Chapter 1: Origin, Occurrence and Production of Petroleum and Natural Gas Recent Developments in the Industry

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Chapter 1: Origin, Occurrence and Production of Petroleum and Natural Gas
Recent Developments in the Industry: There has been a dramatic shift in the energy policy within the last 12 - 36 months. The American economy has been crippled and there has been an increasing demand from other areas such as China. Average producer in AB is losing approx $30 per barrel because they are limited in terms of their available market Natural gas situation is even worse because through horizontal drilling and shale formations there are increased amounts available to the US market from their own land. Within five years, Canada will likely be supplying the US with only 5% instead of an expected 30%.
Busted assumptions

  1. The US will always be Canada’s biggest customer in the oil and gas market

    1. Oil—complicated by abundance in US and pipeline/environmental issues

      1. Northern Gateway Project—decision lies with cabinet of federal government and no longer with the National Energy Board. Environmental and aboriginal rights makes the approval a big issue

      2. Keystone XL—oil is just sitting there for months or years, that is why the oil prices in Alberta are so depressed

    2. Natural gas—complicated by availability of shale gas/hydrofracking which allows them to get at gas in an economical was that was not available before

      1. There were import stations set up on the boarders with the assumption that the US market would need it, but all these projects have been cancelled since the US now has an abundance

      2. But something to keep in mind, shale gas is set by 2 factors:

        1. Natural gas has been very low

        2. Those shale gas reserves seem to produce lots of gas initially and then trail off so nobody knows how long they are expected to last.

Around the world comparisons of Crude Oil

  • Brent Crude Oil (UK)—European market that reflects world prices (highest)

  • West Texas intermediate (US)—Higher than Alberta, but lower than world prices. They reflect world pricing trends, tend to go up and down in the same pattern, but there is a gap

  • Edmonton Par—Huge gap between world prices

    • Canadian Heavy oil trades at a discount compared to the light prices, heavy oil is our largest source of production

Role of Canadian and Albertan Oil

  • Oil boom and discovery in Canada around the beginning of WW1, but a lull of inactivity until 1946

  • US became hooked on cheap energy as it found substantial amounts of reserves in places like Texas and Oklahoma

  • Energy is vital to all US politics as it has a direct impact on things such as domestic security and the broader economy (Energy remains the cornerstone to all US economic policies)

  • Treaty of Versailles (1919) Involved what we now know to be the middle east and was divided up by arbitrary lines on the map, forming places like Iraq, despite ethnic problems that may result because of the arbitrary manner of creating the countries. There are obvious repercussions as the oil reserves, discovered as early as 1901, would be highly sought after.

  • William Darcy went to present iran and paid the shaw of Persia $100 000 and gave him $100 000 of stock in his company which was worthless at the time for exclusive rights to 500 000 square miles of what proved to be some of the richest oil barring land in the world

    • Darcy Oil Company became Anglo-Persian Oil Company (APOC) which became British Petroleum (BP)

    • First concession agreement entered into in the Middle East

  • Companies like Chevron (then Standard Oil of California) were purchasing oil rights as early as 1901.

    • Exploration and production rights granted over vast tracts of land for nominal payments

    • 1933—King of Persia gave a concession agreement over most of Saudi Arabia for 66 years in exchange for 600, 000 pounds of gold

    • Political effects

      • Huge discontent (helped create nationalist movements in most countries involved)

      • Foreign administration are imposed on these countries and their sole purpose was to keep the oil cheap and keep the place stable (e.g. British governance to keep oil from Iraq cheap). Western control of government and resources lead to increasing amounts of hostility and resentment.

      • 1953: Iran’s elected prime minister was disposed by US and UK forces in a coup because he tried to nationalize the Iranian oil industry, the hereditary Sha was reintroduced as leader

PHASE 1: 1946 - 1972 Oil seeking markets (too expensive to sell Alberta oil)

  • Situation prior to Canada having even discovered oil would have a huge impact on the discovery of oil in Canada. World was awash in cheap oil.

  • 1946: oil discovered in Canada (Leduc), however there was no huge rush for it as it was slightly more expensive

  • AB primary concern was finding markets that would buy it. Canada developed a national energy policy based on the Ottawa valley rule: You could only import middle eastern oil as far as the Ottawa Valley border, to encourage use of Canada oil in the west

    • Enacted under Federal Trade and Commerce power

  • Gas was also begin produced at this time, however there was next to no demand.

  • 1958: Pipeline debate on a national scale regarding whether the gov’t would build a Transcanada pipeline

PHASE 2: 1973-81 OPEC Crisis (massive boom)

  • 1973: price of oil did not change between 1946 - 1972. The mentality was the price would never really change.

  • Then OPEC gained power. Upset with the unfair concession agreements and resentment towards because of political and economic control by the west, OPEC started to choke off supplies until the price rose. Prices when from $3-$12/barrel

  • precipitating factors were a few wars including the 6 day war with Isreal, backed heavily by Western powers)

    • intense military campaign which crushed the opposition and left them feeling humiliated because Isreal was backed by western support who had weapons built from oil revenues obtained from middle eastern countries

  • This began to create substantial inflation across the global economy

    • US started talking about things like max fuel consumptions on cars

    • Suddenly the value of AB oil was rising, an AB suddenly became an energy based economy

    • 1973: AB Leg decided that existing fixed royalty rate is abolished, and Lt Governor would periodically set the rate from now on. Went from 12.5% to 50%

    • AB started essentially acting like a middle eastern country

    • Rest of Canada was suffering from vast inflation, which started a sense of national resentment towards AB (political time-bomb)

