• the timeliness of the reports; and
• the inadequacy of the information contained in the reports.

Many of the freehold lease agreements which were entered into prior to the introduction of CAPL leases in 1988 require the oil company-lessee to pay royalties to the freehold owner lessor on or before the 20th or the 25th day of the month following the month in which leased substances are produced and marketed from the freehold owner-lessor’s property. But, according to Mr. J.B. Ballem, one of Canada’s foremost experts in oil and gas law:

"The undertaking by the lessee to remit royalty on or before the twenty-fifth of the month following the month of production creates an unrealistically tight time frame and is seldom complied with in practice. In many instances, the lessee himself will not have received the proceeds of the previous month's production by that date."¹

The current regulations of the Alberta Energy and Utilities Board (the “AEUB”) require all operators of wells in Alberta to report to the AEUB on the volumes of crude oil, condensate, natural gas and water which they produce from, or inject into, wells in the Province on or before the 18th day of the month following production or injection. Similarly, all operators of batteries or plant facilities are required to report to the AEUB the volumes of crude oil, condensate, and natural gas gathered, and the volumes of these substances together with propane, butane, and pentanes-plus disposed of during the prior month, on or before the 18th day of the month following gathering or disposition².

Information on the volumes of hydrocarbons produced and marketed from all wells and all facilities in Alberta is clearly available to all well and plant operators on or before the 18th day of the month following production or disposition. Information on the sales price of the oil, condensate, natural gas or natural gas by-products marketed in Alberta is also clearly available to the industry operator selling the hydrocarbons at the time of the sale. The foregoing information could be made available to all of the joint venture partners of these operators at the same time as production and disposition information is provided to the AEUB. Furthermore, if the joint venture agreements between well and facility operators and their industry partners do not provide for the operator to report to its joint venture partners in a timely manner, the information required for royalty reporting can easily be estimated.

The concept that the oil and gas industry is justified in systemically breaching its contracts with freehold owners because some oil company-lessees may not have received their share of production proceeds from the operator of a well or facility at the time that royalty payments are due to the freehold owner can, at best, be described as hypocritical. Freehold lease agreements which require oil company-lessees to pay royalties in the month following production usually call for a 12 1/2% royalty to be paid. This royalty rate was agreed to many years ago under different economic circumstances at a time when the Crown’s royalty rate was at a similar level. The oil and gas industry raised no public objection when the Alberta Government retroactively increased the royalty rates in existing Crown leases to reflect changing circumstances (“Royalty Rates"), but the industry dismisses freeholders’ requests to renegotiate their royalty rates based on ‘sanctity of contract’ arguments. Apparently the rates specified in the royalty clauses of freehold leases are sacrosanct but the terms of payment specified in these same clauses aren’t.

CAPL 88, CAPL 91 and CAPL 99 provide for royalties to be paid on or before the 15th day of the second month following production. Some oil company-lessees do not even abide by this contractual requirement.

Although freehold lease agreements typically provide for records relating to the leased substances produced to be made available to the freehold owner-lessor at the oil company-lessee’s office during normal business hours, most lease agreements are completely silent with respect to what information the oil company-lessee is to provide the freehold owner-lessor in conjunction with royalty payments. Some oil company-lessees provide no royalty reporting statements whatsoever. Most oil company-lessees provide freeholders with royalty statements generated by computer systems designed for reporting to joint venture partners or the Crown. These statements usually include the:

• volumes of oil or condensate produced, or deemed to be produced, from the freeholder's property;
• volumes of raw natural gas produced, or deemed to be produced, from the freeholder's property;
• volumes of oil or condensate marketed, or deemed to have been marketed, from the freeholder's property;
• volumes of residue gas (the gas remaining at the plant outlet after processing the raw natural gas) marketed, or deemed to be marketed, from the freeholder's property;
• volumes of propane, butane, pentanes-plus and sulphur recovered and marketed, or deemed to be recovered and marketed, from the processed raw natural gas;
• gross revenue from the sale of each of the products;
• deductions for transporting oil or condensate;
• deductions for gathering and processing raw natural gas;
• the net revenue for royalty calculation purposes; and
• the royalty payable to the freeholder

