This decision illustrates the interaction between contract and legislation, and in particular, the effect on numerous petroleum and natural gas leases of a recent amendment to Alberta's Mines and Minerals Act (Act) which declared coalbed methane to be natural gas.
The amendment to section 10.1 of the Act was made in December 2010. Subsection 10.1(1) provided that "coalbed methane is hereby declared to be and at all times to have been a natural gas." Subsection 10.1(2) stated that the declaration did not affect any contract that specifically grants, leases, excludes, excepts or reserves rights in respect of coalbed methane, where the contract was entered into, prior to the amendment coming into force.
Encana Corporation (Encana) and others had granted petroleum and natural gas rights to ARC Resources and others in hundreds of leases, all entered prior to the amendment. ARC Resources claimed that coalbed methane was a substance granted pursuant to the leases. Encana disagreed on the basis that, for the purposes of the leases at issue, coalbed methane could also be coal and the leases provided for a reservation of coal.
The litigation concerning the construction of the various leases was scheduled for trial in March 2011. When the Act was amended in December 2010, the defendants applied for summary judgment on the basis that the amendment provided a complete defence to the claims made in respect of many of the leases, as a matter of statutory interpretation.
The defendants' argument was straightforward. They argued that section 10.1 declared coalbed methane to be a natural gas. Since the plaintiffs' reservations were for coal and the leases granted natural gas rights, the reservations did not include coalbed methane. They also relied on comments of the minister of energy during first and second reading of the amendment, which they say confirmed their interpretation that the effect of the amendment was that the owner of natural gas owned the coalbed methane.
The plaintiffs raised numerous arguments in response. Among others, they argued that section 10.1 did not apply to private minerals or private leases and that for the purposes of the leases in question coalbed methane was reserved by the reservation of coal. For the latter argument, the plaintiffs asserted, among other things, that: (1) not all natural gas was natural gas; that is, methane bound up in coal in situ should go with the coal, just as solution gas goes with petroleum pursuant to a 1953 decision of the Privy Council in Borys v. Canadian Pacific Railway, [1953] A.C. 217; (2) common law property principles dictated that an owner of coal has a fee simple estate in the entire stratum containing the coal; and (3) their construction of the leases was supported by the realities of coal mining, which require control over the gases from coal for safety and conservation reasons.
Despite the creative arguments raised by the plaintiffs, the Court found the interpretation of section 10.1 to require only an application of the principles of statutory interpretation. The Court rejected the need to determine what coalbed methane was from a scientific or etymological perspective. The Court noted that, even if it accepted that coalbed methane was coal, it was irrelevant because the legislature had declared it to be natural gas and the defendants were granted natural gas pursuant to the leases. In accordance with section 10.1(2), only those parties who had turned their minds specifically to coalbed methane would be protected from the operation of section 10.1(1) and only to the extent that the contracts dealt specifically with coalbed methane itself. This had not been done in any of the leases in the instant litigation. In the result, the application for summary judgment was granted.
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