      • Stagflation—economy inflation because the price of oil worked its way through the entire economy. The economy was being crippled but oil and gas was booming

  • Mid 1970s: Economic nationalism and anti-corporation was rampant in Canada especially that the oil profits were going to the US. Fear over foreign ownership

    • Federal government began taking an interest in oil

    • 1975: Petro Canada is established as a national champion. Canada bought a Belgain oil company Petrofina (would not dare attempt to buy Shell (American) or BP)

    • 1977: Concern by Department of Energy that there would be an oil crisis within 10-15 years (although within 10 years oil was back to its pre 1973 prices)

  • Oct 1980: NEP (National Energy Program)

    • During Boom of 1973-1981 Alberta became wealthy, but the tension it produced let to the creation of NEP

    • Goal was domestic self sufficiency in terms of oil supply, increase fed gov’t revenue from industry and to promote Cdn ownership of a US dominated market

    • Features include:

      • imposed an excess profit tax on oil companies and secondly when oil companies paid their taxes to the federal government at the excess level they could no longer deduct provincial royalties, it was like a tax on a tax. It was an internal wealth transfer system which said that AB cannot garner all the profit of this price rise which happened through no fault of there own so this would help spread the revenues across the country

      • Refineries were given subsidies to cover the difference between national and world prices

      • Natural gas: companies would be able to keep the domestic price however any difference with the world price would be kept by the federal government

      • Every company that holds Cdn lands, unless Cdn company, the gov’t will take back 25% of its interest without compensation.

      • Brought the industry to a crashing halt as it was no longer worth it to produce, which means the gov’t didn’t get the revenues it expected which meant that the subsidy the gov’t was expecting to cover with the revenues had to be paid for through other funds

Phase 3: Late 1980s: Federal response to oil boom and NEP

  • 1982: Spike in oil prices caused by special events ($163/ cubic metre), caused due to the revolution in Iran and the Iran/Iraq war.

    • Inevitable result of prolonged high oil prices (1) people learn to use less oil (2) if you’re in a cartel you will start to cheat by producing more oil past quotas than you should

    • Saudi Arabia was only country in OPEC that has enough production to control prices

    • They began between 1981 and 1985 began a policy (continued today) to undertake policies aimed at smoothing the increase in the price of oil, so US would not invest in energy conservation methods

    • 1985: Saudi frustrated by “cheating” (failing to abide by quotas), so Saudi flooded oil markets (2.5 -> 5mm BPD)

    • at the beginning or Iran/Iraq wars, prices were pushed to unthinkable prices

  • 1983— Effect on Canada- complete bust of the oil industry as a result of the NEP program. No longer economical for oil exploration

Phase 4: 1984 – 1990s Market directed approach to energy

  • 1984: Mulroney elected, removed the personnel and philosophy of the NEP (program completely dismantled by 1986)

    • Market should be the driving force behind the price of oil, not the government (equalizes supply and demand). Not shielding people from the high prices will lead naturally to conservation.

    • Pre-1986: Export restrictions (greater than 15 year domestic supply required before exports allowed)

    • Resulted in a reduction of exploration

      • Enacted under federal Trade & Commerce power

    • 1986: Export restrictions abolished, Canadian producers allowed to exploit highest domestic or international price of oil

  • 1990’s: Alliance pipeline (Alberta to Chicago) transported massive amounts of natural gas

  • 1991/1992: Iraqi invasion of Kuwait (first gulf war), short spike in oil prices

    • Remainder of the 1990’s fairly steady decline in the price of oil until 2000 (in 2000 oil prices reached 1986 levels)

    • World suddenly begins to realize they have a largy supply of oil so prices continue to drop and people become accustome to cheap energy

    • Oil as low as $8.64/barrel in December 1998 (accusations Saudi flooding oil markets)

    • In AB, the oil industry hit a slump (gas was still okay though), AB had 2 oilsands going on…no one would invest in the oil sands with prices being so low.

  • 1996à federal/provincial gov’t created an incentive scheme for production of oilsands. Only suncor/syncrude existed. So a scheme was put in where the gov’t agreed to modify its tax/royalty scheme to allow for new oilsands to be made.

Phase 5: Emergence of new technologies and consumers

  • 2000’s: Significant increase in consumption (China and India develop as emerging markets)

    • Geopolitical events: 9/11 and invasion of Afghanistan and Iraq, and incredibility hostile regime in Iran. After these, people realized how vulnerable the oil production was

    • 2007/2008: Huge spike in oil prices ($147/barrel)

      • this time wasn’t the same reaction to the high prices as in 1973. We didn’t use energy or waste it as much as back then

      • until is reached $147/barrel. People stopped driving.

      • Conservation effects reduced prices

    • Higher oil prices brought about an emergence of technology

      • Directional and Multi-well drilling, as well as hydro-fracking

      • Production of shale gas wells has lead to a reduction in both oil and mainly natural gas prices

    • Appears clear that North America is returning again to an abundance of oil and gas

      • Makes it very important for Alberta to develop export opportunities to international markets without depressed oil and natural gas prices

      • This is the reason for the amended CEAA, Fisheries Act, etc.

