Indexed as: Anderson v. Amoco Canada Oil and Gas
Neutral citation: 2004 SCC 49.
File No.: 29370.
2004: April 22; 2004: July 16.
Present: McLachlin C.J. and Major, Bastarache, Binnie and Deschamps JJ.
on appeal from the Court of Appeal for Alberta
Applied: Borys v. Canadian Pacific Railway,  2 D.L.R. 65, aff’g  3 D.L.R. 218, rev’g in part  4 D.L.R. 427; referred to: Bank of Montreal v. Dynex Petroleum Ltd.,  1 S.C.R. 146, 2002 SCC 7.
Statutes and Regulations Cited
Land Titles Act, R.S.A. 2000, c. L‑4.
Oil and Gas Conservation Act, R.S.A 2000, c. O‑6.
Water Act, R.S.A. 2000, c. W‑3.
APPEAL from a judgment of the Alberta Court of Appeal (2002), 5 Alta. L.R. (4th) 54, 312 A.R. 116, 214 D.L.R. (4th) 272,  1 W.W.R. 174,  A.J. No. 829 (QL), 2002 ABCA 162, affirming in part a judgment of the Court of Queen’s Bench (1998), 63 Alta. L.R. (3d) 1, 225 A.R. 277,  3 W.W.R. 255,  A.J. No. 805 (QL), 1998 ABQB 620. Appeal dismissed.
Norman K. Machida and Timothy S. Meagher, for the appellants.
Lenard M. Sali, Q.C., for the respondents Amoco Canada Oil and Gas, Amoco Canada Resources Ltd., Amoco Canada Energy Ltd., 3061434 Canada Ltd. and Ocelot Energy Inc.
Randall W. Block and Karen A. McHugh, for the respondents Gulf Canada Resources Limited, Morgan Hydrocarbons Inc., Murphy Oil Company Ltd., Canadian Gulf Oil Company, Gulf Canada Limited and Gulf Canada Properties Limited.
Gwen K. Randall, Q.C., for the respondents Petro-Canada, Canol Resources Ltd., Dominion Explorers Inc., International Oiltex Ltd., Canadian Fina Oil Limited, Petrofina Canada Ltd., Petro‑Canada Enterprises Inc. and Petro‑Canada Inc.
Mary E. Comeau, for the respondent Talisman Energy Inc. and Encor Energy Corporation.
William R. Pieschel, Q.C., for the respondents Canadian Pacific Limited and PanCanadian Petroleum Limited.
No one appeared for the respondents Empress Gas Corp. Ltd., Union Pacific Resources Inc., Crestar Energy, Sulpetro Limited, Canadian Rampart Oil & Gas Ltd., J & K Petroleum Land Management Ltd., LL & E Canada Holdings Inc., Rocky River Resources Ltd., Sunlite Oil Company Limited, Sunray DX Northern Oil Co. Ltd., Sun Oil Company Limited, Bralorne Resources Limited, Bonanza Oil & Gas Ltd., Canadian Hunter Exploration Ltd., Lochend Partnership, Lochwest Resources Ltd., Serenpet Inc., Serenpet Partnership and Shiningbank Energy Ltd.
L. Douglas Rae and W. Tibor Osvath, for the intervener Freehold Petroleum & Natural Gas Owners Association.
The judgment of the Court was delivered by
- 1Major J. - This appeal reviews the effect a reservation of petroleum rights from a sale of land that took place almost 100 years ago has on the present entitlement to oil and gas from lands encumbered by the same
In fact, the lands are not encumbered by the same reservation.
The CPR reserved all coal and petroleum or all coal, petroleum and valuable stone “which may be found to exist” within, upon or under the lands sold to the settlers. The role of the Registrar of Land Titles is transcribe exactly what is on a transfer agreement unto title (CPR and Imperial Oil Ltd. v. Turta and Sereda, Montreal Trust Co. and Turta SCC  3 D.L.R. 1, p.15). The Alberta Registrar of Land Titles failed to transcribe the ‘which may be found to exist’ wording unto title.
In result of the peculiar nature of petroleum and natural gas and the practical realities of how these minerals are found and exploited, the petroleum which ‘may be found to exist’ within, upon or under a tract of land when a well is drilled on the tract may not be the same petroleum in either quantity or composition as existed beneath the particular tract prior to human disturbance of the pool. In the case of a pool of petroleum which initially has a gas cap (a mixed pool in the terminology of the Anderson Courts), if production has been taken from anywhere in the pool prior to petroleum having been found to exist beneath a particular tract of land, the petroleum will not have the same composition as that which initially existed and may have been replaced, in whole or in part, with natural gas which has evolved from petroleum throughout the pool as the result of production-induced pool pressure decline. This type of gas was referred to by the Court in Anderson v. Amoco as ‘evolved gas’.
Upon review of the trial decision in Anderson v. Amoco the difference between the transfers and the titles became apparent to FHOA. In 1999, FHOA sought access under the Freedom of Information and Protection of Privacy Act (the “FOIP Act”), to all documents in the possession of the Alberta Departments of Municipal Affairs (the department which then administered the Land Titles Act) and Justice having to do with the authority under which the Registrar of Land Titles had failed to transcribe or copy the ‘which may be found to exist’ wording from the transfer agreements which gave rise to split title lands unto title and all documents referencing discussions or decisions respecting corrections to these titles.
The fundamental issue was that although Registrar’s errors on title are not correctable in the case of purchasers for value, the successors to the CPR are not purchasers for value and the Registrar’s error in failing to transcribe the ‘which may be found to exist’ wording from the transfers giving rise to split title land unto the petroleum titles of the CPR and its successors was correctable.
In response to FHOA’s request, the Registrar of Land Titles refused to acknowledge any error for which there was liability, asserted that if there was an error for which a remedy exists at law, the limitation period for making the claim would have expired many years ago, and refused to correct titles or refer the matters to a judge. The responsible minister asserted that the fee for conducting the FOIP request would be in the order of $400,000 - a fee which then exceeded any other FOIP request made to any department of the Alberta Government by several orders of magnitude. Contrary to the express provisions of the FOIP Act, the Minister refused to process FHOA’s request unless FHOA narrowed the scope of its request.
