In recent years, gas has replaced oil as the focus of exploration and development in western Canada as the oil and gas industry struggles to replace gas reserves and fill newly-built export pipelines. Today, gas marketing facilities exist in virtually every area of Alberta in which freehold land is found. Despite this, many gas wells on freehold lands remain shut-in, ostensibly due to a lack of or an intermittent market for gas. Some of these gas wells have been shut-in for decades. In the last 50 years, inflation has ravaged the value of the dollar. A payment of $1 per acre per year is no longer material to most of the freehold owner-lessors who receive these payments. From the oil company-lessee’s standpoint, the cost to acquire land for exploration and development has escalated dramatically while the $1 per acre per year cost to hold land under the shut-in clause has remained unchanged. In most cases, the reason gas wells on freehold land remain shut-in has nothing to do with gas markets and everything to do with oil company-lessees holding freehold land for speculative purposes with token payments.

Since 1988, the vast majority of freehold lease agreements entered into in Canada have been either CAPL 1988 or CAPL 1991 leases. The ‘circumstances’ which allow an oil company-lessee to continue the lease with payments of $1 per acre per year are much broader in CAPL 1988 or 1991 leases than in previous lease agreements. All that is required is that there be a well on the freeholder’s lands which is shut-in and which is “capable of producing the leased substances”. 

The courts in the United States have generally found that the term ‘production’ means ‘production in paying quantities’ even if the phrase is not part of the lease agreement.¹ This issue has not been adjudicated in Canada. Some Canadian oil company-lessees take the position that the wording in CAPL 1988 and CAPL 1991 leases provides them with the authority to continue a freehold lease with a well capable of producing the leased substance in any quantity, no matter how insignificant. At least one acknowledged legal expert² maintains that the Canadian courts will uphold such a position. As virtually every well is capable of producing some gas, the end result is that many 1988 and 1991 CAPL leases are currently being continued by token $1 per acre per year payments and shut-in wells which are effectively dry holes. 

A new form of CAPL lease known as CAPL 99 was approved for use by the Canadian Association of Petroleum Landmen in the fall of 2000. CAPL 99 addresses the obvious unfairness of prior CAPL lease forms by increasing the annual suspended well payment from $1 per acre to an amount equal to the initial per acre bonus consideration divided by the number of years in the primary term of the lease. This still allows an oil company-lessee to continue your freehold lease beyond its primary term for speculative purposes, but, provided you negotiate a reasonable bonus consideration and a short primary term, at least you will receive something more than a token payment. 

If you are involved in negotiating a new lease of your mineral interests, FHOA recommends that you either insist on using CAPL 99 or modify CAPL 91 to protect yourself ("CAPL 91 - Suggested Modifications").

If your lease is being continued by a shut-in well, FHOA recommends that you review the shut-in or suspended well clause in your lease agreement. If the conditions specified for a shut-in well continuing the lease are limited to “a lack of or intermittent market or any cause whatsoever beyond the lessee’s reasonable control”, it may be in your best interest to write to your oil company-lessee asking the company to surrender the lease and remove its caveat from your title. If your oil company-lessee refuses to do so, it may be in your best interest to seek professional advise.

If your lease is being continued by a shut-in well and you have a CAPL 88 or CAPL 91 lease agreement, it may be in your best interest to write to your oil company-lessee asking the company to provide information on the production capability of the shut-in well and its plans for bringing the well on production. If you receive an unsatisfactory response, you may wish to advise the Freehold Owners Association.

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