Since inception, one of FHOA’s principal concerns has been the continuation of freehold leases beyond their primary terms, sometimes for decades, under shut-in or suspended well clauses with token annual payments to the freehold owners and wells which are essentially dry holes.
The vast majority of freehold leases entered into in western Canada in the past quarter century have been either CAPL 88 leases, CAPL 91 leases or leases based on these lease forms. Under the suspended wells clause in both the CAPL 88 and the CAPL 91 lease, the lessee may continue the lease beyond its primary term with a well which is shut-in or suspended irrespective of the reason. The only requirements are that an annual payment (almost invariably $1 per leased acre) be made to the freehold owner-lessor and that the well be “capable of producing the leased substances”. Traditionally, many Canadian energy companies have interpreted this ‘capable of producing’ wording to provide them with the authority to continue a freehold lease with a well capable of producing the leased substance in any quantity, no matter how insignificant. According to one member of the CAPL Freehold Mineral Lease Committee, “The consequence of the existing language is that, in effect, any non-abandoned well can technically hold a lease.”1
The meaning of the phrase ‘capable of producing the leased substances’ in a CAPL 91 freehold lease came before the Alberta Energy Regulator (formerly known as the “Energy Resources Conservation Board”) (the “AER (formerly known as the “ERCB”)”) in a 2009 hearing in which one energy company effectively challenged the CAPL 91 lease of another energy company that was relying of the suspended well clause to continue the lease with a suspended well. The AER (formerly known as the “ERCB”) granted FHOA the right to fully participate in this hearing on its own behalf and on behalf of the FHOA member whose freehold mineral rights were in issue. FHOA also supported the intervention of the FHOA member in the subsequent appeal of the AER (formerly known as the “ERCB”) ruling to the Court of Appeal of Alberta.
On September 7, 2011, the Appeal Court released what has been described by energy company lawyers as a ‘landmark’2 ruling which “may impact thousands of oil and gas leases in Alberta and has significant implications for industry”3. In Omers Energy Inc. v. Alberta (Alberta Energy Regulator (formerly known as the “Energy Resources Conservation Board”), the Court ruled that for an energy company-lessee to rely on the suspended wells clause in a CAPL 91 lease the well must be capable of producing a meaningful volume of production in its existing state and configuration without requiring further operations. According to the Court, a ‘meaningful volume ’ was a quantity “... sufficient to provide a reasonable expectation of profits ...”4
The Appeal Court ruling will benefit many freehold owners whose mineral rights have been sterilized by shut-in wells which are effectively dry holes.
Canadian regulatory and judicial hearings involving freehold mineral rights have almost invariably been contests between energy companies. The freehold owner whose property rights are in issue has seldom been represented. The ‘capable of producing the leased substances’ rulings of both the AER (formerly known as the “ERCB”) and the Alberta Court of Appeal abundantly demonstrate the value of an association such as FHOA that can represent the interests of freehold owners in regulatory and judicial hearings.
1. The Suspended Well Clause in the CAPL Freehold Mineral Lease and Proposal for Deep Right Reversion, Moran, S.J., Working with the Oil and Gas Lease, Insight Press, 1998, p. 179
2. Alberta Court of Appeal Delivers Landmark Oil and Gas Ruling, Blakes, Cassels and Graydon LLP, Sept. 21, 2011
3. Canada: Omers Energy Inc. v. (Alberta Energy Regulator (formerly known as the “Energy Resources Conservation Board”)), Borden Ladner Gervais LLP, Oct. 18, 2011
4. http://www2.albertacourts.ab.ca/jdb/2003-/ca/civil/2011/2011abca0251.pdf, par. 81, 97