FHOA requested an investigation by the FOIP Commissioner. The Commissioner subsequently ruled that records in a Land Title Office were not subject to FOIP (FOIP Commissioner Order 2000-22 http://www.oipc.ab.ca/downloads/documentloader.ashx?id=2375 ).
- 2These reasons rely on the definitions used by the trial judge. The Appendix contains the entirety of these definitions. The following two definitions are used frequently:
“Phase” - a distinct physical state of matter; all matter exists in one or more of three physical states: gas, liquid or solid;
“Pool” - a natural underground Reservoir containing or appearing to contain an accumulation of Gaseous or Liquid Hydrocarbon Solutions or both, and separated or appearing to be separated from any other accumulation.
- 3The completion of a national railway across Canada during the latter part of the nineteenth century was an endeavour that many view as one of the defining moments in Canadian history. As this case demonstrates, effects of this project still linger. For connecting the west coast with the rest of Canada, the Canadian Pacific Railway (“CPR”) was paid in money and land by the Canadian
- 4Canada transferred to the CPR not only the surface rights but the entire legal interest in the land. This included all subsurface resources. At the time, the CPR saw the main value of the land as the ability it gave them to encourage settlement near the railway. Settlement was viewed as key to the economic success of the railroad, and the CPR entered into agreements with settlers for the transfer of title to this land. The first of these contracts transferred the CPR’s entire interest in the plots of land to the settlers.
- 5It was approximately 1904 when the CPR recognized the underground value of the land they owned. As a result, they began to exclude the valuable subsurface minerals from the title when they sold land. Initially the CPR reserved only coal from the transfer but by 1912 they were reserving rights to all mines and minerals. This division of title created “Split Title Lands” which are recognized under the Torrens land registration system in Alberta, and two or more separate interests reflecting ownership of surface and subsurface rights can be registered under the Land Titles Act, R.S.A. 2000, c. L-
According to most historians, the CPR first began to reserve coal in 1902, not 1904.
- 6The current appeal deals with contracts entered into between 1907 and 1912, even though the structure of the purchase and sale agreements resulted in some of the actual transfers not being executed and registered until later. Under these agreements, the CPR reserved its right to petroleum in addition to just coal, or coal and valuableIt is a reasonable assumption that the settlers were primarily interested in the surface rights because of their intended use for farming which, to the extent any is needed, explains their agreement to the split title reservations.
- 7Over time the substances reserved by the CPR varied. This appeal is only about the reservation of “petroleum.” The dispute over the meaning of Apetroleum@ is not new. Its meaning in a reservation similar to those at the core of this appeal was considered by the Judicial Committee of the Privy Council: Borys v. Canadian Pacific Railway,  2 D.L.R. 65, aff’g  3 D.L.R. 218 (Alta. C.A.), rev’g in part  4 D.L.R. 427 (Alta. S.C.).
- 8The parties agree that in the Borys appeal the Privy Council decided that because petroleum” included liquid hydrocarbons but not gaseous ones, ownership was governed by the phase of the hydrocarbon in the ground. They disagree on when the Privy Council said the determination of the phase was to be made. The appellants submit Borys held that the determination should be made when a molecule enters the well bore under ground, and the phase of the hydrocarbon at that point in time should be determinative. The respondents reply that the determination should be made at initial pool conditions, at the time of purchase prior to development. The respondents submit that the Supreme Court of Alberta, the Appellate Division and the Privy Council in Borys have already decided that phase changes should not alter relative ownership.
At no time did the appellants or the intervener ever submit that ownership should be determined when a “molecule enters the well bore”. Although the evidence before the Borys courts was that methane, the principle component of natural gas, is a gas at the molecular level whether it is dissolved in petroleum or whether it is in a free state, the Borys courts relied on the vernacular not the scientific meaning of the words in the CPR reservation as did the appellant and the intervener.
- 9When ownership is determined by the phase of a substance, as Borys held was the case for hydrocarbons, the moment in time that phase is examined becomes important. This is because an underground pool may contain hydrocarbons in both liquid and gas phases. Before the pool is perforated by drilling, the pressure and temperature remain relatively constant; so does the ratio of gas to liquid. But once the pool is invaded by drilling, the pressure in the pool changes, usually decreasing. This has a number of effects; the one of primary concern to this appeal is that some of the hydrocarbons in a liquid phase will “evolve” into a gas phase. Once this evolution happens, it is impossible to distinguish evolved gas from those hydrocarbons which were originally in a gasDepending on the initial pool conditions and other factors including production techniques, the amount of hydrocarbons that change phase can be quite significant. The appellants would prefer the determination of ownership based on phase to be made as late as possible to give more hydrocarbons the opportunity to evolve into a gas phase as it would maximize their entitlement. The Borys decision was that the petroleum reservation did not include those hydrocarbons naturally in a gas phase.
What the Privy Council in Borys decision actually said was that ”the reservation 'petroleum' did not include gas in solution in the liquid as it exists in the earth.” Furthermore, the fact that the appellants would prefer that the determination be made as late as possible so as to maximize their entitlement is irrelevant. Is Justice Major implying that the respondent oil companies wouldn’t prefer the determination to be made as early as possible so as to maximize their entitlement? The comment smacks of bias.
II. Judicial History
- 10Eighty-four separate law suits were filed by parties in relation to land once owned by the CPR, twenty-one were selected as test cases, and fifteen of those cases directly involved this particular type of split title issue. On July 20, 1997, Moore C.J. of the Alberta Court of Queen’s Bench, set out a preliminary question of law to determine the respective subsurface rights of the “Petroleum Owner” (the party owning petroleum, or coal and petroleum within or under the Split Title Lands) and the “Non-Petroleum owner” (the party owning all mines and minerals except petroleum, or coal and petroleum, within or under the Split Title Lands).
There were 21 law suits, not 84 and none were selected as test cases. Furthermore, as set forth at paragraph 14, Moore C.J. ordered a trial of two preliminary issues - the second issue being the duty of lessees to account to the respective owners. This second issue was ignored by all three levels of court.