  • It is important to remember that their are various international prices of oil and gas; although there is an inherent value in a barrel of oil the value is driven by the type of oil required at the time

    • Gradual decline in the conventional production of oil in the past decade; more focus on the oil sands production but then in 2011 advances in production and drilling (along with hydro fracturing) has started to increase conventional production again

    • Natural gas and oil prices are no longer moving in lockstep together

World Energy Reserves

  • In order to qualify as part of an oil reserve, the oil has to be producible and recoverable with current technology

    • hence, the oil sands only recently became part of the Cdn oil reserve

Liquid Natural Gas (LNG)

  • LNG: Is natural gas that is cooled to the point where it condenses into a liquid (-160 c)

  • After cooled to a liquid it takes 1/600th of the space required to store as a gas

  • LNG can be stored and shipped safely because:

    • Colourless, odorless, non toxic liquid

Non-pressurized, non-corrosive

Chapter 2: Ownership Interests in Oil and Gas
Common Systems of Surveys

  • In the prairie provinces (AB, SK, MB), lands are surveyed with respect to meridians of longitude and latitude

  • A township is 6 miles x 6 miles and contains 36 sections

    • Townships are numbered northwards from the 49th parallel (Canada/US border). A column of townships is called a range, and these are numbered from east to west

  • A section is a square area of ~640 acres and contains 16 legal subdivisions

  • L.S. 16 of 33-37-24-W4 refers to Legal Subdivision 16 of Section 33, Township 37, Range 24, West of the 4th Meridian

Land Survey System in More Detail
Starting point is the 49th parallel. Surveyors said that they will lay out a baseline every 24 miles north of the 49th parallel (which is itself a baseline).

-lay out a correction line every 12 miles north and south of a baseline

-lay out 2 TWP lines north of each baseline and 2 TWP lines south of each baseline

-Range Roads of longitude are laid every 6 miles from the 1st meridian (this runs through Winnipeg)

-in AB, we start at the 4th meridian

-because Range Roads of longitude are laid every 6 miles from each meridian, and township lines are laid every 6 miles north of a baseline, each township is 36 sq. miles

-Now ask: what happens within a TWP? Each TWP is divided into 36 sections. SE corner is number 1, number 6 in SW corner, number 7 is above number 6, number 18 is above number 7, etc. (this is called numbered “sinusoidally”)

-Each section is divided into 16 legal subdivisions (LSD’s) numbered sinusoidally (reason that this is important is because there are often competing legal disputes in regards to location of wells and neighbours draining from nearby)

-HB CO. has section 8 in each TWP. It also has the west half and the SE quarter of section 26.

-presumptive rule, because HBC only gets that land in 4/5 townships

-to make it an even 1/20th of the land in the fertile belt, the rule is that HBC gets all of section 26 in each townships divisible by 5.

-ie. townships 5, 10, 15, 20...

-Note: Correction lines/baseline are inserted because the grid is on a sphere. RR’s will eventually meet at the north pole, therefore the top edge of a township at the correction line will be slightly shorter than the township’s bottom edge

The Settlement of Alberta

  • In 1905, Alberta became a province and in 1930 the power to grant surface and mineral rights was transferred from the Dominion Government to the Government of Alberta

  • Alberta now leases but does not sell any of the mineral rights

Royal Proclamation, 1763

  • Fundamental principle of English law is that the Crown owned all the land except when it made a grant to others of that land.

  • Unlike the U.S., in Canada it was never possible to acquire land just by settling on it.

  • Our first critical document is the Royal Proclamation of 1763

    • Still important today because it says that you cannot acquire Indian Lands as a settler

    • Indian Lands can only be acquired if they have first been ceded to the Crown, and only then can they be transferred to settlers.

Calder v. A.G. of BC (SCC) 1973

  • Held that the Royal Proclamation applied to all of Canada, including BC. This was interesting because BC did not exist in 1763

  • The decision was split

  • Effectively the origin of aboriginal land rights in Canada

  • Starting point is that aboriginal lands are aboriginal lands until they have been ceded to the Crown

Land Ownership in the Prairie Provinces

  • In 1670, the King of England granted all of the lands, including minerals, within the watershed draining into the Hudson’s Bay to the Hudson’s Bay Company

  • In 1837, the Crown began giving local autonomy to the western colonies

  • In 1867, the provinces already owned the land and natural resources (s.109 of the BNA)

  • In 1870, the Hudson’s Bay Company surrendered Rupert’s land to the Crown (300,000 pounds), in exchange for approximately 7 million acres or 1.75 sections in each township

    • The Bay retained 1/20th of the lands in the fertile belt (the surface and natural resources below)

    • They decided to take sections 8 and ¾ of section 26 of each township EXCEPT in townships divisible by 5 in which case they got the whole section 26

      • 1st privately owned mineral rights in Alberta

    • This basically created a hole in federal land ownership because all of the land east of Rupert’s land (Ontario and the Maritimes) and west of Rupert’s land was owned by the provinces

  • Up until 1884, the Crown granted petroleum, natural gas and other mineral rights to homesteaders moving west. By 1891, no homesteaders were given M&M rights

  • Today, nearly all mineral rights in the Territories and BC belong to the Crown, while ~81% of minerals rights in Alberta belong to the Crown

  • Ownership of Abs other 19%

    • This land base was 100% owned by the federal government when they bought western Canada from Hudsons Bay

    • There were 5 sources of other rights/exceptions from crown ownership

      • Freehold/private ownership—1891 feds started reserving mines and minerals from settlors

      • Hudsons Bay Settlement—1/20th of lands in fertile belt

      • Railways—CPR received lands 20 miles on either side of railway and surface & mineral rights

      • Indian Reserves—government holds title in trust

      • Miscellaneous statutes over the years—ie soldier settlement acts where land was given to war vets which still included M&M right

  • NOTE: any time you are looking to transfer oil over provincial boundaries the Trade and Commerce power (Federal power) in the Constitution may be a factor. This is the most important power the federal gov’t has in regards to oil and gas production. So the only solid legal ground the provinces could fight back against something like the NEP is through the amount of production as this is the ability of the owner to do so (and likely the only Constitutional way that they could)

    • They created the National Energy Board, which deals with any energy issues with an interprovincial dimension

    • NEB largely regulates provincial and national pipelines, another aspect of federal power under Trade & Commerce power

  • Today, the federal government’s interest in energy production is primarily environmental (ie. climate change legislation)

    • One area we are likely to see some federal activity is in greenhouse gas emissions because it is not an area that can readily be controlled by a single province.


