Copyright 2008, Blake, Cassels & Graydon LLP

Originally published in Blakes Bulletin on Energy–Oil & Gas: March 2008

In the recent application brought before the Alberta Court of Queen's Bench in Nexen Inc. v. Fort Energy Corp., that Court was asked to rule on matters pertaining to the scope of operatorship rights accorded to a non-operator of a joint venture who had commenced independent operations pursuant to the 1990 CAPL Operating Procedure (the Operating Procedure).

The facts were that Nexen Inc. (Nexen) commenced independent operations on certain lands (13-2) pursuant to a farmout arrangement with Fort Energy Corp. and 981405 Alberta Ltd. (collectively, Fort), as well as Canadian Natural Resources Limited (CNRL). Although the independent operations commenced by Nexen pertained to drilling on lands covered by the farmout arrangement among Nexen, Fort and CNRL, the well to be drilled was a trilateral horizontal well, the surface location for such well being located on a parcel of land (4-1) which was covered by a separate joint venture agreement between Nexen and Fort only.

Accordingly, there were two agreements which were relevant to the situation at hand – one among Nexen, Fort and CNRL covering 13-2, and the other between just Nexen and Fort covering 4-1. Nexen only served an independent operations notice under the farmout agreement relating to 13-2.

One of the questions brought before the Court by Nexen was the issue of whether Fort, as operator, was required to transfer surface and other access rights to Nexen as independent operator for the drilling of the well at 13-2 through 4-1.

In answering this question, the Court looked at the interplay between Article 1004 and Article 308 of the Operating Procedure. Article 1004 provided that: "Notwithstanding anything to the contrary contained in this Operating Procedure, the proposing party shall be the Operator with respect to any operation proposed as an independent operation, unless the parties otherwise agree or the proposing party would be disqualified from serving as Operator pursuant to Subclause 202(a)."

Article 308 required the operator to acquire and maintain for the joint account (i.e., for the benefit, interest, ownership, risk, cost, expense and obligation of the parties in proportion to their respective working interests), all necessary surface rights.

Upon examining these two provisions, the Court was clear that, upon serving an independent operations notice, the Operating Procedure entitles the succeeding operator to a corresponding transfer of the surface rights. Under Article 308, the surface rights are acquired for the joint account and do not belong solely to the prior operator of the lands. When a new operator takes over operations as a result of an independent operations notice, that independent operator is entitled to the surface rights for the joint account.

The problem for Nexen in the dispute before the Court was that the relevant surface rights were for 4-1, which were not the subject of the independent operations notice served by Nexen under the farmout agreement. Accordingly, Nexen had not become operator with respect to 4-1 under Article X of the Operating Procedure.

The Court held that Article 308, which again states that surface rights are acquired and maintained by the operator for the joint account, was not sufficiently broad to cover surface rights for another piece of land governed by another agreement. Article 308 of the farmout agreement under which Nexen served the independent operations notice would have required the surface rights for 13-2 to be transferred to Nexen, not the surface rights for 4-1.

If the dispute between Nexen and Fort had involved the surface rights to 13-2 (i.e., the lands for which Nexen had served an independent operations notice), the Court would have required Fort to transfer the surface rights for 13-2 to Nexen. An operator under Article X (Independent Operations) of the Operating Procedure is entitled to the benefit of the surface rights acquired and maintained for the joint account.

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