- 11At trial, Fruman J. found the non-petroleum owners were entitled to: 1) primary gas cap gas; 2) primary gas cap gas which migrates from adjoining lands; 3) condensate and natural gas liquids that derive from primary gas cap gas. Primary gas cap gas refers to those hydrocarbons in gaseous phase in a mixed pool prior to human intervention while secondary gas cap gas refers to gaseous hydrocarbons which were originallyShe also held that the petroleum owners were entitled to: 1) evolved gas; 2) secondary gas cap gas which migrates from adjoining lands; 3) solution gas that emerges from connate water; and 4) condensate and natural gas liquids that derive from secondary gas cap gas ((1998), 63 Alta. L.R. (3 d) 1).
- 12The Court of Appeal dismissed the appeal except to the extent they did not agree that the petroleum owner was entitled to the gas from connate water. It said ((2002), 5 Alta. L.R. (4th) 54), at para. 53:
However, we do not agree with the trial judge’s conclusion that gas which emerges from connate water belongs to the petroleum owner. The reservation did not reserve water. Therefore, gas which was in solution within connate water at initial reservoir conditions does not belong to the petroleum owner. [Emphasis added.]
- 13The Court of Appeal did not determine who owned the hydrocarbons from connate water. It appears that in Alberta this water is owned by the province as a result of the Water Act, R.S.A. 2000, c. W-3. All of the parties to this appeal were content with this disposition by the Court of Appeal so that a determination of who is entitled to any hydrocarbons recovered from the connate water is no longer an issue here.
The issue before the Court is the ownership of hydrocarbons produced from a well on split title lands and the evidence was that approximately 1% of the gas produced from an oil well is gas which has evolved from connate water. The respondent oil companies were clearly content with this disposition, but there is nothing in either the written argument or the Supreme Court transcript to indicate that the appellants or the intervener was. Furthermore, the Water Act is not retroactive.
- 14The two preliminary questions set by Moore C.J. were:
(a) the ownership of hydrocarbons produced from a well drilled on Split Title Lands (as defined below) and the respective rights of:
(i) the Petroleum Owner (the party owning petroleum, or coal and petroleum within or under the Split Title Lands); and
(ii) the Non-Petroleum Owner (the party owning all mines and minerals except petroleum, or coal and petroleum, within or under the Split Title Lands); and
(b) The obligation of any lessee to account to the owner of the respective mineral interest for hydrocarbons produced.
“Split Title Lands” are lands in which all petroleum, or all coal and petroleum, was reserved unto the Petroleum Owner in a transfer to the Non-Petroleum owner prior to human disturbance of any subsurface reservoirs containing hydrocarbons within or under the lands.
As set forth in the notes to paragraph 1, the Petroleum Owner did not reserve “all petroleum”; it reserved all petroleum “which may be found to exist within, upon or under the lands”. This was presumably known to the respondent oil companies who assembled the title documents but was presumably not known to either the appellant freehold owners or Chief Justice Moore at the time the preliminary questions were prescribed.
- 15Only part (a) was addressed by the courts below and is the only question in this appeal.
- 16The history that led to these Split Title Lands has been previously outlined. In addition, the scientific evidence of the characteristics of hydrocarbons in the ground is also worthy of brief review.
A. The Science
- 17The expert evidence was that the substances that are often referred to as oil and gas are actually both similar hydrocarbons, and the general distinction is the phase they exist at under what is referred to as Standard Temperature and Pressure (ASTP@). At temperatures and pressures higher than STP, some “gas” will actually be found in liquid phase. The word gas is used to describe both the actual hydrocarbon substance and the phase of a substance, which understandably leads to some confusion when reading the cases. In addition, the substance gas referred to is properly described as natural gas and is not the petroleum product used to fuel most vehicle engines.
- 18In the ground, pools may initially contain only liquid hydrocarbons (oil pools), only gaseous hydrocarbons (gas pools), or a mixture of both (mixed pools). In addition to the hydrocarbons, a layer of water is also usually found on the bottom of all three types ofThis water is referred to as connate water.
- 19Prior to human intervention, a pool will be under relatively stable pressure and temperature conditions, and the ratio of gas phase to liquid phase hydrocarbons also remains fairly constant. When a pool is drilled into, the pressure changes, causing phase changes which alter this ratio. Some of the hydrocarbons originally found in liquid phase will, if there is a reduction in pressure, “evolve” into gas phase. As in the courts below, I refer to this as “evolved gas”. This evolved gas is, technically, natural gas - it would tend to be in gas phase at STP. But in the pool, prior to human intervention, the “evolved gas” was in liquid phase. The dispute in Borys was about entitlement to all natural gas in the pool, while the current dispute centres on this evolved gas.
B. What Did Borys Decide?
- 20In the late 1940s, significant amounts of oil were found near Leduc, Alberta, production and exploration was at a high pitch, and oil and gas law was in its infancy but evolving. Borys was a farmer who obtained title to his land from the CPR subject to a petroleum reservation similar to the one at issue in these appeals. When Imperial Oil Ltd. (“Imperial”) began drilling on his lands, Borys sued to determine a question that had been inevitable from the moment both oil and gas were discovered under Split Title Lands - what was included in the reservation of “petroleum”?
- 21Borys’ argument was that gas was not included in the reservation of petroleum. He challenged Imperial’s right to produce oil, arguing it would interfere with his natural gas. Imperial counterclaimed and submitted that petroleum be given one of the following three progressively less inclusive definitions: 1) petroleum included all hydrocarbons in the pool, regardless of phase; 2) if the reservation did not include the ownership of the gas, it did include the right to work, win or carry away the gas; and 3) at the very least, the petroleum reservation included the right to all liquid hydrocarbons in the ground.
