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| FHOA's
Concerns » The Split-Title Problem
» 1920's Turner Valley Controversy
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| 1920's - THE TURNER VALLEY CONTROVERSY | |
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In 1906, a settler from Montana named Michael Stoos
had purchased homestead lands from the CPR along the Sheep River in the Turner Valley area of Alberta. The railway company had retained the
rights to petroleum. The shale beds along the banks of the Sheep River as it passes through the lands acquired
by Mr. Stoos form a fold or anticline
and gas seeps from these shale beds. This gas seep attracted
the interest of William S. Herron who has been referred to as
the "father of the petroleum industry in Alberta"1. Herron applied to both the CPR and to
the Dominion Government for leases in the area. In 1911, Herron
reportedly fried eggs over the gas seep with R.B. Bennett2, a lawyer who then acted as the CPR's
Calgary solicitor. That same year, Herron purchased
Stoos' land for $18,000. In 1912,
a group of prominent Calgary citizens, including Bennett, A.E. Cross, W. H. McLaws, J. A. Lougheed, and W. Pearce purchased a majority interest in Herron's
company, Calgary Petroleum Products Co. Ltd., and committed
to spend $50,000 developing the properties which Herron had
transferred to the company.3 On May 14, 1914, Calgary Petroleum Product's
first well, Dingman No. 1, discovered
'wet gas' on a Dominion Government lease adjacent to the Sheep
River seep. Unlike dry gas, wet gas in the subsurface contains
significant quantities of normally liquid hydrocarbons dissolved
in gaseous solution. When the temperature drops as wet gas is
produced at surface, measurable quantities of hydrocarbon liquids
condense from gaseous solution (see "The
Nature of Oil and Gas and their Ownership").
Dingman No. 1 initially produced approximately
1 million cubic feet per day of wet gas which, when passed through
a surface separator yielded what was described by Calgary newspapers as "practically pure
gasoline"4.
The next day, P.L. Naismith, Manager
of the CPR's Department of Natural Resources, described these
hydrocarbon liquids as "oil" in a telegram
to the CPR's Montreal headquarters. In another telegram, three
days later, Naismith described the
scene in downtown Calgary as follows: "for two or three
days the police have had to take charge of the crown on First
Street west, the street being practically overcrowded with people
endeavouring to get into various offices
to purchase stock"5. Alberta's first 'oil' boom dissipated with
the outbreak of World War I. Calgary Petroleum Products drilled
a successful follow-up well (Dingman
No. 2) and spudded a third well (Dingman
No. 3), but was unable to secure the financing necessary to
fully develop its properties. Disaster struck the company in
1920 in the form of a fire which destroyed the plant it had
built to strip gasoline from the gas produced from Dingman
No. 1 and No. 2. R. B. Bennett then approached A. M. McQueen,
Vice-President of Imperial Oil Limited, and arranged for the
assets of Calgary Petroleum Products to be transferred into
a new corporation called Royalite
Oil Company. The former shareholders of Calgary Petroleum Products
acquired 25% of the shares of Royalite,
Imperial retained 75% and committed to spend $400,000 rebuilding
the plant and drilling two further wells. Royalite Oil Company was incorporated in January of 1921.6 Calgary Petroleum Product's drilling in
Turner Valley had been on leases of Dominion Government
lands. Royalite intended to drill
on the split-title lands which Michael Stoos
had purchased from the CPR. The title to these lands, which
Royalite had acquired from Herron,
included "all mines and minerals except coal and petroleum".
