The non- or qualified ownership theory is followed in three of the four major oil and gas producing jurisdictions of the lower forty-eight states of the American Union (California, Oklahoma and Louisiana).

In America, the decisions of the United States Supreme Court do not bind the state courts to the same extent as the decisions of the Canadian Supreme Court bind the courts of the Canadian provinces. A different oil and gas ownership theory known as the 'ownership in place' theory developed in the State of Texas and has been adopted in a number of states which produce minor quantities of oil and gas. Under the ownership in place theory, a landowner owns the oil or gas beneath his lands to the same extent as he owns coal or any other hard mineral, but his ownership is qualified by what is known as the 'rule of capture'. This rule provides that if the oil or gas beneath an owner's lands escape and go into the lands of another, his title is gone.²

One of the leading cases for the ownership in place theory, as it is applied in Texas, is Brown v. Humble Oil & Refining Co. (1935) Tex. S.C., 83 S.W. (2d) 935, where the Court at p. 940 stated:

"Owing to the peculiar characteristics of oil and gas, the foregoing rule of ownership of oil and gas in place should be considered in connection with the law of capture. This rule gives the right to produce all of the oil and gas that will flow out of the well on one's land; and this is a property right. And it is limited only by the physical possibility of the adjoining landowner's diminishing the oil and gas under one's land by the exercise of the same right of capture."

The leading case for qualified ownership as it is applied in Oklahoma, is Rich v. Donaghey (1918) Okla. S.C., 3 A.L.R. 352, p. 355, where the Court, citing the Supreme Court decision in Ohio Oil, stated that fee simple owners of land have:

"... no absolute right or title to the oil or gas which might permeate the strata underlying the surface of their land, as in the case of coal or other solid minerals fixed in, and forming part of, the soil itself.

But with respect to such oil and gas, they had certain rights designated by the same courts as a qualified ownership thereof, but which may be more accurately stated as exclusive right, subject to legislative control against waste and the like, to erect structures on the surface of their land, and explore therefor by drilling wells through the underlying strata, and to take therefrom and reduce to possession, and thus acquire absolute title as personal property to such as might be found and obtained thereby. This right is the proper subject of sale and may be granted or reserved. The right so granted or reserved, and held separate and apart from the possession of the land itself, is an incorporeal hereditament; or more specifically, as designated in the ancient French, a profit à prendre, ..." (emphasis added)

"The doctrine that the owner of the land has no property right in the oil and gas beneath the surface until he has reduced it to possession in no manner denies to such owner the exclusive right to the use of the surface for the purposes of such reduction, or for any other purpose not prohibited by law, but, to the contrary, concedes that right, as inherent in the title to the land, and subject only to the control of the state, in the exercise of its police power; and the right may be sold, as may any other right, and may carry with it the right to the oil and gas that may be found and reduced to possession." (emphasis added)

The principle that oil and gas cannot be owned absolutely until found and reduced to possession is recognized in all of the oil and gas producing jurisdictions of the United States. This principle was incorporated into Canadian oil and gas law by the 1953 decision of the Judicial Committee of the Privy Council in Borys v. CPR and Imperial Oil Limited where Lord Porter, for the Privy Council, stated:

"The substances are fugacious and are not stable within the container although they cannot escape from it. If any of the three substances (petroleum, gas or water) is withdrawn from a portion of the property which does not belong to the appellant but lies within the same container and any oil or gas situated in his property thereby filters from it to the surrounding lands, admittedly he has no remedy. So, also, if any substance is withdrawn from his property, thereby causing any fugacious matter to enter his land, the surrounding owners have no remedy against him. The only safeguard is to be the first to get to work, in which case, those who make the recovery become owners of the material which they withdraw from any well which is situated on their property or from which they have authority to draw."⁴ (emphasis added)

One of the practical implications of the statement of law set forth by Lord Porter is that a Canadian freehold owner has no legal recourse against a company that obtains regulatory authority to drill a well on a tract of land adjoining the freeholder's lands, drills the well, and produces oil or gas from it so as to drain hydrocarbons from beneath the freeholder's lands. The freeholder's only recourse is to drill a well himself. But in leasing his mineral interests to an oil company, the freeholder transfers his right to drill and produce to his oil company-lessee.

In Alberta, oil companies obtain the authority to drill wells under well licenses issued by the Alberta Energy and Utilities Board (the "Board") For many years, freeholders were afforded some measure of protection from wells drilled on neighbouring fence lines by the Board's enforcement of 'off-target' penalties. These penalties discouraged oil companies from drilling off-target wells by automatically reducing the amount of production allowed from an oil or gas well in direct proportion to how close the well was to a neighbouring parcel of land. In 1994, at the request of the oil and gas industry, the Board stopped enforcing off-target penalties unless drainage could be demonstrated. This change, in concert with the wording of CAPL lease agreements, opened the door for unscrupulous oil company-lessees to drain their own freehold owner-lessors lands through off-target wells (see "Understanding Your Lease Agreement - The Offset Wells Clause").

The Privy Council in Borys referred to the different ownership theories prevalent in the United States, but did not choose between them. Although one eminent legal scholar has compared the distinction between the non- or qualified ownership theories and the ownership in place theory to the distinction between describing a checkerboard as white squares on a black background or black squares on a white background⁵, the distinction may ultimately result in a windfall of hundreds of millions of dollars for one of Canada's largest oil companies at the expense of thousands of owners of split title natural gas (see "1990's - The Ownership Trial").

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