This is incorrect. Imperial had no interest in the petroleum before it was found to exist because the CPR could lease unto Imperial no greater interest than the CPR held - the railway company had a reservation of all petroleum which might be found to exist - the dissenting Court of Appeal decision in Borys clearly sets forth Imperial’s counterclaim to the substances which may be found to exist and the fact that Imperial has leased the petroleum “which may be found within, upon or under” Borys land. (Borys v CPR and Imperial  3 D.L.R. 218, 219)
- 22Howson C.J.T.D. decided the vernacular, not the scientific, meaning of petroleum was to govern what was reserved from the transfer. He found petroleum included only “mineral oil”, by which it can be assumed he meant crude oil and not the medication. He decided Borys was entitled to all natural gas under his land even if it was in solution with the liquid, and that Imperial could not continue drilling if it would interfere with the natural gas in any way (pp. 443-44).
- 23Parlee J.A. for the majority on appeal agreed with the trial judge that the vernacular meaning of petroleum at the time of the transfer was to govern its interpretation. But he did not agree that this limited CPR’s rights to actual mineral oil. He determined that the reservation gave CPR rights to all liquid hydrocarbons in the ground, regardless of any subsequent phase changes (p. 230). He also found the petroleum owners had the right to work and recover their oil, even if it interfered with Borys’ gas (p. 237).
What Parlee J.A. actually said at p. 230 was this:
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. (Emphasis added)
Clearly, the subsequent phase changes which Parlee J.A. referred to at p. 230 as not affecting original ownership were the phase changes which occurred in the well bore after the hydrocarbons had entered the bottom of the well and been recovered. The true question is what he meant by ‘original ownership’. In the balance of his decision, Parlee J.A. made it clear that water, oil and gas were peculiar substances that were to be classed by themselves (p. 233) and that gas in the earth is subject to the same principles of law as subterranean water (p. 237). It has been settled law for more than a century that subterranean water cannot be owned until it is recovered.
- 24The Judicial Committee of the Privy Council agreed with the Alberta courts that in determining “the meaning which is to be attributed to ‘petroleum’ in the original reservation”, the vernacular meaning at the time of the transfer should be used, if one could be discerned (p. 70). Their Lordships recognized that the meaning of petroleum could “vary according to the circumstances in which is used”, and then defined it only for the purposes of the reservation (p. 71). The Privy Council had to decide what petroleum meant in relation to a substance in the ground. On that, they concluded that it reserved to the CPR all liquid hydrocarbons in the ground (p. 74). They also upheld the Appellate Division’s finding that the reservation included an implied right to work and produce the petroleum (p. 79). (emphasis added)
This is what H.H. Somerville, Deputy Minister of Mines and Minerals had to say about the underlined Privy Council statement in a February 6, 1953 memorandum to Ernest C. Manning who then held the dual roles of Minister of Mines and Minerals and Premier of Alberta:
“This statement would lead one to believe that petroleum may have varying meanings according to circumstances such as location of the tract of land, the nature of the product existing in the formation, determination of whether the gas cap was created by nature or by producing operations of man, etc.”
What the Privy Council actually concluded at p. 74 was that “all the petroleum reserved, including all hydrocarbons in solution or contained in the liquid in the ground, is the property of the” CPR - the CPR had reserved all petroleum which may be found to exist within, upon or under Mr. Borys’ lands.
- 25The parties agree that three points were determined by Borys:
1) the petroleum owner is entitled to all liquid hydrocarbons in the pool, while the non-petroleum owner is entitled to all hydrocarbons in gas phase;
2) the determination of ownership, based on phase is to be made in the ground; and
3) the petroleum reservation included an implied right to work and produce the product.
- 26The parties disagree in their interpretation of Borys over what mistakenly appears to be a minor detail but which in fact is of significant economic importance. The dispute is over what point the Privy Council found was the appropriate time to determine what phase a molecule of hydrocarbon was in and therefore to whom it
As per Par. 8, the Privy Council had no interest in molecules and the dispute has nothing to do with molecules.
- 27The appellants submit that in Borys the Privy Council decided ownership is to be determined based on the phase of the hydrocarbon only at the time of recovery in the ground. They interpret this as the point in time when the hydrocarbon first enters the well bore. As the pressure in a pool decreases after development, more liquid evolves into gas phase over time. The interpretation of Borys sought by the appellants would maximize their entitlement because the hydrocarbons within the pool will have the most opportunity to evolve into gas phase.
As per Par. 9, both sides to the dispute seek to maximize their entitlement and there is no reason for Justice Major to single out the appellants.
- 28The respondents contend, and I agree, that both the Appellate Division and the Privy Council held that the time for interpreting petroleum and determining relative ownership was at the time of the contract as opposed to the time ofThe rationale for this was that the pools had not been interfered with by human contact at the time of the reservations, and it is therefore the appropriate time to determine the phase of the hydrocarbons.
Nowhere in the Privy Council decision is there any reference to the pool prior to human interference, at the time of the contract or at any time other than the time the substances are recovered. Justice Major may believe that the appropriate time to determine the phase of the hydrocarbons for ownership determination is at the time of the reservations, and the Supreme Court has the authority to make this ruling if it wishes. But it is incorrect to attribute this rationale to the Privy Council. In fact, the Privy Council stated exactly the opposite - in summarizing the Appellate Division decision it upheld the Privy Council stated:
... the Court of Appeal adopted a compromise, viz., the condition of the substance as it emerges from time to time from the reservoir.
The Privy Council’s summary is critical to any reasonable interpretation of the Borys decision, yet Justice Major makes no mention whatsoever of this summary nor of the trial judge’s remarkable assertion that this summary was “wrong”.
Deputy Minister Somerville cited the following from the Privy Council’s ruling the time for determining relative ownership:
“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.”
Based on this quote Deputy Minister Somerville opined:
“From the context it would seem that the word ‘emerged’ where it occurs in both instances means ‘emerged from the reservoir’ and not at the surface orifice of the well.”
- 29Parlee J.A. held that petroleum included all liquid hydrocarbons in a pool and expressly stated that this ownership should not be affected by subsequent phase changes (at p. 230):
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, 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 [statutory] provisions and regulations.
All gas not included in the reservation of petroleum as indicated is the property of the plaintiff. [Emphasis added.]
