Canada: Omers Energy Inc. v. Alberta - (Energy Resources Conservation Board)

Omers Energy Inc. v. Alberta (Energy Resources Conservation Board): Alberta Court of Appeal interprets "capable of producing" to mean "presently capable of producing in meaningful quantities".

In Omers Energy Inc. v. Alberta (Energy Resources Conservation Board),1 the Alberta Court of Appeal confirmed the ERCB's interpretation of the Suspended Wells Clause in the standard form CAPL 91 oil and gas lease. In doing so, the Court held that for a lessee to rely on the Suspended Wells Clause to extend the lease beyond the primary term, the shut-in well must be: (1) "capable" of production in its existing state and configuration; and (2) that such "production" be meaningful in the sense that the continued operation of the well offers a reasonable expectation of a return to profitability within the short term. The Court's analysis and decision may impact thousands of oil and gas leases in Alberta and has significant implications for industry.


Omers sought to rely on the Suspended Wells Clause to extend the lease beyond the end of the primary term where a well was shut-in after encountering excess water during production. Despite attempts at re-working, the well never produced for more than a few minutes at a time. The lessor took the position that the lease had expired and granted a top lease. The top lessor, Montane Resources Ltd., took steps to challenge Omers' lease. Omers took the position that "capable of producing" meant that the well only had to be physically capable of achieving any production flow whatsoever, even in miniscule amounts. Montane applied to the ERCB to challenge the validity of Omers' well licence.

The ERCB ruled that, to rely on the Suspended Wells clause, the shut-in well had to be capable of production in a meaningful quantity. In 2009, the Alberta Court of Appeal granted leave to appeal in part on the basis that the case had significance to the oil and gas industry.


1. ERCB's Role in Interpretation of Oil and Gas Leases Confirmed. The Court of Appeal has again confirmed the growing practice of the ERCB to interpret oil and gas leases as part of its mandate. However, the Court of Appeal will continue to review the contractual language of the leases for correctness because the interpretation is a legal question beyond the specialized expertise of the ERCB.

2. Increasing Reliance on "Sensible Commercial Results." The Court of Appeal confirmed that each oil and gas lease must be interpreted on its own, including consideration of the text and the surrounding circumstances known to the parties, and the purpose and object of the transaction. Importantly, the Court's decision was driven by a desire to adopt an interpretation that lead to a "sensible commercial result." The Court of Appeal attempted to balance the lessee's interest in periodically shutting in a well because a well will not be profitable at every moment of production, and the lessor's expectations in the expedient development of the well in order to realize a commercial profit.

3. Entitlement to Shut-In for "Any Reason" Left Open. The Court of Appeal did not need to decide whether wells can be shut in for any reason, or would require "prudent reasons" and expressly left this issue open. The tone of the decision suggests that the Court may sometime in the future interpret the leases to include a requirement that a well shut-in must be "prudent."

4. "Capable of Producing" Not the Same as "Paying Quantities," but Pretty Close. Although the Court held that "capable of producing" does not mean the same thing as capable of producing "in paying quantities," the Court engaged in a detailed analysis of that language based on American authorities. It concluded that "capable of producing" meant more than producing a "mere puff" of gas, but something less than requiring that a well maintain commercial profitability at all times. The Court concluded that the overriding objective of oil and gas leases is for each side to earn a profit.

5. Putting Meaning into "Meaningful." The Court adopted the ERCB's new test of "meaningful" quantities, which the Court acknowledged was not significantly different from "paying" quantities. As the facts in Omers were relatively straightforward and the production from the well in issue was not meaningful "by any application of the word," the Court left the development of the test for future cases. The Court suggested that an appropriate test might be: "Would a reasonably prudent operator, for the purpose of making a profit and not merely for speculation, continue to operate a well in the manner that it does?" or "Is there a reasonable expectation of profitable returns from the well?" The Court further noted that if a well required an "operation," it was not capable of producing in meaningful quantities, which appears to be a very restrictive view that may have unintended consequences. The "meaningful production" test puts a significant burden on lessees to re-work wells that encounter difficulties in production within a relatively short time frame, or risk the expiration of the lease.


The potential reliance of the oil and gas industry on the standard form lease's use of only the word "capable" in the 91 CAPL Suspended Wells Clause does not appear to have factored in the decision. It is not clear whether evidence of industry practice was provided to the ERCB or the Court.

The test of "capable of producing in meaningful quantities" has important implications:

1. It establishes a contextual, rather than a "bright-line" test, potentially resulting in commercial uncertainty and leaving room for disagreement within the oil and gas industry over the proper interpretation of the word "meaningful."

2. Lessees will need to assess shut-in wells to determine whether they are capable of "meaningful" production, potentially requiring expensive and detailed technical, financial and legal analysis.

3. Lessors and top-lessees will have incentive to investigate shut-in wells to independently determine whether they have an argument that a well is not capable of "meaningful" production. The industry may see an increase in top-leasing and lease challenging activities targeting shut-in wells.

4. All of this will likely result in an increase in expensive litigation over expiry of leases. The issue may be litigated before the Court of Queen's Bench (through actions to prove caveats) or in front of the ERCB (by way of well licence challenge), and possibly before the Court of Appeal (on appeal or leave to appeal). This litigation may include associated and sometimes complex claims for trespass and accounting, or a second round of litigation on those issues may follow once a lease is determined or held to have expired. In those cases, the reasonableness of the lessee's position may be significantly scrutinized by the court.

5. Future decisions to shut wells in must be made with an eye to meeting the "meaningful production" test if challenged. Further, industry participants would be well advised to consider the Court of Appeal's warning that the entitlement to shut wells in may be limited to circumstances where there are "prudent" reasons for doing so. This would be a potentially significant change to industry practice. In Omers, "none of the parties ... challenged the right to shut-in a well for any reason whatsoever."

6. The potential application of the interpretation of "capable of producing" into other situations is uncertain. For example, would the interpretation in Omers inform a future interpretation of section 15(3) of the Oil and Gas Conservation Act, which provides that no person can apply for a well licence from a pool from which another well is "capable of obtaining production" in the same drilling spacing unit?

Canadian oil and gas industry participants with interests in CAPL 91 oil and gas leases, and other leases with similar wording, may wish to assess this decision with a view to mitigating potential risks and to identifying potential opportunities based on the new "meaningful production" test.


1. Omers Energy Inc. v. Alberta (Energy Resources Conservation Board), 2011 ABCA 251 (September 7, 2011).

About BLG

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

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

Similar Articles
Relevancy Powered by MondaqAI
Blake, Cassels & Graydon LLP
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Blake, Cassels & Graydon LLP
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

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 or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq 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 of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions