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| About
Oil & Gas
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| PRIVATELY HELD SUBSURFACE HYDROCARBONS | |
| In
most modern industrialized democracies, petroleum and natural
gas were recognized as strategic commodities and nationalized
before any significant deposits which might have presented political
barriers to nationalization had been discovered within the jurisdiction.
As a result, there is no private ownership of subsurface oil and
gas in most countries.
Rock oil was first
discovered in the United States in 1859 in a well drilled to
a depth of 69 feet near Titusville, Pennsylvania. What followed
has been likened to a gold rush. Farms, which had been virtually
worthless before the discovery, sold for $1.3 million in 1865,
and $2.0 million several months later1. In the 1860's,
rock oil was used primarily as a substitute for whale oil and
coal oil in lamps. During the latter half of the 19th century,
the refining and marketing of this illuminating oil provided
the foundation for most of today's major oil companies, but
the strategic value of oil only became apparent in the 20th
century as war loomed in Europe and it became obvious that the
internal combustion engine could propel battle ships more efficiently
than coal-fired steam engines. Perhaps because the
Pennsylvania oil boom or similar oil booms in Texas and Oklahoma
in the early 1900's had established subsurface hydrocarbons
as a landowner's potential ‘nirvana’ before the
strategic value of subsurface hydrocarbons was recognized, or
perhaps because of the protection for property rights afforded
to the citizens of the United States by their constitution,
the United States federal government has never attempted to
nationalize subsurface petroleum or natural gas. As a result,
title to the vast majority of subsurface hydrocarbons within
the original 48 states of the American Union is held by the
owner of the surface rights. In Canada, a more complex
ownership regime developed. In 1670, the King of
England granted approximately 1 billion acres of land in the
drainage basin of Hudson’s Bay to the Governor and Company
of Adventurers of England Trading into Hudson’s Bay. This
land grant, which comprised roughly half of what is now Canada,
included everything from the surface to the centre of the earth
except for “gold, silver, gems and precious stones to
be found or discovered”2. The Gentlemen Adventurers
principal trading rival was the Northwest Company whose sphere
of influence included southern British Columbia, Washington
and Oregon. In 1821, the Gentlemen Adventurers combined with
Northwest Company to become the Hudson’s Bay Company (the
“HBC”). Following Canadian
confederation in 1867, a major priority of the Dominion Government
was to thwart potential United States expansion across the 49th
parallel. Sir John A. MacDonald, Canada’s first prime
minister, was particularly concerned with the possibility that
British Columbia, which was then a British Crown colony, would
fall into American hands. British Columbia was prepared too
join the Canadian confederation, but only if a railway was built
linking the Pacific coast to the existing rail system in Ontario
and Quebec. MacDonald recognized that such a railway could only
be economically viable if the vast expanse of prairie lands
controlled by the HBC was colonized. Although the 1670 land
grant required the Gentlemen Adventurers to colonize the land,
very little colonization had occurred because colonization conflicted
with the groups’ primary objective which was to profit
from trading furs with natives. In 1869, the Dominion Government
entered into an agreement with the HBC whereby the 1670 land
grant was surrendered in return for 300,000 pounds sterling
and 1/20th of the arable land in western Canada (approximately
4.5 million acres of land). In 1870, the North-West Territories,
which then included Alberta and Saskatchewan, were admitted
to the Canadian confederacy, and the Dominion Government negotiated
the terms of British Columbia’s entry. Under the agreement
with British Columbia, the Dominion Government committed to
starting the construction of a transcontinental railway within
2 years, and completing it within 10 years3. To encourage settlement
of the North-West Territories, the Dominion Government granted,
or sold for token consideration, farm-sized parcels of land
(generally 160 acres) to individuals prepared to establish prairie
homesteads. Concurrently, the Dominion Government attempted
to follow the American example of having transcontinental rail
lines built by providing land grants to private corporations.
Prime Minister MacDonald’s initial attempt to involve
private capital ended in disgrace in 1873 when he was forced
to resign after it was discovered that he and his government
had taken substantial bribes from Sir Hugh Allen, the first
president of the Canadian Pacific Railway Company4.
Succeeding governments spent more than $31 million of taxpayer’s
money and built some of the more difficult portions of the rail
line5, but when Sir John A. MacDonald was returned
to power in 1878, much of the line remained uncompleted. Macdonald
encouraged the formation of a new group of financiers and, in
1880, his government entered into a contract (the “Canadian
Pacific Railway Company Charter”) with a syndicate organized
by George Stephen, then reputedly the richest man in Montreal6.