As per Paragraph 23, the phase change referred to by Parlee J.A. is the phase change which occurs in the well bore after the liquid has been recovered and the real question is what he meant by ‘original ownership’. Justice Major makes no reference to the fact that in the next 7 pages of his decision Justice Parlee makes it clear that he considered water, oil and gas to be substances which were to be classed by themselves and were subject to the same principles of law - ie they cannot be owned until reduced to possession.
- 30The appellants isolated certain words and phrases from this passage in an attempt to support theirThey pointed to “exists” and “existing” as an indication that Parlee J.A. intended the phase of the hydrocarbons was to be determined from time to time, and argued that if he wanted the ownership ratio to remain fixed in the past he would have used “existed”. The appellants make a similar argument in relation to the phrase “original ownership”. They submit this acknowledges that ownership may change over time, and argue this supports their view that relative ownership is not decided until the substance is reduced to possession. I agree with the rejection of these arguments by the courts below. The tense of the word “exists” that Parlee J.A. chose to use does not negate the fact that he was focussed on determining the meaning of petroleum at the time of the reservation and must be read in the context of the entire judgment. The use of the phrase “original ownership” indicates that Parlee J.A. was only interested in determining what interest each party received as a result of the transfer, and not the effects of any subsequent transfers of those interests.
The use of the present tense by Parlee supports ownership determination at the time the hydrocarbons are recovered at the bottom of the well bore but this point was not raised in either written or verbal argument before the Supreme Court.
Justice Major is correct that Parlee J.A. was focused on the meaning of petroleum at the time of the reservation. He found that the word petroleum included gas in solution in the ground. This in no way alters the fact that the CPR did not reserve the petroleum that existed in the ground at the time of the reservation, it reserved all petroleum “which may be found to exist within, upon or under Borys’ lands - ie all petroleum which might in future be found. The petroleum which was found to exist beneath Mr. Borys’ lands when Imperial’s well was completed in 1953 was not the same petroleum, in volume or composition, as existed at the time of the reservation. The Leduc Woodbend D-3 pool is an oil pool with a gas cap (a ‘mixed pool’ in the Court’s terminology) which had been on production since 1947. Parlee J.A. knew that changes in composition and relative volumes of gas and oil take place throughout a mixed pool once the pool is brought on production because Imperial and the CPR had retained experts to describe the phenomena.
If Parlee J.A.’s words “must be read in the context of the entire judgment”, why does Justice Major make no reference to Parlee J.A.’s statement that gas, oil and water are subject to the same principles of law - ie cannot be owned prior to recovery? And why does he make no reference to the actual words in the transfer agreement?
- 31The Privy Council recognized the complications that could be caused by phase change and sought to minimize these by determining ownership based upon the most stable conditions possible. Lord Porter found that the most stability and certainty would be while the substances were still in the ground. Because he was fully aware of the phase changes that occur in a pool once it was drilled into, it is implicit that he intended relative ownership to be based on conditions in the ground prior to humanThis is the only interpretation that is consistent with his desire for stability (at p. 71):
To discriminate between two substances, found in solution, one from the other is difficult enough in any case, but when changes of temperature and pressure can alter the respective relative quantities of one and the other, the difficulty is enhanced. In the ground there is a distinction; one is then liquid and the other gaseous and the liquid may naturally be called petroleum and the gaseous gas. Any other distinction must depend on a purely conventional assumption that liquid at a particular temperature and pressure corresponding more or less to that found on the surface of the earth is petroleum and the rest of the substance is gas. This is a purely chemical formula and in no way elucidates the meaning which the word bears on the lips of landowners, business men or engineers, and except as a convenient conventional formula has no logical basis. [Emphasis added.]
Yes, Lord Porter was fully aware of the phase changes that occur in a pool once production starts because the CPR and Imperial retained what the CPR described as “an array of the world’s greatest living scientists to give evidence”. But it is not implicit that Lord Porter intended relative ownership to be based on conditions in the ground prior to human intervention. Exactly the opposite is implicit because in Borys the experts retained by the CPR and Imperial testified that in a mixed pool the difficulties in determining ownership based on the substances phase condition prior to human disturbance would be “physically and practically insurmountable”.
The evidence before the courts in the 1990's ownership trial was essentially the same - certainty in ownership can be achieved if ownership is determined pursuant to Lord Porter’s summary of the Appellate Division decision he upheld – “the condition of the substance as it emerges from time to time from the reservoir”, but it cannot be achieved based on Justice Major’s prior to human intervention concept because, as acknowledged by Justice Major at Par. 9, once gas begins to evolve from petroleum it merges with and becomes indistinguishable from any pre-existing gas.
- 32The Privy Council determined that the evidence provided at the trial was not directed to determining the vernacular meaning of petroleum in the ground. As a result, Lord Porter said they had to “form their own opinion purely as a matter of construction as to the meaning which the word ‘petroleum’ bears when the substance referred to is in situ in a container below ground” (at p. 73). Their Lordships expressly agreed with the above passage from Parlee J.A.’s judgment on the meaning of petroleum (pp. 73-74).
- 33While plain English has its admirers, Lord Porter’s use of the latin phrase “in situ” provides a precise indication that his focus was on the substances in their original position. This pre-development position was in the ground, in a pool that had never been subjected to human intervention.
The literal translation of the phrase ‘in situ’ is ‘in place’ and the “precise indication” which Justice Major attributes to the phrase ‘in situ’ lies in the eye of the beholder.
- 34There is no doubt that the Privy Council was concerned with what was included in the reservation of petroleum at the time of the transfer. When the contracts for the transfer of land in Borys and in the current appeals were agreed to, the pools of hydrocarbons under the lands had not been disturbed. Borys should be read as indicating it is the initial conditions of the pool that govern the relative ownership between the parties to those original contracts. As Lord Porter recognized, “petroleum” can have many meanings. For the purposes of these reservations, “petroleum” includes all hydrocarbons in liquid phase under the tract of land prior to any development. Phase changes that occur once a pool is drilled into do not affect the ratio of hydrocarbons the petroleum owner and the non-petroleum owner are entitled to.
