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The modern world has become so complex that even the best informed of society’s decision makers cannot hope to fully understand all of the issues which come before them. It sometimes seems that every special interest group imaginable has organized itself for purposes of promoting the particular interests of its members and influencing society’s decisions makers.

In the case of the oil and gas industry, dozens of societies and associations have been formed to represent the interests of the various sectors of the industry. Some of these groups retain media experts to ensure that the public receives the most advantageous ‘spin’ on issues of importance to their membership. Others retain professional political lobbyists in an attempt to influence decision makers and their bureaucracies. For instance, the Canadian Association of Petroleum Producers (“CAPP”), whose members explore for, develop and produce more than 90% of Canada’s oil and natural gas, has a multi-million dollar annual budget and a paid staff of about 60 employees.

The oil and gas industry supports approximately 500,000 jobs across Canada.  Clearly, the views of the various sectors of the oil and gas industry should be heard by decision makers.  But should the voices of the oil and gas industry be the only voices heard when it comes to energy issues impacting the property rights of individuals?

The Alberta Law Reform Institute invariably seeks input from concerned parties when it studies the statute law in Alberta and makes recommendations for legislative changes to the Government of Alberta. The oil and gas industry makes representations to the Law Reform Institute when the interests of the industry may be impacted by the potential legislative changes.

Who represented freehold owners when the Law Reform Commission studied the Alberta Limitations of Actions Act and recommended that the act be amended to bar all legal actions, including those based on an alleged breach of trust or breach of fiduciary duty, unless the action was commenced within 15 years of the alleged breach?1 The rationale - the cost to society of defendants maintaining records and insurance against possible claims allegedly outweighed the benefit to society which might be conferred on a narrow class of possible claimants.The ‘narrow class of possible claimants’ includes virtually every freehold owner who has leased his or her mineral rights to an energy company.  Although the nature of the relationship between an oil company-lessee and a freehold owner-lessor under a freehold lease agreement has never been adjudicated in Canada, the oil company-lessee has scope for the exercise of some discretion or power; the oil company-lessee can unilaterally exercise that power or discretion so as to affect the freehold owner-lessor’s legal or practical interests; and the freehold owner-lessor is peculiarly vulnerable to, or at the mercy of, the oil company-lessee holding the discretion or power. These three aspects of the lessee/lessor relationship are the test for the existence of a fiduciary relationship as set forth by the Supreme Court of Canada (see “Conflicts between Lessees & Lessors”).

Who represented freehold owners when the Alberta Government introduced draft legislation based on the recommendations of the Law Reform Commission in which the recommended 15-year ultimate period was reduced to 10 years?

Clearly no one represented the interests of freehold owners. Under the Limitations Act which became law in Alberta on March 1, 1999, legal actions alleging discreet breaches of trust or breaches of fiduciary duty are effectively barred unless they are commenced within 10 years of the alleged breach.

Similarly, the Alberta Energy Regulator (formerly known as the “Energy Resources Conservation Board”) (the “AER (formerly known as the “ERCB”)”) typically seeks input from involved ‘stakeholders’ when it considers amending Board policies and procedures. Surely the owners of freehold mineral interests are stakeholders in oil and gas industry regulatory matters.  But no one represented the interests of freehold owners when the AER (formerly known as the “ERCB”) considered, and in 1994 decided to adopt, changes to its off-target well policy which have resulted in a proliferation of gas wells draining freehold owners’ lands from just across their fence lines.

And who represented the interests of freehold owners when a Court of Queen’s Bench judge decided that there was no internal ambiguity in a lease agreement which called for a ‘gross’ royalty to be paid (‘gross’ means ‘exclusive of deduction’ in most dictionaries) at the same time as allowing for deductions from that royalty.  As there was purportedly no internal ambiguity in the lease, the trial judge ruled that evidence demonstrating that for 50 years it had been industry practice to not make the deductions in issue was inadmissible, and that oil company-lessees could henceforth deduct oil gathering, treating and storage costs (see “Understanding Your Lease Agreement - The Acanthus Decision”)?  Who represented the interests of freehold owners when this trial court decision which impacts tens of thousands of individual freehold owners was not appealed?

Most freeholders do not understand the complexities of oil and gas industry operations, industry regulation, statute law or common law.  Freeholders need an association which can research issues of concern to freehold owners; monitor proposed changes in regulations and statute law,  and legal actions proceeding through the judicial system; and intercede when necessary to speak with a common voice on behalf of freeholders.