Because these statements are designed for use by knowledgeable parties, they typically omit the units of volume measurement (oil, condensate, propane, butane and pentanes-plus are measured in cubic meters (m3), produced raw gas and residue gas are measured in thousands of cubic meters (103 m3), and sulphur is measured in tonnes) and often abbreviate the names of the hydrocarbon products produced and marketed. Most oil company-lessees do not provide per unit prices of products sold in freehold royalty statements. In order to determine these per unit prices, the freehold owner-lessor must divide the reported gross revenue received for each product by the reported volume of each product sold.

Alberta Energy’’s web site (http://www.energy.gov.ab.ca/) includes historical data on the monthly average prices for oil and heavy oil sold in the Province (go to ‘‘Oil”, “Info Letters”, and click on either “Petroleum Royalty” or “Par Price” for the applicable year and month. The ‘‘Par Price’’ reported for any particular month is a measure of average Alberta sales prices in the preceding month. You can compare the price which your oil company-lessee sold oil or heavy oil produced from your property to the Par Price published for the following month by Alberta Energy, but you should remember that the Alberta Energy calculation includes adjustments for oil quality and for the average cost to transport the oil from the field to the point of sale. The location and quality of your particular oil may not be average.

Alberta Energy also publishes weighted average prices for all gas, propane, butane, pentanes-plus and sulphur sold in the Province - go to ‘‘Natural Gas’’; ‘‘Gas Price History”, and click on the applicable year and month. You can compare the price which your oil company-lessee sold propane, butane or pentanes-plus recovered from gas produced from your property to the Reference Price published for the that month by Alberta Energy, but you should be aware that Alberta Energy allows lessees of Crown land to deduct a transportation and fractionation allowance from the Reference Price for Crown royalty purposes.

It is more difficult to compare Alberta Energy’s published Reference Price for natural gas to the price at which your oil company-lessee markets your gas because Alberta Energy reports weighted average sale prices for natural gas in dollars per Gigajoule ($/GJ). A Gigajoule is a measure of heat or energy. The energy content of natural gas depends on the composition of the gas. Raw unprocessed natural gas is a complex solution consisting dominantly of methane gas but also containing natural gas liquids (ethane, propane, butane and pentanes-plus) dissolved in a gaseous solution ("The Nature of Oil and Gas and their Ownership"). The more natural gas liquids or NGL’s in the natural gas, the higher its energy content. Within Alberta, the volume of NGL’s in raw gas varies considerably - from less than 1% in the shallow gas produced in southeastern Alberta to 15% or more in areas of deeper gas production. NGL’s are removed from raw gas when the gas is processed in a gas plant. But gas plants are not 100% efficient and some NGL’s remain in the residue gas when it is sold at the outlet of a gas plant. Due to differences in gas plant efficiency and differences in raw gas NGL content, the heat content of residue gas sold in Alberta varies from approximately 41 GJ/103m3 to 35 GJ/103m3 (shallow gas). Very few oil company-lessees report the heat content of residue gas sold in freehold royalty statements. If your oil company-lessee is producing shallow gas from your property, you can multiply Alberta Energy’s published Reference Price by 35 to arrive at a price in $/103m3 which can be compared to the sale price received by your oil company-lessee. Otherwise, ask your oil company-lessee to provide you with information on the heat content of the residue gas which it sells from your property, or multiply by an average value of 38 GJ/103m3.

There may be legitimate reasons why the price your oil company-lessee receives for oil, gas or gas by-products produced from your property is materially below the published average Alberta price. If so, your oil company-lessee should not object to explaining these reasons to you. If not, you may wish to seek professional help or advise FHOA.

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