Justice Major and the Supreme Court can decide that the word ‘petroleum’ includes ice cream if they want. The Privy Council clearly stated that “petroleum means a substance formed from a hydrocarbon admixture in its liquid form when in position in its container under ground”.These words have no prior to human disturbance or development connotation and the Privy Council clearly focussed on the vernacular. It can only be described as silly to claim that the vernacular or everyday meaning of petroleum in the early 1900's or at any other time meant “prior to any development” particularly when the ‘which may be found to exist’ words used by the CPR to describe the petroleum it reserved have a clear contingent and prospective meaning.
C. Ownership Theory
- 35The traditional categories of property law may not easily match the realities of oil and gas ownership, a problem this Court acknowledged in Bank of Montreal v. Dynex Petroleum Ltd.,  1 S.C.R. 146, 2002 SCC 7. The traditional categories of property law are not to be indiscriminately applied; similarly a new view of global ownership theory for oil and gas must be subject to the same caution. There is no need to determine an overarching ownership theory in this appeal because the question posed by Moore C.J. simply asks for a determination of the respective rights of the petroleum and non-petroleum owners. Borys decided that the reservation of petroleum determined the parties’ interest at the time of the transfer. The appellants raise two ownership theory arguments based on possession, and these need to be considered to see if they distinguish this case from the Borys decision.
The “new view of global ownership theory” referred to by Justice Major has been the law in the all oil and gas producing jurisdiction for more than a century - what you own is what you recover in a well legally drilled on your lands.
- 36The appellants submitted that Canada is not an ownership in situ jurisdiction and therefore no rights vest in hydrocarbons until they are reduced to possession. They relied on this ownership theory as support for their position that it is not until the time of possession that the phase of the hydrocarbon becomes important for determining ownership, because no one has any rights before that. This is the type of broad ownership theory that is not required to be determined in this appeal. Irrespective of any other rights the parties may have in relation to the hydrocarbons in the ground, they chose to divide their interest by contract. It is not open to later argue that division was meaningless on the basis that no rights can attach until the substance is reduced to possession. When the substance, which was not in their possession at the time of the contract, is reduced to possession, the date and terms of the contract govern their relative entitlement.
An ‘ownership in situ jurisdiction’ is a creature of Justice Major’s creation and the appellants did not use this term. There are two basic oil and gas ownership theories. In an ‘ownership in place’ jurisdiction hydrocarbons are owned in the ground prior to their recovery but this ownership is subject to the rule of capture. In a ‘non or qualified ownership’ jurisdiction hydrocarbons cannot be owned until they are reduced to possession or captured. Both jurisdictions have the same effect - what you own is what you capture in a well legally drilled on your lands. The appellants submitted that Canada is not an ownership in place jurisdiction.
If Canada is not an ownership in situ (referred to as ownership in place by legal scholars) jurisdiction, neither the CPR nor the homesteaders owned the hydrocarbons beneath their lands until they were reduced to possession. Only if Canada is an ownership in place jurisdiction, is there any possibility of owning hydrocarbons prior to recovery.
If however Canada is an ownership in place jurisdiction, then, according to Justice Major, the words in the contract by which the parties chose to divide their interest govern their relative entitlement and “It is not open to later argue that division was meaningless ...”. The CPR sold the entire fee simple interest to Mr. Borys reserving “all coal, petroleum and valuable stone which may be found to exist within, upon or under” his lands. The words “which may be found to exist” define and describe the petroleum reserved and by ignoring the prospective nature of these words Justice Major is doing exactly what he claims is not open to be done.
- 37The appellants also relied upon the “rule of capture” to support their position that evolved gas belonged to them. The rule of capture developed as a rule of non-liability between owners of separate tracts of land. Since underground pools often extend beyond a single tract of land, it prevents A from having a valid claim against B when B captures from under his land a substance that was originally under A’s land. In Borys, Lord Porter found this rule would apply to oil and gas and A’s only remedy was to drill its own well and begin production. The unhindered application of this rule would lead to a race to produce, and because this uncontrolled development actually reduces overall hydrocarbon recovery, that rule has been subsumed by the regulatory environmental reserve and preservation provisions of legislation such as the Oil and Gas Conservation Act, R.S.A 2000, c. O-
- 38The appellants did not seek an unbridled application of the rule of capture to phase changes that occur in the ground but instead a modified extension of thisThey submitted that when hydrocarbons which were initially in liquid form enter the well bore in gas phase, they should be said to be “captured” by the gas owner, regardless of whose well it is. In essence, they would like the rule of capture to only apply until that point in time when the phase change occurs. This illogical use of the rule cannot be right. If the rule were applied to defeat the original ownership division based on phase, it follows that all ownership based on phase could be defeated.
Neither the appellants nor the intervener argued any such thing. It was argued that the rule of capture or the qualified ownership theory exists in every oil and gas producing jurisdiction because the nature of oil and gas is such that these substances cannot be traced backward in time and space to their original phase condition or location with the certainty required to establish original ownership. Furthermore, the rule of capture or qualified ownership theory has not been ‘subsumed’ by conservation regulation and continues to apply in every oil and gas producing jurisdiction in the world including Alberta.
Hydrocarbons which were originally in liquid phase and enter the well bore in gaseous phase are ‘captured’ by the operator of the well, not the gas owner or the petroleum owner. Well operators typically have both a petroleum lease with the CPR’s successor corporation and a natural gas lease with the descendants of the homesteaders. Well operators should have historically decided who owns the hydrocarbons based on the Borys decision and paid royalties accordingly, but the operators who were the respondents before the Supreme Court have a conflict of interest in this regard due to the contractual demands of the CPR. Each of the 5 petroleum leases before the Supreme Court require the lessee to pay the CPR a royalty on hydrocarbons owned by the natural gas owners and to indemnify the petroleum owner for any damages or court costs which might be levied against the CPR in result. Justice Major did not comment upon these leases in his judgment.
During verbal argument, counsel for the petroleum owner attempted to explain to the Court why the CPR leases of petroleum before the Court would require the petroleum lessee to pay the CPR a royalty on gas not owned by the CPR. Justice Major interrupted this explanation to ask what the price of gas was in the early 1960's when the lease was signed. The CPR’s counsel replied that he did not know. Justice Major then responded “I’d be right that it was pennies”.