  • If A owns everything in Balckacre with no reservations/exceptions in the title, then they own everything except for the Gold and Silver

  • If A owns Blackacre but the Crown has a right to mines and minerals then the Crown has

    • (a) the right to remove the mines and minerals and

    • (b) access to the land to work it

      • The settlor gets everything except mine and minerals

  • What is a mine or mineral?

    • Anything that can be obtained from beneath the surface of the ground for a profit

    • Common Law—Crown reserves in minerals is anything that can be obtained from beneath the surface for profit by means of a mine

      • What is a mine? – a space that encloses a mineral (circular definition)

    • If there is non valuable rock beneath the surface than it is not a mineral and belongs to the surface owner

  • There are also statutory definitions (but we start with the common law)

    • 2010 the government passed legislation that all pore space beneath the ground belongs to the Crown

    • by declaring this belonging to the crown then you are taking it away from someone else. But crown said not true because originally didn’t belong to anyone.

    • But this is incorrect because you can’t have pore space as an exception to the rule of ownership A owns the whole container, minus any exceptions stated on the title

    • Alberta Mines and Minerals Act—lists everything considered mines and minerals. And belongs to the M&M owner. If its not listed, then it belongs to the surface owner

Theories of Ownership of Oil and Gas (1953 Article)
General Idea: The broad principles of ownership governing stationary or visible objects are difficult to apply to a substance which migrates from one place to another before being reduced to possession. Is it possible to convey an interest in a substance which may not be the subject of ownership until it is possessed? At the time of the article, CDN courts had not really considered the issue.
Three Approaches to the Petroleum Lease:

(1) Texas: The petroleum lease is a separate and absolute fee simple

  • If the interest holder owns an absolute interest in the petroleum beneath his land, he ought to be able to protect his interest.

  • Texas courts responded by saying that a fee simple exists in petroleum in the ground, but then stated that it is a defeasible fee. In other words, the owner is liable to lose the oil if someone draws it away, but until then his ownership is absolute.

  • Critique: Calling this a fee simple is misleading because adding the defeasible qualifier indicates an estate that is something less than a fee simple.

(2) Pennsylvania (MAIN VIEW TODAY): The petroleum lease is something less than a fee simple. Ownership is not absolute until the oil is actually brought to the surface and reduced to possession.

  • The right granted includes an incorporeal right to explore and vests title when oil is reduced to possession.

  • Petroleum is viewed as a chattel real, a profit a prendre, and is therefore an interest in land.

(3) Oklahoma: Petroleum leases are regarded as exclusive grants of rights to explore, conveying no interest in land.

  • Compares oil to a wild animal and therefore cannot be owned until it is captured.

Landowners Mutual Minerals Ltd. v. Registrar (1952) (what to do when we have assertions of ownership interests in fugacious substances)
Key point: Oil and natural gas are “minerals” for the purpose of the Land Titles Act and therefore so long as they remain in the earth, they are an interest in land and belong to the owner of the surface unless excepted from his title, and he may transfer ownership just as in the case of other minerals.
Facts: Saskatchewan farmers owned M&M. They pooled their rights and tried to transfer to Keystone a ¼ interest in all petroleum, NG and all related hydrocarbons except coal. When they tried to register the interest in land the registrar refused to execute the conveyance. The registrar said that they cannot convey oil and gas, as they are trying to transfer an interest in a fugacious substance, rather than an interest in land

Issue: Whether interests in petroleum and natural gas can be transferred and registered under the Land Titles Act

Held: If you owned land, you owned the ‘column’ (giant carrot except for gold and silver). Accordingly, you can transfer the surface, minerals, coal, etc.

Reasons: The SK court looked at the Mines and Minerals Act and the Mineral Taxation Act. No statute that narrowed the definition of “mineral”. Mineral is broadly defined, and LTA contemplates that you can issue a title for minerals or any mineral
Aftermath of Landowners Mutual

  • Although one can have a registerable property interest in P/G, there was no ability to exert exclusive possession over this right until the P/G was obtained at the surface

    • You can own oil and gas in the ground and own it enough to transfer title to someone

    • But you still don’t have perfect ownership because your neighbor by legitimate operation take your oil from their lands

  • The decision meant that a landowner could draw P/G from his neighbor’s property without punishment

  • As such, once a landowner drilled a well, the landowner’s neighbour had no choice but to drill his own well or risk losing his share in the common pool

  • This created the risk of a spindletop situation whereby everyone would sink their own wells which could potentially compromise the total amount of oil that could be ultimately recovered

  • Alberta responded to this decision by enacting the OGCA and OGC regulations—started implementing spacing rules

Oil and Gas Conservation Act and OGC Regulations (Alberta)
Section 4: Purpose

(a) to effect the conservation of, and to prevent the waste of, the O/G resources of AB

(b) to secure the observance of safe and efficient practices in the locating, spacing, drilling, equipping, completing, reworking, testing, operating, maintenance, repair, suspension and abandonment of wells and in operations for the production of O/G

