Canada: Drilling An Offset Well – Is It A Title Preserving Well ?

Last Updated: March 27 2008
Article by Cheryl Kelly

Copyright 2008, Blake, Cassels & Graydon LLP

Originally published in Blakes Bulletin on on Energy -Oil & Gas - March 2008

The recent Alberta Court of Appeal case, Amethyst Petroleums Ltd. v. Primrose Drilling Ventures Ltd., involved a dispute over the right to oil and gas on lands jointly leased by the respondents, Amethyst Petroleums Ltd. and Hill Oil (1993) Limited, and the appellant Primrose Drilling Ventures Ltd. The lands were owned by Bearspaw Petroleum Ltd. (Bearspaw), and Primrose was the operator. Amethyst, Hill Oil and Primrose had previously drilled the 14-8 well on the lands. The right to oil and gas in this instance depended on whether a particular well was considered a "title preserving well" under the governing operating procedure, the 1990 CAPL Operating Procedure (the Operating Procedure). If the 2-8 well was a title preserving well, Primrose would be entitled to the respondents' working interest in the 2-8 well. If it wasn't, then Amethyst and Hill Oil would retain their interest upon payment of certain costs and penalties.

Pursuant to clause 1007 of the Operating Procedure, a party who has elected not to participate in the drilling of a well may retain its interest in the well by paying certain costs and penalties unless the well is a so-called "title preserving well".

Clause 1010 applies to title preserving wells and includes the following provisions:"(a)...(iv) "title preserving well" means a well which is drilled, completed or re-completed hereunder, whether the failure to conduct such operation would result in the forfeiture of all or a portion of the joint lands contained in a title document ...(b) Notwithstanding Clauses 903, 1007 and 1008, a non-participating party with respect to a title preserving well shall forfeit: (i) upon completion of such operation, one hundred percent (100%) of its working interest in such well ... to the participating parties in the title preserving well ..."

Pursuant to the offset well clause contained in the subject lease, the lessees had six months to commence or cause to be commenced the drilling of an offset well following the date upon which commercial production is obtained from a well located on laterally adjoining lands. Pursuant to the default clause contained in the lease, upon receipt by the lessees of written notice from the lessor of a default, the lessees would have 30 days to remedy such default or the lease would terminate.

On September 18, 1997, Bearspaw issued a default notice to Amethyst, copied to Primrose, as the 14-5 well on neighbouring lands was draining the detrital formation. The notice demanded that the lessees drill an offset well in accordance with the offset well provision contained in the subject lease. The default notice was later withdrawn by Bearspaw for various reasons, including Primrose's argument that the default notice was invalid. Following the issuance of this default notice, Primrose conducted geological investigations in respect of the lands and found that considerable potential existed.

Several months following the issuance of the default notice, Bearspaw issued a subsequent default notice to both Amethyst and Primrose, which included a proposal whereby, in the event that Amethyst elected not to offset the 14-5 well, Amethyst would retain the 14-8 wellbore and the rights to the current producing interval, but would return the remainder of section 8 to Bearspaw. The offer was open for acceptance for 30 days, after which time the lease would become null and void and Bearspaw would seek to terminate the lease as a whole and take over the 14-8 well.

Two days following the receipt of this notice, Primrose issued an independent operations notice to the respondents stating that, as the offset notice required a well to be drilled, this was a title preserving well, and that failure to participate in the operation would result in forfeiture of each non-participating party's interests pursuant to Article 1010 of the Operating Procedure.

Primrose subsequently proceeded to drill the offset well at 2-8 and asserted that Amethyst and Hill Oil had forfeited their interests in the well as they did not participate and as it was a title preserving well.

The trial court found that the well was not a "title preserving well" as the default notice did not specify that failure to drill the offset well would result in the "forfeiture of all or a portion of the joint lands contained in the title document" as required by Clause 1010. The lessees could have surrendered certain formations as opposed to surrendering the entire lease. Secondly, the trial court held that, where a well is drilled for economic reasons rather than to preserve an interest in land, such well is not a "title preserving well". The trial court found that Amethyst and Hill Oil did not forfeit their interests in the well.

The Court of Appeal noted that the standard required to overturn the trial court is a palpable and overriding error. Contrary to finding an error, the Court of Appeal agreed with the trial judge that the only reason Primrose had changed its attitude towards the default notices was because the Primrose geologist expected promising production from both the detrital and glauconite formations. The Court of Appeal noted that in order to be a true offset well, production in the offset well must be restricted to the formation that is being produced by the well which invoked the offset obligation – in this case, the detrital zone.

Finally, the Court of Appeal reiterated the trial court's findings that the lessees had another option available other than termination of the lease. The appeal was dismissed and the respondents were entitled to retain their interest in the oil and gas in the 2-8 well.

In order for the drilling of an offset well to be considered a title preserving operation, the failure to drill such well must result in no other outcome other than forfeiture of land contained in the title document.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Cheryl Kelly
 
In association with
Related Video
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert
Email Address
Company Name
Password
Confirm Password
Mondaq Topics -- Select your Interests
Accounting and Audit
Anti-trust/Competition Law
Consumer Protection
Corporate/Commercial Law
Criminal Law
Employment and HR
Energy and Natural Resources
Environment
Family and Matrimonial
Finance and Banking
Food, Drugs, Healthcare, Life Sciences
Government, Public Sector
Immigration
Insolvency/Bankruptcy, Re-structuring
Insurance
Intellectual Property
International Law
Litigation, Mediation & Arbitration
Media, Telecoms, IT, Entertainment
Privacy
Real Estate and Construction
Strategy
Tax
Transport
Wealth Management
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.