The low price of gas half a century ago may explain why energy companies would have agreed to sign petroleum leases in which they were obligated to pay royalties to the CPR on substances the CPR didn’t own and to indemnify the CPR and its successors for any damages or costs in the event the gas owner discovered what was going on and succeeded in a legal action. The low price of gas in the 1960’s has nothing to do with the issue of whether the lower courts were correct in finding that settled expectations arose from these petroleum leases
In his February 6, 1953 memorandum to Premier Manning, Deputy Minister Somerville discussed the difficulties in distinguishing petroleum from natural gas pursuant to the Privy Council ruling in Borys and concluded as follows:
“I think that the Canadian Pacific Railway Company should be left to work out its own solutions. At the moment there appears to be no simple division between petroleum and natural gas and even though requests may be made for the enactment of a statute prescribing a division I do not think that this procedure should be favourably considered until we have particulars on several specific instances where the Canadian Pacific Railway Company has failed to agree to a fair and equitable division.”
The late Messrs. Somerville and Manning were men of renowned intelligence and integrity and the solution worked out by the CPR and its successors as evidenced by the lease agreements before the Supreme Court would presumably have appalled them as it does FHOA. The Supreme Court and the Courts below apparently dance to a different drummer.
- 39The rule of capture does not apply to the division of ownership by phase as it does to divisions of ownership based on surface land ownership. Applying the rule of capture to parties who have agreed to divide their interest under the same tract of land would defeat the purpose of the contract. This is because if it applied, the party who reduced the substance to possession by drilling the well and producing the hydrocarbons would be entitled to all of them, and the other party would have no claim. At the time the CPR sold the land to the settler they agreed to divide the property on certain terms. To hold that either party could later take the other party’s property with impunity would defeat the purpose of the reservation.
Justice Major apparently does not understand how conservation regulations impact the rule of capture - in Canada these regulations require a well licensee to be entitled to produce the substances captured in the well bore. In split title situations, the gas owner has the right to produce everything in the subsurface but the substances reserved by the CPR. The CPR and its successors have (or should have) the right to produce all petroleum which may be found to exist - ie the liquid hydrocarbons which they recover.
It is not the rule of capture that defeats the purpose of the contract, but Justice Major’s failure to honour the terms of the contract. The “certain terms” under which the parties agreed to divide the property provided the CPR with the right to all petroleum (all liquid hydrocarbons in the ground) “which may be found to exist” within the lands it sold to the settlers. No liquid hydrocarbons had been found to exist in the early 1900's at the time of the contract. Petroleum cannot be ‘found’ without drilling a well and recovering the liquid.
- 40The appellants submit that dividing ownership based upon original conditions will lead to great uncertainty in quantifying their respective interests. Fruman J. answered this concern by explaining that the entire industry relies on estimates of what is under the surface, and these estimates have to suffice for dividing up ownership as well. The fact that modern estimation techniques are more advanced and more accurate than those in existence in 1953 when the Privy Council first determined that original conditions in the ground governed relative ownership supports the trial judge’s
The fact that the entire industry relies on estimates of what is under the surface and that estimation techniques have advanced since 1953 is irrelevant to ownership determination. Gas has no label and in oil pools with gas caps it remains impossible to separate the evolved and gas cap components of the produced gas stream.
- 41In addition, while the estimates will no doubt be the subject of some debate, no system is flawless and a determination made at the time of recovery could be subject to manipulation by a dishonest producer. Improved production techniques help to accurately monitor the evolution of liquid hydrocarbons into gas phase, but for the foreseeable future this measurement will also lack perfection.
What about the so-called ‘dishonest producer’ who decides to honour the contractual demands of the petroleum owner for royalties on substances it doesn’t own and not pay the individual freehold owner of natural gas so as to avoid double royalties?
- 42In my opinion the courts below were correct to find that Borys decided the reservation of petroleum included all hydrocarbons which were in liquid phase in the ground at the time of the transaction. The Alberta courts’ answer to the preliminary questions posed by Moore C.J. was:
a) The petroleum owner is entitled to all hydrocarbons which were in liquid phase at initial pool conditions, regardless of the phase they are in when recovered.
b) The non-petroleum owner is entitled to all hydrocarbons which were in gas phase at initial pool conditions, regardless of the phase they are in at time of recovery.
This division will apply to hydrocarbons which migrate from under other lands, subject of course to any regulatory mitigation of the rule of capture. The only hydrocarbons in the well which this decision does not deal with are those which are dissolved in the connate water at initial conditions.
- 43The trial judge considered the issue of costs in detail and as this was within her discretion no variation to her order should be made. We agree with the Court of Appeal that she made no reviewable error in exercising this discretion.
- 44In the Split Title Lands at issue in this appeal, the reservation of petroleum divided the ownership interest in oil and gas on the basis of the phase the hydrocarbon was in under initial conditions at the time of the contract for the sale of the property. Any phase changes which occur after the well is drilled into a pool does not alter the ratio of ownership created by the reservation. This applies between the parties to the original contract and to those who derive their interest from these parties. As a result, the appeal is dismissed with costs to the respondents.
Canada’s highest court has ruled that hundreds of millions of dollars worth of evolved gas production belongs to Canada’s largest independent energy company and not to thousands of individual Canadians. In reaching this decision, Canada’s highest court:
a) refused to consider oil and gas ownership theory ostensibly because the parties divided their interest by contract;
b) ignored the plain meaning of the words in the contract; and
c) failed to address a conflicting conclusion of law in the ruling of a court of equivalent jurisdiction.
To add insult to injury, the Supreme Court confirmed the lower courts cost decisions and added their own costs.