  • Essentially says that the province can tell a property owner where to drill a well

(c) to provide for the economic, orderly and efficient development in the public interest of the O/G resources of AB

  • Can regulate how much oil can be produced

(d) to afford each owner the opportunity of obtaining the owner’s share of the production of O/G from any pool

  • Allows each property owner to his piece of the pie (target areas also achieve this purpose)

(e) to provide for the recording and the timely and useful dissemination of information regarding O/G resources in AB

(f) to control pollution above, at or below the surface in the drilling of wells and in operations for the production of O/G and in other operations over which the Board has jurisdiction

  • Two bodies in control of pollution (EPEA, which is composed of the NRCB and EUB)

  • Power of ERCB over environmental regulation is huge

  • Alberta Environment is there, but Energy Resources Conservation Board (ERCB) conducts the hearings

How does the OGCA Achieve its Purposes?
(A) Drilling Space Unit

  • The minimum area allocated for the purposes of drilling a well. The purpose is to effect the efficient recovery of oil

  • Definition: A DSU for a well is the surface area of the DSU and subsurface vertically beneath that area, OR where the DSU is prescribed with respect to a specific pool, geological formation, member or zone, the pool, geological formation, member or zone vertically beneath that area (OSC Regs)

  • A normal DSU for an oil well is one quarter section; gas well is one section (old rule).

    • New Gas Rule: 2 wells/pool/DSU

      • Rationale: Drilling for tight gas requires precision long vertical wells as the gas in usually found in narrow, cylindrical formations

  • Applications for smaller DSU’s are permitted under s. 15(3) but are only considered in light of technical considerations

  • Problem: DSU’s only provide a partial answer as owners have an incentive to locate wells strategically within a DSU to increase their share of the pool which would defeat the purpose of conservation spacing → target areas.

  • NOTE: The government sometimes leased both deep and shallow rights, in which case more than one well per spacing unit was permitted on the same section of land.

  • RECENT DEVELOPMENT: In November 2011, the government abolished spacing requirements for coalbed methane, shale gas, and low quality gas reservoirs

    • Rationale: The nature of these deposits required multiple wells for optimal production

Section 12: No person shall drill a well unless a license has been issued by the Energy Resources Conservation Board and is in full force and effect.
Section 15(3): No person shall apply for a license for a well for the purpose of obtaining production from the same pool as that from which another well is obtaining or capable of obtaining production in the same DSU

  • Recall: DSU is defined in the Reg. 4.020. Normal drilling spacing unit for oil is ¼ section; for NG 1 section. This is a presumption, you can override it

    • Reg. 4.040: The board cannot reduce the size of the spacing unit unless the applicant shows that

  1. Improved recovery will be obtained,

  2. Additional wells are necessary to provide capacity to drain the pool at a reasonable rate that will not adversely affect the recovery from the pool

  3. The DSU would be in a pool in a substantial part of which there are DSU’s of such reduced size; OR

  4. If in a gas field, increased deliverability is a possibility.

    • These are technical criteria and the onus is on the applicant.

  • One exception—you could get 2 wells in a spacing unit that will license to different reservoirs or pool of O&G

    • The function of spacing units is conservation. If there are 2 unconnected reservoirs then conservation is still achieved


  • Prior to 1981 (focus on resource allocation):

    • the purpose of the oil spacing unit was 1 per quarter section (in the middle)

    • A gas spacing unit was allowed 1 well per the four inner quarter sections (4 interior LSD’s)

  • In 1981 (agricultural protection), gas spacing units were changed so that 1 well could be drilled on each of the North Eastern quarter sections

    • The intention was not petroleum conservation, but rather to protect agricultural land (making access easier, and minimizing disturbance to land to drill a well)

    • Because it was in a corner of a quarter section, you no longer had to take all your equipment into the center of the land to drill a well

    • By keeping everyone at a distance, everyone had a fair hot of obtaining their share of an underlying reservoir

  • NEW RULE: Late 2012 DSUs still have the default rule of one gas well per section. But it’s a default rule because reservoir characteristics vary and you can change the area of the spacing unit because reservoir characteristics require a different placement of spacing unit. You cannot change them on a matter of convenience. (ie: 2 wells per section allowed in one case because oil well was especially permeable.)

    • Change 1—For oil wells is the target area is 100m from all boundaries of the DSU; Gas wells, target area 150m from all the boundaries of the DSU. There is a narrow exception for specific areas of the province, however we only need to know that there is an exception and none of the details.

    • Change 2—Announced that well density controls were removed for collate methane and shale gas reservoirs. The process for hydrofracking and collate methane require more wells than the rules originally permitted

    • Change 3—for all new gas wells, the rule changes to being allowed 2 gas wells pe section (which didn’t change any existing spacing approvals)

(B) Assignment of a Target Area

  • The location within the DSU where a well can be drilled

  • Purpose: Maintains approximately equal spacing between wells, prevents clustering of wells

  • Target areas promote: (1) equitable withdrawals and (2) reduces drainage across lease lines

  • Must distinguish between (i) non-agriculturally productive land and (ii) agriculturally settled land

    • These are shown on a map in Schedule 13 of the Regs.