The Freehold Owners Association:

  • Intervened on behalf of freeholders before the Supreme Court of Canada in 2004 in respect of the ownership of evolved gas produced from wells on split title land (see “Split Title Issues”; “Supreme Court”);
  • Participated in the Coalbed Methane (“CBM”) Multi-Stakeholder Advisory Committee (“MAC”) to review and improve existing regulations relating to CBM development in Alberta.   The MAC’s Final Report, released in 2006, contained 44 recommendations of which 42 were accepted by the Alberta Government;
  • Participated in MACII formed in 2006 to address the progress in implementing the recommendations of the MAC over a three-year period.  This lead to a 2009 Freehold Oil and Gas Issues Stakeholder Consultation led by former Alberta Energy Parliamentary Assistant MLA Len Webber  (see http://www.energy.alberta.ca/NaturalGas/Gas_Pdfs/FreeholdOilGasStakeholderReport.pdf)
  • Intervened on behalf of freeholders before the AER (formerly known as the “ERCB”) in 2006 in a hearing to determine the legal entitlement to coal bed methane (“CBM”) produced from wells on split title land (see “Split Title Issues”; “The CBM Ownership Dispute”; “Proceeding 1457147”.  FHOA took the position that the split title owner of natural gas and not the owner of coal was entitled to CBM and, in 2007, the AER (formerly known as the “ERCB”) ruled in favour of the natural gas owners (see "AER (formerly known as the “ERCB”) Decision 2007-024")
  • Successfully lobbied the Alberta Government to introduce legislation confirming the ruling of the AER (formerly known as the “ERCB”).  The Mines and Minerals (Coal Bed Methane) Amendment Act received Royal Assent and came into force on December 2, 2010 (see "Bill 26")
  • Participated in a task force reviewing the administration of freehold mineral tax in the Province of Alberta (see ”Taxation of Freehold Mineral Rights”) which lead to the clarification of the ‘payor’ of mineral tax in freehold mineral tax statements;
  • Intervened on behalf of freeholders and the involved freehold owner in a hearing to determine the meaning of the words “capable of producing the leased substances” in a CAPL 91 lease.  OMERS Energy Inc. asserted that any amount of production so long as it was measureable was sufficient to establish that a well was capable of producing and that the lease could be continued with $1 per acre per year payments.  FHOA took the position that this would allow indefinite continuation for speculative purposes and was contrary to the fundamental intent of a freehold lease agreement.  FHOA also argued that the phrase should be interpreted as it is in American oil and gas producing jurisdictions where the phrase means capable of producing in paying quantities (ie the well The AER (formerly known as the “ERCB”) ruled that in order to continue the CAPL 91 lease under the Suspended Wells clause with an annual suspended well payment, the well must be capable of meaningful production in its current configuration (see ERCB Decision 2007-037
  • Supported the intervention of FHOA’s member in OMERS appeal of AER (formerly known as the “ERCB”) Decision 2007-037 before the Alberta Court of Appeal.  The Court upheld the AER (formerly known as the “ERCB”) Decision stating that “the Board used the word “meaningful” in the sense that the quantity was sufficient to provide a reasonable expectation of profits, and it did not err in doing so”.  The Court also forcefully condemned the continuation of freehold leases by energy companies for speculative purposes and stated:  “The lease is a contract through which the lessor and lessee agreed to develop the leased substances for mutual benefit” (see “Omers v. AER (formerly known as the “ERCB”)”).

The interests of freeholders are frequently adverse to those of powerful vested interests.  FHOA does not have a multi-million dollar budget and our paid staff consists of one administrative assistant.  FHOA needs the support of all freeholders if we are to speak with a common vice to protect our collective interests. 

 

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End Notes:

1. Alberta Law Reform Institute, Limitations, Report No. 55, December, 1989
2. Ibid, p. 65
3. Omers Energy Inc. v. Alberta (Alberta Energy Regulator (formerly known as the “Energy Resources Conservation Board”)) Alta. CA [2011] A.J. No 954

Freehold Petroleum & Natural Gas Owners Association

"Freehold Owners Association"

901, 1000 5th Ave SW, Calgary, AB, T4P 4V1 Telephone: 403-245-4438