On September 7, 2011, the Alberta Court of Appeal released its
judgment, Omers Energy Inc. v. Alberta (Energy Resources
Conservation Board) 2011 ABCA 251, with respect to an
appeal by Omers Energy Inc. ("Omers") of
an Alberta Energy Resources Conservation Board
("ERCB") decision to suspend two well
licenses on an oil and gas lease due to a lapse of the lease. The
lease contained a suspended wells clause that provided an
indefinite extension of the primary term of the lease when a
"well that is capable of producing the leased substances is
shut-in or suspended".
The Court of Appeal Decision
Omers argued that a suspended well is "capable of
producing" for the purposes of the lease whenever the well has
the ability to achieve any production flow whatsoever; particularly
where there is pressure from the leased substances at the outlet
valve of that well or whenever steps can be taken to address the
well's conditions to achieve production flow.
Montane Resources Ltd., which made the original application for
suspension of the lease, asserted that the phrase means that the
wells must be capable of producing, on a sustained basis,
quantities that are sufficiently meaningful to provide an incentive
to produce. Likewise, the mineral rights-owner argued that the
phrase should be read as capable of producing the leased substance
in paying quantities, on the basis that there is no motivation for
entering an oil and gas lease outside of the potential for economic
The Court of Appeal affirmed the ERCB's interpretation of
"capable of producing the leased substance" to mean
capable of producing a meaningful quantity of the leased substance,
in the well's existing state, without requiring any further
operations. Satisfying the requirement of "meaningful" or
"material" will depend on the relevant factors in each
individual case, but means more than minuscule.
Although not willing to go as far as reading in or implying that
"produce" means produce in paying quantities, as is the
case in the American jurisprudence, the Court of Appeal expressed
its view that the parties intended to extend the primary term of
the lease only when the well was capable of producing a volumetric
quantity that would maximize profitability.
What does this mean?
Oil and Gas producers should assess the current production
ability of their leasehold properties where the primary terms have
expired. Leases will continue to protect leaseholders with shut-in
wells provided they have a reasonable expectation of a return to
profitability. Where that is not the case, current leaseholders may
need to approach the mineral rights-owners to negotiate new deals.
The resulting competition could increase the overall receipt of
royalties for mineral-rights holders and provide more efficient
production of oil and gas resources.
This decision may also lead to further litigation regarding the
definition of "meaningful" in this context. Active cases
will need to further refine the volumetric test, especially among
lease agreements with more specific suspended wells clauses. It may
also require that parties vary new lease contracts to clarify the
meaning of "capable of production" in suspended well
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