(i) Non-agriculturally productive land (includes Fort McMurray, non-urban areas)

  • If the DSU is one section (gas), the target area shall be the central part of the section

    • Within 4 interior LSD’s of the section (LSD 6, 7, 10, 11)

  • If the DSU is one quarter section (oil), the target area shall be the central part of the quarter section

  • If the DSU is one legal subdivision, the target area shall be the central part of the legal subdivision

  • Key point: TA’s are the centre of the DSU

(ii) Agriculturally settled land (includes GP, Peace River area, Edmonton, Calgary)

  • Oil – NE ¼ of a ¼ section (LSD 6, 8, 14, 16)

  • NG – central part of section (NE corner of LSD 6)

  • Penalty: Imposes a penalty for a well being off the target area, via a reduction in your allowable production. This is meant to increase the efficiency of total recovery, and to assure that everybody will get their fair share of the reservoir (Regs. 4.030)

Problems after the Spacing Unit was Enacted:
(1) Pooling ss. 80-84

  • Definition: Pooling combines tracts of land to form a DSU

    • A tract is an area within a DSU or a pool within which the owner has the right or an interest in the right to drill for and produce oil and gas

  • Example: In a section, the quarter sections are owned by 4 different parties. Suppose an energy company is drilling for oil in LSD 6, but discovers NG. What is the energy company’s legal problem in that situation?

  • Must have the rights to the entire DSU (a section in this case) according to the spacing unit regulations. As a result, they would have to cap the well

  • Voluntary Pooling: Where the quarter section owners enter into an agreement to give the rights to one of the owners in exchange for a percentage of the oil and gas.

    • This could result in a holdout problem

  • Compulsory Pooling: Used when voluntary pooling fails due to a holdout. The owner of a tract within a DSU may apply to the Board for an order that all tracts within the DSU be operated as a unit to permit the drilling/production of oil and gas from the DSU (s.80)

    • Significant because it means someone’s lands can be pooled without their consent, even though they have the rights to the mines and minerals

    • Preliminary Steps:

      1. Must show that you cannot make an agreement on reasonable terms, and must provide detailed particulars on what you did to try and reach an agreement

      2. Must sort out who is going to get what share of production. The default rule is that the shares will be allocated on an area basis (s.80(4)(c))

        • This is called a royalty interest, which is a cost free share of the production

        • This presumption can be overcome if it can be shown that it is inequitable, ie. by demonstrating that the reservoir characteristics do not justify an equal split.

    • s. 80(7): In compulsory pooling, Production on one quarter section of land deems that there production on the other sections as well (but you have to check the lease to make sure)

        • Class note: there is some debate as to whether this section is designed to refer to freehold leases—probably not because it doesn’t explicitly state so

Rateable Take of Gas

  • The Board may, by order, restrict the amount of oil and gas that may be produced during a period from a pool in Alberta (s.36(1))

(2) Unitization ss. 78 and 79

  • Definition: Unitization combines DSU`s to form a field with the objective of exploiting the field through the minimum number of wells possible. Each landowner gets paid according to their production. Voluntary.

  • Example: The energy company has a gas lease overtop of a pool of gas, and is confident that it can drain a pool using a well on its existing DSU. However, the 8 surrounding sections (owned by different parties) could use a well and drain the pool also.

  • Under s. 4 of the OGCA, efficiency is a concern. The solution to this problem is unitization.

  • In Alberta, unitization is voluntary (contractual), and is obviously encouraged by the Board (s.79)

    • In Saskatchewan, compulsory unitization exists

  • You must inform the Board of what is going on by filing unitization agreements

  • This is important in the gas industry because gas is more fugacious than oil

  • Created to give each owner their chance of getting their share of the common pool, but not enough see s 48

  • If you don’t like the participation factor, then you don’t participate, but then you have to spend the expense to use your own land

(3) Indirect Monopolization (not covered in class)

  • Example: A company has a direct link from its well to an oil refinery. They are capable of producing at a faster rate than smaller producers who have adjacent leases. It is true that everyone can drill a well, but it is not true that everyone can get their share of the common pool

  • Solution: Access to transportation (common carrier – pipeline), refining facilities (common purchaser) and processing facilities (common processor order) resolve the problem of indirect monopolization.

(i) Common Carrier ss. 48-49

  • Rule: You cannot deny service to any customer if the customer is willing to pay the established price

  • An application can be made to the Board to have a pipeline declared a common carrier. As a result, no proprietor of a common carrier can allow any discrimination of any kind against any person attempting to have oil or gas transported (s.48)

    • They cannot even prioritize their own interests (s.48(3))

    • Cannot discriminate against someone who transports their oil through the pipeline

    • Cannot discriminate with their own product at the expense of others who wish to use the pipeline

    • Cannot discriminate in price or capacity

  • The only relief afforded to a common carrier is on the basis that the oil and gas is of inferior or different quality/composition

(ii) Common Purchaser ss. 50-52

  • Applies to a person who purchases, produces, or otherwise acquires oil produced from any pool in AB (a refinery)

    • An application can be made to declare a party as a common purchaser

  • In other words, a refinery can be deemed a common purchaser, which means that they must purchase all oil offered for sale to it without any discrimination (s.50)

  • The only relief afforded to a common purchaser is on the basis of inferior or different quality/composition (s.52)

(iii) Common Processor ss. 53-54 (not covered in class)

  • The owner/operator of a processing plant can be deemed a common processor, in which case they must process all gas brought forward without discrimination (s.53)

  • The only relief afforded to a common purchaser is on the basis of inferior or different quality/composition (s.54)

Introduction to Ownership Issues
Borys v. Imperial Oil (1953)

Facts: Borys acquired land in fee simple that had the following reservation on title: “all coal, petroleum, and valuable stone.” This reservation was in favour of CPR who, in reliance of this reservation, leased to Imperial Oil all petroleum that might be found within, upon, or under the said land. Problem arises because above the petroleum is a layer of NG.

