Exploration and development of oil and gas is almost invariably carried out under lease agreements which provides an oil company (the “lessee”) with exclusive rights to explore for any oil and gas which may exist beneath an owner’s lands for a fixed term of years and, if any hydrocarbons are found to exist, to produce these substances until they are exhausted. The owner (the “lessor”) typically receives an initial cash bonus consideration, an annual rental payment during the period before production begins, and a royalty share of any oil or gas produced and marketed. (“The Development of the Freehold Lease”)

When an oil company wants to acquire the rights to explore and develop oil and gas owned by a government or a powerful corporation such as Encana, the form of lease agreement is determined by the government or corporation that owns the resource. In response to changing economic circumstances, governments or powerful corporations have modified their prescribed lease forms so as to extract maximum value for themselves, as owners.

The form of lease agreement used in leasing oil and gas owned by individual Canadian freehold owners has historically been determined by the oil company seeking to acquire the rights to explore and develop the freeholder’s oil and gas, not by the freehold owner. Canadian freehold lease agreements have also been modified on many occasions, but most changes to freehold lease forms have been designed to increase the protection for oil company-lessees, not the return to the freeholders who own the resource.

Once a lease agreement is entered into, the interests of the oil company-lessee and the owner-lessor correspond to the extent that both parties profit from production. But to a greater extent, the interests are in conflict because the oil company-lessee can only profit after paying the costs of exploration and development and the owner’s royalty. While the freehold owner-lessor seeks to maximize royalties, it is in the oil company-lessee’s economic interest to minimize all costs, including royalties. In addition to this fundamental conflict, most oil company-lessees have other business interests which may come into conflict with their duties and obligations to owner-lessors under particular lease agreements. (“Conflicts Between Oil Company-Lessees and Lessors”)

Governments and powerful corporations have the technical expertise necessary to monitor the activities of their oil company-lessees, and the legal and financial strength necessary to enforce the terms of their lease agreements. Individual freehold owners typically have little understanding of complex oil and gas field technical matters. Some freeholders assume that their oil company-lessee will protect their interests. Others assume that some government agency is protecting their interests. Unfortunately, this is not the case. For instance In Alberta, all aspects of oil and gas industry operations are regulated by the Alberta Energy and Utilities Board (the “AEUB”). The AEUB has broad general powers to make any just and reasonable order considered necessary to effect the purposes of the Oil and Gas Conservation Act. Although one of the stated purposes of this act is “to afford each owner the opportunity of obtaining his share of the production of oil or gas from any pool”, the AEUB takes the position that it has no jurisdiction to become involved in disputes between freehold owners and the oil companies that have leased their oil and gas interests. According to the AEUB, such disputes belong in the courts (“see The Role of Regulatory Authorities”). Few freehold owners can afford to engage in costly oil and gas litigation against oil companies.

One might expect that Canadian courts would show some sympathy for the plight of individual freeholders who, having no oil and gas regulatory authority to turn to and being unable to afford technical and legal advice on a fee for service basis, retain technical experts and lawyers on a contingency fee basis in an attempt to protect their property rights. Not so!

A Court of Queen’s Bench of Alberta judge recently ordered the freehold owner-plaintiffs in 21 law suits to pay approximately $600,000 in court costs to the oil companies the freeholders were suing. These costs did not relate to trials of the freehold owners’ individual legal actions, but to a 6 1/2 day trial of a preliminary issue of law which had been imposed on the freehold owner-plaintiffs by the Court at the request of the oil companies the freeholders were suing. The judge considered it appropriate for the freehold owner-plaintiffs to pay the $600,000 “forthwith” or immediately because: “At least some, if not all, of the plaintiffs appear not to be paying the bills for this litigation”. According to the trial judge, had she ruled in favour of the freehold owners in the preliminary issue of law, her ruling would have had “serious implications” for “the oil and gas industry, its regulators, investors and bankers” (see “1990's – The Ownership Trial”).

What about the implications for freehold owners of a $600,000 forthwith cost award in a preliminary issue of law? One would have to be incredibly naive not to recognize that the likely effect of a judge ordering citizens of ordinary financial means to pay $600,000 to the same group of oil companies the citizens are suing, before the merit of the citizens’ law suits has even been heard, would be to put an end to the citizens’ law suits, to preclude an appeal of the trial judge’s decision in the preliminary issue of law, and to cause individual freeholders to think long and hard before ever again entering into a contingency fee agreement in order to advance a law suit against an oil company. Would this cost decision, which effectively impinges on the fundamental right of all Canadians to a trial of all matters in issue in a law suit, have been made if the trial judge had any understanding of the plight of Canadian freehold owners? FHOA, and presumably all Canadians who share our faith in the judicial system, can only hope that it would not.

The Canadian oil and gas industry supports a number of highly-professional, well-financed lobby groups which champion the industry’s viewpoint. For instance, the Canadian Association of Petroleum Producers (“CAPP”), whose mandate it is to advance industry views in the development of public policy, has an annual budget of approximately $8 million. A healthy Canadian oil and gas industry is exceedingly important to the economy of western Canada and the views of the industry should obviously be heard. But should the oil and gas industry lobby be the only voice heard by industry regulators, governments and the judiciary? In FHOA’s view, it clearly should not.

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