Article by Jason Husack, ©2006 Blake, Cassels & Graydon LLP
This article was originally published in Blakes Bulletin on Energy - Oil & Gas, March 2006
Alberta’s CBM Activity
Conventional gas reserves are expected to decline in North America over the next decade. The Alberta Government and the oil industry are showing an increasing interest in exploiting the estimated 263 billion cubic feet of coalbed methane (CBM) reserves in Alberta. This interest will only increase as conventional gas reserves decline and demand and prices increase. However, as commercial feasibility of CBM projects is being established, there is a growing concern over the uncertainty surrounding the ownership rights in and to CBM in the context of split-title. Split-title arises where one party is a holder of fee simple coal rights and the other party holds the fee simple rights to all other mines and minerals (title to the coal and gas are owned by separate parties), and both parties are claiming ownership of the CBM. The urgency to resolve this issue will likely intensify as companies confronted with split-title issues must make decisions regarding offset obligations and instances where parcels of land are being drained by adjoining lands where there is certainty of mineral ownership.
According to the Alberta Energy and Utilities Board (EUB), as at December 31, 2004, there were a total of 3,575 CBM wells in Alberta of which only 1,735 had produced or were producing. Approximately 2,506 new CBM wells (which accounts for 70 per cent of the total CBM wells) were added in 2004, which reflects the accelerated growth and interest in the development of CBM as a viable resource. The Horseshoe Canyon and Belly River coals account for over 90 per cent of Alberta’s CBM wells and about seven per cent are completed in Mannville coals. The remainder of CBM wells are completed in Ardley and Kootenay coals which are being tested further. The Horseshoe Canyon/Belly River continues to be the main CBM target but the Mannville continues to be actively tested to evaluate production.
Provincial Tenure of CBM
On August 26, 1991, the EUB issued Informational Letter 91-11 stating that CBM is considered "to be a form of natural gas." The Alberta Government administers CBM in the same manner as conventional gas in the province (e.g., royalty, tenure, EUB drilling, production, and operational rules and regulations). The Mines and Minerals Act (the Act), recently amended to provide that a coal lease does not grant any rights to any natural gas, including CBM, unless the Minister, on the recommendation of the EUB deems it necessary to do so for safety or conservation reasons, may authorize the lessee of a coal lease to recover natural gas, including CBM, contained in a coal seam in the location of the coal lease. We also see this approach further recognized in the Petroleum and Natural Gas Tenure Regulation, whereby an agreement granting rights to petroleum or natural gas or both does not grant the right to CBM in a coal seam unless the Minister has authorized the lessee of a coal lease to recover under s. 67(2) of the Act.
Although the Act recognizes the distinction between natural gas and coal, it does not go far enough to resolve the issue. The Act failed to provide a definition of CBM and it was only made applicable to Crown Lands and not freehold. Interestingly, the Act was not made retroactive (as in B.C.). It is therefore conceivable (and likely) that existing Crown lease holders would argue that the law does not apply to them.
Alberta is not the only province taking action to reduce uncertainty regarding the ownership of CBM. In Nova Scotia, the Petroleum Resources Act (PRA) recognizes coal gas as a distinct substance and has included coal gas in its definition of "petroleum", which states "coal gas, existing in its natural condition in strata". The PRA also requires a specific coal gas agreement before one can explore, develop or produce CBM.
In B.C., the government resolved the split-title issues by enacting the CoalBed Gas Act on April 10, 2003, which confirmed that CBM is natural gas and therefore owned by the holder of the natural gas rights. This law was retroactive and applied to both Crown and freehold lands. A likely driving force behind such a determination was to encourage the development of the significant CBM reserves located in the province.
It is unlikely that the Alberta Government will take similar action but there is precedent in Alberta whereby legislation was passed which materially altered the rights of sub-surface owners. In 1951, the Alberta Government enacted the Sand and Gravel Act (SGA) in response to the Alberta Supreme Court’s decision in Western Minerals v. Gaumont (Western). The Court had previously held that sand and gravel was included in the definition of "mineral" and therefore owned by the sub-surface rights owner who had title to "all mines, minerals and valuable stone". The SGA altered the law by declaring that the owner of surface title was "deemed at all times to have been the owner of and entitled to all sand and gravel on the surface of the land." The SGA also stated that sand and gravel was "not deemed to be a mine, mineral or valuable stone but shall be deemed to be and to have been a part of the surface of land and to belong to the owner thereof" and "Notwithstanding any patent, title, grant, deed, notification, conveyance, lease, license, agreement, disposition or other document heretofore or hereafter issued or made that contains or reserves mines, minerals or valuable stone, the owner" of such grant shall not be entitled to the sand and gravel. Western was ultimately appealed to the Supreme Court of Canada where the Court determined that the province was acting within its jurisdiction when it enacted the SGA.
Unfortunately, the current legislation and policies do not assist split-title situations on freehold lands. At the moment, the courts have not directly addressed the split-title issue regarding ownership of methane from coal seams, but the following cases do provide some guidance in how courts may resolve this issue.
In Borys v. Canadian Pacific Railway and Imperial Oil Ltd., the 1906 land transfer from CPR to Borys reserved unto the CPR "all coal, petroleum and valuable stone which may be found to exist within, upon or under the said land". The Plaintiff sought a declaration that he owned all of the natural gas in the said lands. The trial judge ruled in favour of the Plaintiff, but upon appeal the Court held that "all the petroleum reserved, including all hydrocarbons in solution or contained in the liquid in the ground, is the property of the defendants who are entitled to do as they like with it, subject, of course, to the observance of all relevant statutory provisions and regulations. All gas not included in the reservation of petroleum as indicated in the property of the plaintiff."
In Anderson v. Amoco Canada Oil and Gas, the Supreme Court of Canada effectively reaffirmed the Borys decision by upholding the decision of the Alberta Court of Appeal. Major J., on behalf of the Court, held that the determination of whether a substance is petroleum or not depends on the status of the substance (either gaseous or liquid) in the reservoir as at the date of the reservation. Subsequent changes in the phase of the substances are irrelevant in determining ownership. Therefore, the owner of petroleum is entitled to all hydrocarbons that were in liquid phase at initial reservoir conditions, regardless of the phase they are in when recovered and the non-petroleum owner is entitled to all hydrocarbons that were in gas phase at initial reservoir conditions, regardless of the phase they are in at time of recovery.
Given the current state of uncertainty, it is prudent that companies contemplating CBM development on split-title freehold lands attempt to negotiate an agreement between the different title holders to yield some certainty for both parties before proceeding with projects. Several Alberta companies have already negotiated revenue sharing agreements on coal and gas. Ultimately the legislature or the courts will resolve this issue to allow for the development of such a potentially significant untapped resource.
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