The royalty clause in the CAPL 88 lease provides that the oil company-lessee “shall pay to the freehold owner-lessor a royalty in an amount equal to the current market value at the wellhead as and when produced of _________ percent (__%) of all the leased substances produced, saved and sold ...” and that “The Lessor shall bear its reasonable proportion of any expense incurred by the Lessee for separating, treating, processing and transportation to the point of sale beyond the point of measurement.” Subsequent to the release of CAPL 88, some freehold owner-lessors began to receive invoices for gas gathering and processing costs, rather than royalty checks from their oil company-lessees - the ‘reasonable’ costs to make their gas market-ready apparently exceeded the market value of their gas. The obvious conundrum of oil companies, the sometimes champions of profit as the only necessary social motivator, selling gas at an apparent loss can easily be explained - the costs to make gas ‘market ready’ are not real costs but include intangibles such as an allowance for overhead and a ‘reasonable’ return on the capital invested in the facilities necessary to make the gas ‘market ready’. While a freeholder might consider it ‘reasonable’ to get a 7% rate of return on his investments, some oil companies consider 30% or more reasonable for their investments. In 1989, Alberta’s Energy Minister wrote to the principle industry associations suggesting that the industry develop a “system of peer arbitration” which would resolve the problem without requiring regulatory intervention² (“Deductions from Freehold Royalties”). 

No system of peer arbitration was forthcoming but, in 1991, a new form of CAPL lease known as CAPL 91 was released for use. CAPL 91 introduced the use of a negotiated cap on the amount that could be deducted by the oil company-lessee in making the leased substances market ready: “... the royalty payable to the Lessor hereunder shall not be less than ________ percent (__%) of the royalty that would have been payable to the Lessor if no such expenses had been incurred by the Lessee.” 

The ‘Suspended Wells’ clause in CAPL 91 is identical to the clause in CAPL 88 and provides that: “If, at the expiration of the primary term or at any time or times thereafter, there is any well on the said lands, the pooled lands, or the unitized lands, capable of producing the leased substances or any of them, and all such wells are shut-in or suspended, this Lease shall, nevertheless, continue in force as though operations were being conducted on the said lands, for so long as all the said wells are shut-in or suspended ...” Almost any well in Alberta is ‘capable of producing’ some gas and many oil companies interpret the suspended well clause in CAPL 88 and CAPL 91 literally so as to allow them to continue a freeholder’s lease indefinitely as long as they have run production casing in a well bore on the lands (“Shut-in Wells”). 

The CAPL 99 lease, released for use in late 2000, addresses the inequity fostered by the Suspended Wells clause in prior CAPL lease forms. CAPL 99 effectively provides that if a well completed for and capable of production of leased substances is shut in and has not produced for at least 720 hours in any year after the primary term, the oil company lessee shall pay to the freehold owner-lessor a shut-in well payment equal to the original bonus consideration for the lease divided by the number of years in the primary term. 

In FHOA’s view, the CAPL 99 lease is preferable to CAPL 91 from the standpoint of freehold owners because of the more lessor-friendly Suspended Wells clause and because CAPL 99 addresses the issue of diagonal offset drainage. It should be emphasized however that you must negotiate a short primary term and a reasonable lease payment in a CAPL 99 lease in order for the Suspended Well clause to have any material impact in preventing your lands from being held indefinitely for speculative purposes, and that you should consider modifying CAPL 99 to more fully protect your interests (“Understanding Your Lease Agreement - CAPL Leases”, “Suggested Modifications - CAPL 99"). 

Almost two years after CAPL 99 was approved for use by the Canadian Association of Petroleum Landmen, some land agents still profess to have never heard of it.  Other land agents claim that their oil company clients will only enter into CAPL 88 leases. If the land agent that approaches you to lease your lands presents you with a CAPL 88 lease for execution, the Freehold Owners Association recommends that you politely send him on his way with an unsigned lease. If the land agent presents you with a CAPL 91 lease for execution and advises you that his oil company-client will absolutely not enter into a CAPL 99 lease, FHOA recommends that you amend the CAPL 91 lease form ("CAPL 91 Suggested Modification”).

Freehold owners should recognize that convincing a land agent, or the oil company that the agent represents, to accept an amendment to a CAPL lease form may be more difficult than negotiating a higher royalty rate or bonus consideration. In many instances a land agent and his contact at the oil company he represents will have been provided with an upper limit by company management for the bonus considerations, primary terms, royalty rates and processing caps to be negotiated in freehold leases. The job of a land agent is to secure a lease of your mineral interests at the lowest cost to his client, consequently the initial offer seldom represents the company’s upper limit and the agent or his oil company contact generally has the authority to accept a counteroffer. But land agents seldom have authority to amend the form of freehold lease used by an oil company. This authority often rests with the company’s upper management. Landmen dealing with requests to amend freehold lease agreements are sometimes reluctant to involve senior management in their relatively insignificant problems. Oftentimes your request for an amendment, although eminently reasonable, never crosses the desk of anyone with the authority to approve it.

Back to Top