Borys believes that NG was not included in the term “petroleum” found in the reservation, and accordingly that they are entitled to it. Problem is complicated further because the NG, once recovered, will be mixed with the petroleum (pressure change causes some NG to turn from liquid to vapor form).

Issue: Who owns the NG beneath Borys’s land?

Held: In favor of Borys


  • The court had no difficulty accepting that the NG in situ belonged to Borys because it was not included in the reservation. This was found despite the fact that a key feature of ownership, possession, is not found. However, the issue remains of how to deal with the NG that exists in the solution with the petroleum.

  • The court determined that petroleum, with a non-scientific interpretation, meant only a substance in liquid form. Natural gas, on the other hand, was a vapor and not included in the definition of petroleum.

    • From a scientific perspective, liquid vs vapor NG are very close in composition

  • Imperial Oil has a direct grant to the petroleum, and they are not under an obligation to conserve Borys’s natural gas with the consequent denial of their right to recover the petroleum in the usual way.

  • Even if it were conceded that the respective rights of the two parties are to work for and recover each his own property, it does not follow that neither can act without the consent of the other and that only by mutual agreement can they work at all.

Result: Borys can recover the NG by any usual and customary manner, but cannot prevent Imperial Oil from following a similar course.

NOTE: CPR’s reservation did not include a right to work. Despite this, the court held that a reservation by a landowner of the MM is meaningless unless it is accompanied by the right to work and recover the substance reserved. Accordingly, the Court gave Imperial Oil a right of access even though Borys did not consent. This was reversed by the Surface Rights Act, which has other requirements.
Cabre Exploration Ltd. v Arndt

Ratio: Upon the severance of the title to the minerals from the title to the surface, a right of entry arises at law. The surface owner’s permission is not required (the court basically found that a natural easement arose because of the severance of title)

Rationale: No party would purchase a severed title to mines and minerals that was not accompanied by a right to work the minerals

NOTE: This is changed by the Surface Rights Act, below

Surface Rights Act
Right of Entry:

  • No operator has a right of entry with respect to the surface of any land until:

    1. the operator has obtained the consent of the owner AND the occupant of the surface of the land; OR

    2. has obtained a right of entry by reason of an order of the Board (s. 12(1))

      1. NOTE: The board only grants a right of entry in exchange for compensation (s.23), which is determined based on market value of the land and other factors (s.25)

  • Notwithstanding anything contained in a grant, conveyance, lease, license or other instrument, whether made before or after the commencement of this Act, and pertaining to the acquisition of an interest in a mineral, an operator DOES NOT obtain the right of entry in respect of the surface of any land unless the grant, conveyance, lease, licence or other instrument provides a separate specific sum in consideration for the right of entry of the surface required for his operations (s. 12(2))

  • S 25-- Compensation provisions are designed to indemnify the surface rights owner

    • (1) For any damage caused by operator or other adverse effects

    • (2) compensation based on amount of land occupied based on the most productive use of the land possible to the land owner

    • Prevents O&G companies from taking advantage of people, they have to know why they are receiving the money—stops farmers from alleging they didn’t know what they were getting themselves into and complaining about it later

    • Usually calculated pretty generously, prevents agricultural opposition.

Five Reasons SRB for Granting Access:

  • The act only applies to these 5 cases to compel access

  • Nowhere does it say that you can have access for mine and mineral exploration (which is odd since you had this right at common law)

  1. Recovery of Minerals

  2. Construction of tanks, stations and structures in connection with a mining or drilling operation

  3. Pipelines

  4. Power transmission line

  5. Telephone line

Encana Corp v Campbell

  • s. 15(6) of the SRA allows the Board to grant a right of entry onto certain lands, along with conditions to that entry, so long as the conditions imposed are not against the license granted to the licensee

  • SRB cannot exercise jurisdiction to deny entry to the well site so as to frustrate the license—right of entry order must be granted

  • suggests that the AER license takes priority—the act does not read exactly like this but Percy assumes this interpretation is correct

What Does a Typical Reservoir Contain?

  • Free gas

  • Oil reservoir

  • Mixed reservoir (solution/evolved gas)

  • Connate water at the bottom (will contain some dissolved gas)

Gas Cap Gas (Free Gas): Gaseous hydrocarbons existing at the top of the reservoir; remains gaseous throughout the production process and is a source of pressure to drive oil to the surface. In 1951, you could not produce the Gas Cap Gas until you had produced the oil from the well (Borys was one of few individuals who was able to capture the gas)
Solution Gas (Associated Gas): Gas that is liquid under the initial reservoir conditions, enters the well bore as liquid, but due to pressure changes/temperature changes in the well bore, changes to a gas and emerges at the surface as a gas.
Evolved Gas (Secondary Gas Cap Gas): Liquid under initial reservoir conditions, yet changes to a gas in the reservoir upon human intervention; enters the well bore as gas and emerges at the surface as gas. Has similar composition to solution gas, so it is difficult to determine the origins of each.

Back to Bory’s: Who Owns the Natural Gas?

  • Main Question: The land had a reservation for “petroleum” only, so the question was whether this should include the natural gas layer above the petroleum

  • Vernacular Approach What was the intention of the contracting parties at the time of the grant/land transfer? Must look to the lay person’s understanding of petroleum at the time of grant (1906) Accordingly, since petroleum is a liquid and natural gas is a vapour, they are separate substances

    • (NOTE: This is NOT a universal rule, this was just for this case)

  • Problems:

    • Main opposition via scientific approach which casts doubt on whether you can make a meaningful distinction between liquids and gases under the ground.

