Property law Alberta, Drill Baby Drill

Introduction

The Canadian Pacific Railway (CPR) was given money and land by the Canadian government for the creation of a railway system that connected eastern too western Canada; approximately in the early 1900’s.  For a period, the CPR made agreements with Canadian settlers with that land which included “Split Title” land.  This involved the reservation of certain minerals that secured rights to the Petroleum to the CPR (among other certain rights).   Over the years these rights were either passed on through new ownership or leased to producers.  Years later, controversy regarding the rights to ownership of was called evolved gas ensued between parties of who maintained ownership rights to the natural gas and the petroleum.  Evolved gas occurs when “natural gas separates out of solution from petroleum in the reservoir as a result of declining pressure called evolved gas”[1].  This essay will examine the Supreme Court of Canada’s ruling in Anderson v Amoco Canada Oil and Gas 2004, (Anderson) which settled this issue of ownership regarding evolved gas.  It involved these “Split Title” lands “contracts entered into between 1907 and 1912”[2] where land title was split between landowners and the reservation of certain sub surface rights to the CPR.   In considering this ruling it is important to remember that the contracts were entered into over a hundred years ago, and today it is questionable what these parties’ understandings were back then.  With the advancements in science and technology certain factors may not have been available at the time to provide parties with an informed grasp of the contract’s implications.  This paper will outline the decision in Anderson to provide the reader with an understanding of the facts of the case, outlining two fundamental points which the Court based their ruling. The establishment of these two points was based on the Borys v Canadian Pacific Railway and Imperial Oil Limited 1953, (Borys) decision. Then this paper will then consider an alternative to the problem solution as expressed by James Pasieka and Glenn Cameron in their paper entitled Ownership of Evolved Gas in Split Title Situations.  In conclusion, it will be evident that the Court’s in Anderson, opened themselves up to criticisms in their approach to ownership rights of evolved gas.

Approximately one hundred years ago, the CPR realization that the minerals under their land were potentially valuable, lead to the ‘Split Title’ of these lands.   Again, years latter another recognition of the potential value of the evolved gas, would incentivise the owners of natural gas rights to that land to engage in a dispute over its ownership.  While petroleum and natural gas are distinct substances, the physical form of hydrocarbons which formed under ground went through phase changes once drilling began.  These phase changes of “hydrocarbons found in liquid form will change into a gas under this pressure of drilling”[3].  Once this happens it is impossible ‘to determine what gas was in its original state, subject to the reservation and to what has changed called evolved gas’ that was arguable not a part of the reservation’[4].  To this end the natural gas owners argued that this evolved gas despite its evolution was owned by them.  As such the natural gas which was escaping was being extracted with no compensation being provided to the landowner.  Once again, the issues of the “respective subsurface rights of the petroleum owners and the non-petroleum owners under the Split Title Lands” was to be determined by the Courts after the landmark case in Borys.  The first of two cases to determine subsurface rights was decided by the Privy Council in the Borys case.  This ruling in Borys held that the reservation of petroleum did not include natural gas, which remained the ownership of the settlers or landowners claim, while the liquid form of gas was owned by the CPR owning subsurface rights to the petroleum.  The ownership of these different subsurface rights reflected a realization of the potential economic value of subsurface minerals.  Problematically, for the petroleum developers after the Borys ruling, was once again this issue of ownership.  It would come back to haunt them in the form new understandings of the characteristics of hydrocarbons in the form of evolved gas rights; assumingly something not contemplated by the original contracting parties.

The Supreme Court in Anderson found it important to look back at Bory’s case[5] as a foundation in resolving the ownership of this evolved gas. The Bory’s ruling clearly stated that the petroleum reservation did not include natural gas, the Privy Council reading this meaning into the original contract.   Essentially Borys determined that based on understandings in the original contract it was established that ‘petroleum under the split tile lands did not include gas[6].  The initial trial judge in Bory’s, “Howson C.JT.D. decided the vernacular, not the scientific, meaning of petroleum was to govern what was reserved from the transfer. He found petroleum only included mineral oil[7]. The vernacular meaning of petroleum at the time of the transfer was to govern its interpretation.  Parlee Ja. For the majority of the Privy Council concerned but did not agree that this limited CPR’s rights to the actual mineral oil”[8].  The second feature of the Borys decision was that the Court found important in Anderson, was that the Privy council agreed with the initial trial Judge that the “reservation included an implied right to work and produce the petroleum”[9].  These two points would aid the Supreme Court in Anderson to establish a reading into the original contract, once again, to determine ownership.  The producers claim in Borys that they held the rights to natural gas was based on this understanding of the states of hydrocarbons in liquid and gas form included petroleum.   It is this ruling and understanding of the different states of hydrocarbons and an implied right to extract the petroleum which would lead a more favorable ruling for the producers in Anderson.     

