Canada: Encana Corporation V. Arc Resources Ltd.: Ownership Of CBM Within Freehold Alberta Lands

The ownership of coalbed methane on freehold lands has been uncertain in Alberta due to ongoing disputes between coal owners and natural gas owners. On July 7, 2011, the Court of Queen's Bench of Alberta confirmed that CBM is natural gas and the right to exploit CBM is granted to natural gas lessees under the terms of standard petroleum and natural gas leases.

EnCana Corporation is the successor to the Canadian Pacific Railway, which had over many decades leased out the rights to natural gas to various petroleum industry participants. Leases granted by predecessors to EnCana generally granted natural gas and exempted coal. EnCana asserted that CBM was coal and as such was reserved from the grants. The continuing claims by EnCana spawned a public hearing before the Alberta Energy Utilities Board in 2006. In March of 2007, the EUB found that CBM is natural gas and is distinct from coal.1 Court of Queen's Bench proceedings were also commenced by EnCana alleging trespass by certain natural gas owners to the CBM. ConocoPhillips and other asserting as natural gas lessees commenced separate actions against EnCana as coal owner, that they had been granted the "right to win, work and recover CBM and EnCana as the coal owner had no right to CBM." The actions were consolidated and set for trial in March of 2011.

By way of background, in 1991, the EUB and the Alberta Department of Energy published IL-91-11, a joint Information Letter on CBM. IL 91-11 sets forth the position of the EUB and Department of Energy that CBM is a form of natural gas and that under the Mines and Minerals Act (MMA),2 natural gas and coal are treated as distinct substances and are leased separately. Natural gas may exist in a variety of reservoir rocks, including coal seams. In 2003, the Government of Alberta amended the MMA to specifically address CBM within Crown lands.

Section 67(1) added to the MMA states that a "coal lease grants the right to the coal that is the property of the Crown in the location in accordance with the terms and conditions of the lease but subject to subsection (2), does not grant any rights to natural gas, including CBM."

The Government of Alberta passed Bill 26 into law on December 2, 2010. Until Bill 26 was passed, there was no legislation specifically dealing with CBM on freehold lands. Bill 26 added section 10.1 to the MMA and states that CBM "is hereby declared to be and at all times to have been natural gas." Subsection 10.1(2) provides that subsection (1) does not affect any contract that specifically grants, leases, excludes, excepts or reserves rights in land in respect of CBM that was entered into prior to the coming into force of section 10.1.

As a result of Bill 26, the gas producers were granted leave to bring a summary judgment application seeking declarations that CBM was included within the substances granted under their leases.

The summary judgment applications were heard before Madam Justice Kent of the Alberta Court of Queen's Bench. The Court first considered whether the meaning of section 10.1 was obvious. Justice Kent determined that the plain wording of the section, combined with the statements in the Alberta legislature from the Minister of Energy, strongly supported the interpretation of section 10.1 that the owner of natural gas owns CBM. Having determined that the meaning of section 10.1 was obvious, Justice Kent then considered each of the coal owners' arguments to determine whether the applicants' interpretation was incorrect or if summary judgment was otherwise unavailable due to complex issues of fact, law and policy. Justice Kent held:

  • Section 10.1 applies to freehold minerals and freehold lands. There was nothing in the MMA or in the Minister's statement to support the interpretation that the MMA only applies to Crown minerals and freehold minerals where title is split with the Crown.
  • A scientific and etymological analysis of CBM was irrelevant in the face of section 10.1. The legislature declared CBM to be natural gas. By leasing natural gas, the lessors also leased CBM and only parties who turned their minds specifically to CBM are protected by the operation of section 10.1(2), and only to the extent that their contracts specifically dealt with CBM itself.
  • No factual determinations were required as the meaning of section 10.1 is clear. Thus, the issue could be decided summarily.
  • As no findings of fact were required, there was no prospect of inconsistent factual findings in ongoing litigation. Justice Kent stated that the interpretation of section 10.1 would be the same at trial.

The intent of section 10.1 was to resolve the conflict between the holders of natural gas and coal rights over ownership of CBM. By granting summary judgment, the Court of Queen's Bench gave effect to the legislative intent of section 10.1 of the MMA to clarify ownership of CBM in favour of the natural gas rights holder for both Crown and freehold lands and to provide certainty to the industry and encourage development of CBM.

The decision of the Court is the first decision in Canada to deal with the issue of CBM ownership. The interpretation of section 10.1 of the MMA by the Court of Queen's Bench fully aligns with the position of the EUB in IL 91-11, EUB Decision 2007-024, the Alberta position on Crown lands since 2003, British Columbia legislation,3 and the United States Supreme Court determination on the issue in Amoco Production Co. v. Southern Ute Indian Tribe,4 The law in Alberta, as declared by section 10.1 of the MMA and confirmed by this summary judgment, is that CBM is and always has been natural gas and that exceptions of "coal" in natural gas leases do not include CBM, unless expressly agreed otherwise by the parties to a contract prior to December 2, 2010.

Footnotes

1 Decision 2007-024 Alberta Energy and Utilities Board, March 28, 2007.

2 R.S.A. 2000, c. M-17.

3 Coalbed Gas Act, SBC, 2003, c. 18, s. 3. which provides that "coalbed gas must be considered to be and to have always been

natural gas."

4 (1999), 526 US 865, released June 7, 1999.

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