Canpar Holdings Ltd. v. Petrobank Energy & Resources
Ltd., 2009 (ABQB)
In Canpar Holdings Ltd v. Petrobank Energy and Resources Ltd.
and Gentry Resources Ltd., the Alberta Court of Queen's
Bench considered a claim by a corporate petroleum and natural gas
lessor against a lessee for failure to comply with a prescribed
royalty schedule. The lease expressly provided that royalties were
to be calculated at a given percentage of either the sale price or
market value, whichever was greater, and "all without
deductions", except transportation expenses. The lessee took
the position that the use of fuel gas was a permitted deduction
pursuant to the definition of "operations" in the lease.
The lessor argued that this deduction was beyond that authorized by
the royalty clause and issued a notice of default. The lessee
continued production after the notice of default was given.
The Alberta Court of Queen's Bench, in an oral decision issued
by Justice Miller, considered (1) the correct interpretation of the
lease with respect to the price of gas, and (2) whether fuel gas
was a permitted deduction.
The Court relied on a strict interpretation of the terminated
petroleum and gas lease to determine damages with respect to
royalty pricing and payments. The Court found that in calculating
royalties, only two options were available as provided in the
royalty clause: the greater of sale price or market value. Contrary
to prior decisions, which considered the conduct of the parties and
common industry practice when interpreting such clauses, the Court
applied a strict, rather than purposive interpretation to the
phrase "all without deductions" in the royalty clause.
Using this approach, the Court found that fuel gas was not included
in the definition of "operations" and was, therefore, not
an allowable deduction under the exemption provision.
570495 Alberta Ltd. v. Hamilton Brothers, a 2008 Alberta
Court of Queen's Bench decision, provides similar guidance in
that a royalty owner is only required to pay a share of processing
expenses where it is expressly accounted for in the lease. On the
other hand, although addressing a shut-in well provision, the 2008
Alberta Court of Appeal case of Kensington Energy Ltd. v.
B&G Energy Ltd. gave direction on the interpretation of
oil and gas lease agreements, suggesting that courts should examine
the subtle meaning of language and give effect to the parties'
intentions.
In determining the damages payable in the Canpar case, the
Court concluded that a lessee's continuation of production
after termination of a lease amounts to the tort of trespass or
conversion, but does not warrant punitive or exemplary damages
unless the lessee's conduct is high-handed, abusive or
egregious. In this case, the Court held that the lessee's
conduct after termination of the lease did not meet these criteria.
The lessee was therefore only required to provide an accounting of
profits, less any associated costs actually incurred. The primary
focus was to restore the lessor to its original position had the
tort not occurred.
This case is significant in that the Court gives full effect to the
express language of the royalty clause prohibiting deductions. That
said, the fact that royalties in this case were to be calculated
based on the greater of sale price or market value may distinguish
it from other cases where the royalty is calculated at the
wellhead, where a more convincing argument may be made that
deductions ought to be made for expenses that were incurred up to
the time of sale.
This decision demonstrates that petroleum and natural gas leases,
and specifically royalty clauses, must be drafted with care. Given
the Court's reliance on the plain language of the agreement,
future leases should expressly outline the percentage of production
on which the royalty is payable, specific allowable deductions
(i.e. operating expenses of the property, other overriding
royalties, transportation and gathering, cleaning, processing,
enhanced recovery, etc.) and any right of the lessee to use
substances consistent with the royalty (for example, fuel gas for
enhanced recovery to extend production), and whether the lessor is
to bear a portion of that expense.
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