    • Extracting petroleum brings a combination of gas cap gas and solution gas to the surface, and the substances are not in a constant phase. As they rise to the surface, some previously liquid molecules turn to gas

  • So when do we apply this arbitrary distinction? Three possibilities concerning when to look at the phase of petroleum/natural gas:

    • Condition within the reservoir—what was the distribution of substance prior to production?

    • Condition in which the substances enters the well bore—what condition does the substance enter the well for production?

    • Condition in which it arrives at the surface (determined by carbon content)—what is the condition when it reaches the well head? This would typically yield more vapour NG

  • Borys Outcome: Borys got the NG in the gas cap, but not the NG in the solution

Does Borys have the right to the gas cap gas at the surface?

  • Yes, but both mineral owners/lessees have a right to recover the leased substances. This is an incidental part of the mineral interest

  • Without statutory regulation this means that the NG owner could collect the gas at the cost of losing the required pressure to later capture the petroleum.

  • This is part of the driving force behind statutory regulation indicating that the gas cap of a reservoir cannot be harvested unless the oil is gathered at the same time.

  • Imperial Oil is entitled to recover petroleum by ordinary and reasonable methods. This will involve losing gas cap gas. They must have the right to do this because otherwise they would not be able to produce petroleum and their interest would be sterilized.

  • In situations where companies are actively capturing and selling gas cap gas there may be ramifications as they may be seen as converting and selling someone else’s property, or are benefiting from property owned by someone else. Based on production figures, it is possible to estimate how much cap gas and mixed gas there is in the usual reservoir.

  • Result: Borys reached a settlement with Imperial Oil, because Borys’ strategy would have been to immediately drill for natural gas. This would result in affecting the pressure when extracting petroleum and imperial would only get a fraction of their petroleum. Gas cap is essential to production of petroleum. Borys got a 2.5% royalty of everything produced from the reservoir.

Legislative Response to Borys

  • Many companies had to go around and get NG leases to avoid the Borys problem

  • You cannot concurrently produce oil and its associated gas cap without an order from the Board subject to any terms and conditions it sets (s. 39 OGCA)

  • a NG lease must say that the NG owner will not produce NG until all the oil is gone

    • This essentially sterilizes the rights of NG owners, and provides no compensation to them

Borys Summary

  • Natural gas—owner owns the gas in the gas can

  • Solution gas—belongs to the petroleum owner

  • Ownership is a bundle of rights in Oil and Gas law in Canada A defeasible fee simple interest

    • Right of transferability

      • Observed in LMM and Borys

    • Right to use as one sees fit subject to regulatory restrictions

      • A petroleum owner/lessee can drill for petroleum and use it as he sees fit. BUT, the OGCA places limitations on this whereby natural gas cannot be produced until all the oil is produced (OGCA s.39)

    • Right of exclusion

      • We can exclude others from entering the pool beneath our land, but we cannot exclude them from draining the pool from their land.

  • Current test for ownership of petroleum and natural gas: All liquid hydrocarbons in the reservoir at the time of the grant. This ownership principle needs refining to encompass “solution gas” and “evolved gas”

  • Borys has come up in being applied to (a) evolved gas (b) gas over bitumen (c ) coal bed methane

Prism Petroleum v. Omega Hydrocarbons

Facts: Prism (the appellants) entered into a unitization agreement for the West Provost Viking Gas Unit. Omega (the respondent) has two operating oil units within the boundaries of the gas unit. The unitization agreement includes:

  • petroleum substances and all fluid hydrocarbons not defined as oil – everything except oil

  • Oil is defined as “crude oil and all other hydrocarbons regardless of gravity that are or can be recovered in liquid form from the unitized zone through a well by ordinary crude oil production methods.” – Omega

  • So if recovered as a vapour then it belongs to gas owner—Prism

Key Fact: Omega acquired its oil rights after the unitization agreement was in effect. This means that the initial registered owners or lessee’s from the registered owners could only convey to Omega those rights that were not already conveyed to Prism. Omega started producing oil in the unitized zone, and drilled 17 produced wells. Prism claimed ownership to the gas that was being produced from these wells.

Issue: Is Omega violating anyone’s rights by producing gas along with its oil?

  • The gas at the heart of this dispute is Solution Gas, which emerges at the wellhead as a vapour but is in liquid form in the reservoir. Thus the issue is reduced to whether the plain words of the definition related to surface or reservoir conditions.

  • Once the case is characterized as a solution gas case, it follows that the great temptation is to apply Borys, and to therefore hold that Omega as the petroleum owner can take the solution gas.

    • BUT, remember: Borys was not a case of general application, but it held that the ordinary meaning of petroleum at the time of the land transfer between CPR and Borys included all hydrocarbon liquid substances in the reservoir

  • The Court nevertheless followed Borys and said that because there is not a test for determining the nature of ownership of a substance at the surface, then we must look at the reservoir conditions. Therefore, the solution gas belongs to Omega

A Closer Look at Prism
(1) Why did the ABCA consider the fact that Borys would not automatically decide the case?

  • The court in Borys emphasized that the ruling was contextual, and that the laymans meaning must be given to each lease/agreement. Accordingly, the meaning of the words “petroleum” and “oil” may vary depending on the lease/agreement

  • Owners argued that they define gas in a different way than was defined in Borys.

(2) What possible legal basis was there for Prism’s argument that they were entitled to the non-gas-cap gas that was produced by Omega?
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