Before the Court could read meaning into the old contract, they found it necessary to address this issue of phase changes in the hydrocarbons.  To achieve this the Court set out to determine at “what point the Privy Council (in Bory’s) found was the appropriate time to determine what phase a molecule of hydrocarbon was in and therefore to whom it belonged”[10], given phase changes that occurred during drilling.  Understandings between a railway company and landowners were, as a reasonable assumption, limited regarding phase changes of hydrocarbons.  After the ruling in Bory’s, which was the first time new meanings were read into the old contract, the result, “enabled Imperial oil to produce the petroleum reserves leased to it by the CPR even though the Imperial oil did not also own or lease the natural gas that was found in the reservoir together with the petroleum and even though natural gas would be lost as a result of the production activity”[11].  Now, in Anderson if the plaintiffs were successful in claiming ownership of the evolved gas would increase the royalty payments, they would receive from the producers, which may work retroactively.

Problematically the economical ramifications on oil producers would be high.  Essentially, the plaintiff, Anderson, was attempting to maximise its entitlement “because the hydrocarbons within the pool will have the most opportunity to evolve into gas”[12].  Fortunately for the producers in Anderson, the Court did not see the original contract this way.  The Court found that it was in their original state prior to disturbance when the ownership of these minerals would be determined based on the original implied understanding of the contract and the ruling in Borys.  According to the Court, the reasoning for this was because the “pools were not interfered with by human contact at the time of reservation” [13].  Had the Court determined that the ownership started at the point of extraction, then that gas which evolved and escaped would essentially be the property of the natural gas owner.   So, taking from Bory’s, the Anderson case found that the “phase changes after drilling did not alter the ratio of ownership created at reservation”[14].  States of hydrocarbon underground are based understandings of scientific advancements made after the contract was signed[15].  Scientific, technological and economical factors bread new arguments from both sides in both Borys and Anderson.  A commonsense viewpoint would then potentially criticize the Courts in the participation of essentially a re-drafting the original contract for support of the oil producers.  Neither the CPR nor the settlers at the time may have known exactly the value or the state of phase changes of hydrocarbons at the time signing the contract.  It would seem appropriate for the Court then, in this consideration, to fall back on more common law approach to property ownership rather than try to create what would have been understood by both parities years ago in the original signing of the contract between them.  

In their paper Ownership of Evolved Gas in Split Title Situations, by James Pasieka and N Glenn Cameron, put forward an interesting alternative argument in support the natural gas owner’s position.  They place the petroleum owner as someone who has no right to the evolved gas.  According to Pasieka and Cameron “there is no compelling practical reason or basis in law why the owner of the petroleum should be entitled to such natural gas”[16]. This argument was based upon one main consideration of a modified rule of capture. This modification was an augmentation of the American model to fit their conclusions[17] which originally was constructed for ownership rights of water pools under adjacent parcels land.  Simply put, the drainage of gas, oil or water from a property that is from a pool underneath adjoining properties, once extracted that party who captures it claims title to it[18].  The purpose of this was that the adjoining property owner were to have no remedy against its extraction and once it was extracted became the owner of the party who took it out of the ground or who was in possession of it.  The Court in Anderson rejected the need to consider any broad theorizations of ownership[19], of this kind.  If possession were to involve the bringing of something into one’s control, then a modified rule of capture would be in line with this type of thinking and avoid criticisms made about the possibility of dangers in reading into what parties understood years ago. 

The rule of capture was created to decide issues of ownership as was the issue in Anderson.  The Court correctly stated in , that phase changes were not contemplated in a rule of capture. Further, Pasieka and Cameron realize that the rule of capture deals with “different ownership interests across spacing and unit boundaries and not subsurface rights”[20].  They also realize “the impossibility of determining whether any production from a reservoir is from the well on the owner’s property or an adjoining property”[21].  They suggest that in the case of evolved gas that “if the natural gas escapes from solution with the petroleum before the petroleum enters the bore hole where control of the production is obtained, then the owner of the petroleum failed to capture the gas”[22].  The phase change of the hydrocarbons would not matter; neither would be when or how phase changes occurred in this line of reasoning.  This is a similar conclusion the Court drew in Anderson when they considered the contractual relationship between the parties.  