The Supreme Court has decided a preliminary issue of law. The freeholders who were ordered to pay almost $750,000 to the involved oil companies did not seek a trial of preliminary issues. They sought trials of their own legal actions. The trial of preliminary issues was ordered by the Chief Justice of the Court of Queen’s Bench of Alberta at the request of the involved energy companies. In the 21 legal actions underlying the preliminary issue of law it is alleged that the freeholders have been deprived of royalties on gas cap gas which royalties were paid to the CPR and its successors - the same gas which the Supreme Court has confirmed belongs to the freeholders. What possible justification can there be for any court to award costs against any plaintiff in a preliminary issue of law ordered by the court before the merit of the plaintiff’s legal action has been heard?
Glossary of Terms
1) Agreed Terms (from trial judgment, para. 15)
“Compound” - any substance containing two or more elements chemically combined in specific proportions.
“Hydrocarbon” - a Compound made up of the elements carbon and hydrogen which may or may not contain traces of the elements sulphur, nitrogen and oxygen.
“Phase” - a distinct physical state of matter; all matter exists in one or more of three physical states: gas, liquid or solid.
“Fluid” - a substance which has a low resistance to flow and a tendency to assume the shape of its container.
“Liquid” - a Fluid which occupies a definite volume. A liquid Fluid is the more dense of two equilibrium Phase Fluids separated by an interface or any single Phase Fluid having properties such as density, viscosity, etc. similar to those normally associated with the more dense of two equilibrium Phase Fluids.
“Gaseous” - a Fluid which expands to occupy its container. A gaseous Fluid is the less dense of two equilibrium Phase Fluids separated by an interface or any single Phase Fluid having properties such as density, viscosity, etc. similar to those normally associated with the less dense of two equilibrium Phase Fluids.
“Hydrocarbon Solution” - a mixture of Hydrocarbons in a single Phase Fluid.
“Reservoir” - a porous, permeable rock formation or formations capable of containing and transmitting Fluids.
“Pool” - a natural underground Reservoir containing or appearing to contain an accumulation of Gaseous or Liquid Hydrocarbon Solutions or both, and separated or appearing to be separated from any other accumulation.
“Standard Temperature and Pressure” - temperature and pressure used for reporting Hydrocarbon Solution volumes (15 degrees C. and 101.325 kPa, respectively).
“Mixed Pool” - a Pool containing or appearing to contain an accumulation of both Gaseous and Liquid Hydrocarbon Solutions.
2) Other Defined Terms (not agreed to by the parties, but defined by the trial judge, at para. 17)
“Solution gas” means gas which is dissolved in liquid hydrocarbons in the pool prior to human disturbance, but emerges as gas at the surface.
“Evolved gas” or “secondary gas cap gas” means solution gas which emerges from liquid hydrocarbons in the pool due to changes in pressure.
“Free gas” or “primary gas cap gas” means hydrocarbons in a gaseous phase in the pool under initial reservoir conditions. I do not include any solution gas, evolved gas or secondary gas cap gas in this definition.
“Condensate” means hydrocarbons which are in gaseous phase in the pool, dissolved in primary gas cap gas or secondary gas cap gas, but are recovered in liquid phase at surface pressure and temperature.
“Natural gas liquids” means hydrocarbons which are in a gaseous phase in the pool, dissolved in primary gas cap gas or secondary gas cap gas, are still in gaseous phase at surface pressure and temperature, but are recovered in processing plants as liquids under higher pressure or lower temperature than surface conditions.
“Connate water” means all water present in a pool. It includes water present within the voids or pores, edge water and bottom water.
The terms “initial reservoir conditions”, “virgin reservoir conditions”, “prior to human disturbance” and “prior to human intervention” are used interchangeably. Because of the distinction the parties have made between “reservoir” and “pool” in the glossary of agreed terms, initial or virgin reservoir conditions also mean initial or virgin pool conditions.
Appeal dismissed with costs.
Solicitors for the appellants: Machida Mack Shewchuk, Calgary.
Solicitors for the respondents Amoco Canada Oil and Gas, Amoco Canada Resources Ltd., Amoco Canada Energy Ltd., 3061434 Canada Ltd. and Ocelot Energy Inc.: Bennett Jones, Calgary.
Solicitors for the respondents Gulf Canada Resources Limited, Morgan Hydrocarbons Inc., Murphy Oil Company Ltd., Canadian Gulf Oil Company, Gulf Canada Limited and Gulf Canada Properties Limited: Borden Ladner Gervais, Calgary.
Solicitors for the respondents Petro‑Canada, Canol Resources Ltd., Dominion Explorers Inc., International Oiltex Ltd., Canadian Fina Oil Limited, Petrofina Canada Ltd., Petro‑Canada Enterprises Inc. and Petro‑Canada Inc.: Davis & Company, Calgary.
Solicitors for the respondent Talisman Energy Inc. and Encor Energy Corporation: MacLeod Dixon, Calgary.
Solicitors for the respondents Canadian Pacific Limited and PanCanadian Petroleum Limited: Parlee McLaws, Calgary.
Solicitors for the respondents Home Oil Company Limited, 227096 Oil & Gas Ltd., Husky Oil Operations Ltd., Conwest Exploration Company Limited, Canada Northwest Energy Limited and Serenpet Exploration Inc.: Carscallen Lockwood Cormie, Calgary.
Solicitors for the respondents Imperial Oil Limited, Imperial Oil Resources, Imperial Oil Resources Limited, Imperial Oil Resources Production Limited, McColl‑Frontenac Inc., Imperial Oil Limited and Atlantic Richfield Company: Gowling Lafleur Henderson, Calgary.
Solicitors for the respondents Jethro Development Ltd., Kerr‑McGee Canada Ltd., Gascan Resources Ltd. and Lincoln‑McKay Development Company Ltd.: Fraser Milner Casgrain, Calgary.
Solicitors for the respondents Mobil Oil Canada, Mobil Oil Canada Ltd., Royal Trust Energy Resources II Corporation, RTEC One Resources Inc., Suncor Inc., Gentra One Resources Inc., Westrock Energy Resources II Corporation, Mobil Resources Ltd. and Canpar Holdings Ltd.: Burnet, Duckworth & Palmer, Calgary.
Solicitors for the respondent Apache Corporation: Peacock Linder Halt, Calgary.
Solicitors for the intervener Freehold Petroleum & Natural Gas Owners Association: Rae and Company, Calgary.