amoco Canada Oil and Gas Alta. Q.B. [1998] A.J. No. 805, Par. 140
41. Oil and Gas Conservation Act, R.S.A. 2000, c.O-6, Part 1, 4(d)
42. Anderson v. Amoco Canada Oil and Gas Alta. Q.B. [1998] A.J. No. 805, Par. 155
43. Ibid
44. Ibid, Par. 40
45. Anderson v. Amoco Canada Oil and Gas Alta. Q.B. [1998], Exhibit 18
46. Information and Privacy Commission Order #99-039
47. Anderson v. Amoco Canada Oil and Gas Alta. Q.B. [1998] A.J. No. 805, Par. 162
48. Ibid, Par. 164 - 165
49. Anderson v. Amoco Canada Oil and Gas Alta. Q.B. [1998] Reasons for Judgment of Costs of the Honourable Madam Justice Fruman (unreported)
50. Ibid, p. 8
51. Anderson v. Amoco Canada Oil and Gas Alta. Q.B. [1998], Trial Transcript p.773 - 774
52. Anderson v. Amoco Canada Oil and Gas Alta. Q.B. [1998] Reasons for Judgment of Costs of the Honourable Madam Justice Fruman (unreported) p. 14
53. Ibid
54. Ibid

Freehold Petroleum & Natural Gas Owners Association

"Freehold Owners Association"

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