There were two points of controversy the Court identifies in application of a rule of capture.  If applied in this case the Court found that it would defeat those who wished to “divide their interests under the same property, defeating the purpose of a contract reducing the substances to possession”[23].   Secondly, the Court found. that ownership by capture in this sense would further defeat the purpose of reservation under the same pretense”[24].  According to Pasieka and Cameron, “evolved gas may accordingly continue to be produced together with the petroleum notwithstanding that such natural gas has separated from the petroleum and periodic testing allows technicians to measure the amounts of evolved gas with accurate estimations”[25].  In this way the amount of evolved gas that escapes are easily compensated to the natural gas owner at the expense of the producer[26].  Problematically, as Pasieka and Cameron point out, the existing leases would potentially be put into jeopardy for not paying past royalties and the costs of those new royalty’s would put further strain on the producers financially.  As, twenty-nine percent of the land held in Alberta is by split title lands, any potential court decision favoring the owners of natural gas would have potentially hindering the production of petroleum in Canada.  The costs associated with the ramifications of ruling in favor of the natural gas owner would have been detrimental to the entire industry in Alberta.[27].  

Conclusion:

Criticisms of the Courts approach in Anderson must consider the alternative economical ramifications of a decision which would favor the natural gas owner’s position.  Two options critiqued in this paper that if juxtaposed, the Court would either follow past property law doctrine or favor a contractual approach to the issue of evolved gas that would lead to different rulings for either side.  To be fair a deeper dive must be made into how a contractual verses a property law perspective would favor alternate points of views.   As outlined by Pasieka and Cameron a modified rule of capture might have been in line with a historical approach to ownership of these subsurface rights.  Further, Pasieka and Cameron realize, that the leases associate with producers may have been null and void for a lack of payment to royalties and those royalty payments over the years of extracting evolved gas would be potentially high.  It is hard to see how these economic issues may not have at least influenced the Court in their chosen contractual approach to ‘Split Title’ lands.  At least it seems to be a process of constructing new meanings behind an understanding between parties to a hundred old contract which avoided potential economic harm to producers.  Rather than considering a modified rule of capture, that’s in line with years of property law doctrine, the Courts must have realized potentially that there was no ad idem (meeting of the minds) in the contract.  Neither the settlers nor the CPR where producers of petroleum and neither were obviously well versed in phases of hydrocarbons.  So, it may remain a question of perception as to how far the Court in Anderson went, if they did insert fairer terms into an agreement under the guise of extracting meaning from pre-existing terminology.

[1] J Pasieka and G Cameron, Ownership of evolved gas in split title situations (1999) p 21

[2] See., Anderson 2004

[3] Ibid.

[4] Ibid.

[5] Borys did not consider evolved gas directly although it can be argued that it did settle the issue.

[6] See., Anderson 2004 para 20-22

[7] Ibid., para 22

[8] Ibid., para 23

[9] Ibid., para 24

[10] Ibid., para 26

[11] J Pasieka and G Cameron, Ownership of evolved gas in split title situations (1999) p 25

[12] See, Anderson para 27

[13] Ibid., para 28

[14] Ibid., para 44

[15] Anthony Sampson, The Seven Sisters (The Viking Press, Inc.: New York, 1975), 32-33, 58, 147

[16] J Pasieka and G Cameron, Ownership of evolved gas in split title situation (1999) p 25

[17]  Ibid., p 26

[18] Ibid., p 26

[19] See, Anderson 2004 para 25

[20] J Pasieka and G Cameron, Ownership of evolved gas in split title situation (1999). p 26

[21] Ibid., p 26

[22] Ibid., p 26

[23] See Anderson para 39

[24] Ibid, para 39

[25] J Pasieka and G Cameron, Ownership of evolved gas in split title situation (1999). P 21

[26] It would follow that this is in line with principles outlines in Pierson v Post 1805 where first possessor wins rights to previously owned object.  The gas escaping was not captured thus it remains the property of the natural gas owner or at least they must have claim to it.

[27] J Pasieka and G Cameron, Ownership of evolved gas in split title situation (1999). p 32