But Royalite also had acquired a 1915
lease from the CPR to Calgary Petroleum Products on these same
lands and the lease called for a royalty of 10% on gas and gasoline
to be paid to the CPR. In the summer of 1922, Imperial approached
the CPR to amend the terms of this lease. In a July 3, 1922 memo to the President
of the CPR, Sir Augustus Nanton, who
was a member of the railway company's Board of Directors and
Chairman of the Board's Advisory Committee, advised that "the
question may be raised as to whether Gas is a Petroleum product
or not" and recommended that the 1915 lease be canceled
and a new lease be issued with "the royalty to be paid
the Canadian Pacific being 5% on Gas and Gasoline as these commodities
come from the absorption plant"7. A new lease was issued on August
1, 1922 and,
in September of 1922, Royalite
No. 4 was spudded on the split-title
lands formerly owned by Mr. Stoos. In 1924, Alberta's first giant field was discovered when
Royalite No. 4 blew in while drilling
in limestone beds stratigraphically
below the productive zone encountered in Dingman
No. 1. When Royalite No. 4 was brought under control it produced approximately
20 million cubic feet per day of wet gas. The gas produced from
Royalite No. 4 was very rich in hydrocarbon
liquids and, when passed through a surface separator, produced
600 barrels per day of "naptha",
or "water-white gasoline"8. Who owned the wet gas produced from a well
on split-title lands or the hydrocarbon liquids contained in
this wet gas? Did it really matter to the CPR who owned these
substances, if appropriate contractual arrangements were in
place? The August 1, 1922 CPR petroleum lease
which Royalite had negotiated prior
to spudding Royalite No. 4 provided
for Royalite to pay the CPR a royalty
of "ten per cent (10%) of the current market value at
the time and place of production of all the petroleum taken
out of the said area" and "five per cent (5%)
on the current market value of such gas and (or) gasoline at
the place of production as the same is produced from the said
plants"9. Royalite initially paid the CPR's Department of Natural
Resources a 5% royalty on the liquid hydrocarbons produced from
Royalite No. 4, asserting that what it was producing was
gasoline.10 This
resulted in what P.L. Naismith described
as a "little dispute"11. In March of 1925, the Department of Natural
Resources sought the advice of the CPR's Law Department in Montreal. The CPR's General Solicitor, W.H. Curle, advised that "'Petroleum' does not include
dry natural gas", but the "oil which is being
recovered at Okotoks by the Imperial Oil Company, is, in my opinion,
oil and not gas". Curle
apparently understood that a royalty of 10% was due on both
gas and oil (see "Curle
Legal Opinion") and his opinion that "it makes
no difference for the Imperial Oil Company to argue about this
distinction" must be taken in context. Nevertheless,
the issue of whether the CPR actually owned all of the gas which
Royalite was contractually obligated
to pay it a royalty on appears to have been irrelevant to the
CPR's General Counsel. In a chilling harbinger of what was to
come for individual freehold owners of natural gas on split-title
lands, R. B. Bennett, representing Royalite,
met with the Manager of the CPR's Department of Natural Resources
in April of 1925 and agreed that Royalite
would pay a 10% royalty to the CPR. If a subsidiary of what
was then the world's largest oil company, represented by a lawyer
who 5 years later would become Canada's 11th Prime Minister,
could not stand up to the CPR, who could? Although the Royalite
No. 4 controversy had apparently been resolved to the CPR's
satisfaction, Imperial sought further petroleum leases from
the CPR on split-title lands in the Turner Valley area where title to all mines and minerals
except coal and petroleum was held by individuals and not Imperial
or its subsidiaries. In November of 1926, P.L. Naismith
wrote to A. M. McQueen of Imperial advising that the CPR's Board
of Directors was concerned with the CPR's potential legal exposure
in such situations and asking whether Imperial was aware of
any court rulings in similar circumstances.12 In McQueen's letter of response, he states: Perhaps in the context of a "little
dispute", Mr. McQueen's reference to paying a royalty
to the presumed rightful owner of the gas is a subtle indication
that Imperial would not be prepared to pay royalties to the
CPR on this same gas, as it was required to do in the form of
lease prescribed by the CPR on Royalite No. 4. McQueen's letter does not address the CPR's
potential legal liability under this form of petroleum lease,
but a December
7, 1926 memorandum
of law in the CPR files at the Glenbow Museum does. This memorandum concludes: "The
Canadian Pacific Railway Company having conveyed to (omitted) the natural gas cannot derogate
from its own grant and confer on a lessee the right to drill
for petroleum so as to destroy or injure the natural gas
on the Lessee's land. It would
seem that while the petroleum lessee would not be enjoined
from drilling for petroleum he would be under obligation,
if in the course of such drilling he struck natural gas,
to take such steps as would prevent the gas from escaping
or compensate (omitted)
for the interference with the natural gas. Under
no circumstances would the oil lessee be justified in appropriating
the natural gas. The form
of petroleum lease used by the Company seems to contemplate
such a contingency as the present by the language of paragraph
17." (emphasis added) It is implicit in this legal memorandum,
as it was explicit in W.H. Curle's
1925 legal opinion, that the CPR did not believe that it's
right to petroleum on split-title lands included the right to
all natural gas. Curle apparently
recognized no problem in the CPR demanding a royalty on something
it didn't own, whereas the unknown author of the 1926 memorandum
of law was clearly of a different view. How the CPR resolved
this potential legal liability while still demanding a royalty
on something it didn"t own appears
to have had a profound impact on the oil and gas industry's
view of how ownership should be determined on split-title lands
(see "Borys -The Aftermath",
"The Ownership Trial"). It is also implicit in these legal opinions
and throughout the correspondence between the CPR and Imperial
that, during the 1920's, both parties held the view that ownership
determination on split-title lands should be based on the phase
condition of the hydrocarbons as they were produced at surface
from time to time. A quarter of a century later, the CPR and
Imperial changed their tune (see "The
Leduc Controversy"). |