In addition to giving the Canadian Pacific Railway Company (the
“CPR”) those portions of the rail line which had
already been built by the Canadian taxpayer, Section 9 of the
CPR Charter provided:
Fortunately for western Canadian settlers, the CPR and the HBC were even more myopic than the Dominion Government. A quarter of a century passed before the railway company began, in 1906, to reserve petroleum for its own account in land sales to settlers. In approximately 1912, the CPR began to reserve all mines and minerals for its own account thereby securing an interest in any natural gas found to exist beneath the homestead lands which it sold to settlers. The HBC had begun to reserve all mines and minerals for its own account in approximately 19089. As a result of the foregoing, Canadian settlers who purchased homestead lands from the Dominion Government prior to 1887, from the HBC prior to 1908, or from the CPR prior to 1906, acquired title to subsurface petroleum and natural gas, and title to petroleum and natural gas became split on homestead lands acquired by settlers from the CPR during the 1905 - 1912 period. On these ‘split title’ lands, the CPR retained the right to any coal or petroleum found to exist within, upon or under the lands and the settlers acquired title to the surface and all mines and minerals not reserved by the railway company (including natural gas). The last step in the creation of the peculiar hydrocarbon ownership regime which exists in western Canada occurred in 1930, when the Dominion Government transferred its residual rights in petroleum and natural gas to the prairie provinces10. Settlement of the prairie provinces generally progressed from east to west. The timing of this settlement controls both the degree of private ownership of subsurface petroleum and natural gas within the province and whether this private ownership now lies in the hands of the freeholders who purchased or inherited farm land from the original settlers, or the corporate successors to the HBC and the CPR. The fertile southwest corner of Manitoba was one of the first areas settled in the prairies. Considerable settlement had occurred before the Dominion Government decided to retain petroleum and natural gas for its own account in 1887, and settlement was largely completed before the HBC and the CPR began to retain petroleum and natural gas for their own accounts11. Consequently, an estimated 80% of the subsurface hydrocarbons in southwest Manitoba (the only area of the Province with known subsurface hydrocarbon reserves) are privately-owned, the vast majority by individual freehold owners12. There had been no substantial settlement in the portion of the North-West Territories now known as Alberta prior to 1887. As a result, the vast majority of settlers who acquired homestead lands from the Dominion Government in what was to become Alberta acquired only the surface rights, and the majority of the individually-owned freehold mineral rights in Alberta were acquired from the CPR prior to 1912 or from the HBC prior to 1908. The CPR Charter provided for the railway company to select lands “in alternate sections of 640 acres each, extending back 24 miles deep, on each side of the railway”13. But the Charter also permitted the CPR to select lands in other areas south of the 57th parallel if lands “fairly fit for settlement” could not be located along the main line right of way14, and for the lands selected to be free from taxation for 20 years15. To maximize this tax advantage and enhance the value of its land grant, the CPR delayed selection of portions of its land grant16. Although the transcontinental railway was completed in 1885, it was not until 1903 that the CPR made its final selection of lands - an approximately 3,000,000 acre block of land east of Calgary to be developed as an irrigation project17. Due to this delayed selection, a disproportionate amount of the CPR’s main line land grant was selected in Alberta. Overall, the CPR retained 9.6 million acres of petroleum and natural gas rights from its 25 million acre land grant (8.3 million acres in Alberta, 1 million acres in Saskatchewan and 0.3 million acres in Manitoba)19. In 2002 PanCanadian Petroleum Limited, the successor to the CPR, merged with the Alberta Energy Company to form Encana Corporation. Within Alberta, the petroleum and natural gas beneath approximately 81% of the Province’s surface area (133 million of the total 163 million acres) is now owned by the ‘Crown in right of Alberta’, and the petroleum and natural gas beneath approximately 16 million acres is privately-owned20. Encana Corporation ("Encana") owns the majority of this, but individuals who are the assigns or descendants of Alberta's original homesteaders are the registered owners of the petroleum and/or natural gas beneath approximately 6.0 million acres (4% of the Province’s surface area). The petroleum and natural gas ownership regime which exists in Alberta is unique in three important respects. In no other jurisdiction does a single corporate entity control such a significant portion of the petroleum and natural gas rights - Encana owns the oil and gas beneath approximately 12% of southern Alberta (south of Township 60). Due to the wide areal distribution of Encana's rights and due to the nature of oil and gas industry operations, it is virtually impossible for an oil company of any significant size to operate in southern Alberta without dealing with Encana. In no other jurisdiction with significant hydrocarbon reserves do individually-owned petroleum and natural gas interests comprise such a small proportion of the total rights within that jurisdiction. In other major oil and gas producing jurisdictions, either the government owns all petroleum and natural gas and there is no freehold, or, as in the lower 48 states of the United States, the vast majority of petroleum and natural gas interests are owned by individual freehold owners. In these other jurisdictions there is either no freehold ownership 'problem' as there is no freehold, or freehold ownership is so widespread that legislators, regulators, and the courts have been forced to address the concerns of freehold owners. In no other jurisdiction do ‘split title’ petroleum and natural gas rights exist as a separate class. As a result of the CPR's belated recognition of the value of natural gas, there are approximately 1.0 million acres of land in southern Alberta in which title to petroleum is held by one party and title to all mines and minerals except coal and petroleum (including natural gas) is held by another. The party owning petroleum beneath these lands (known as 'split title' lands) is, in all cases, Encana. There are an estimated 10,000 individual owners of Alberta split title natural gas. The unique hydrocarbon ownership regime which exists in Alberta results in certain oil company-lessee/freehold owner-lessor conflict of interest situations which are not found in other jurisdictions (see “The Split Title Problem"). These conflicts and others are rooted in the nature of subsurface hydrocarbons and the peculiar relationship established under an oil and gas lease agreement (“The Nature of Oil and Gas and their Ownerhip", "The Development of the Freehold Lease”, “The Oil Company-Lessee / Freehold Owner-Lessor Relationship”). End Notes:
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