FROM MOOSEs TO MOLASSES

Oil and Gas Rights in Canada: Dealing with the Crown and Freeholders

Paul Negenman, LawyerLawson Lundell LLP

OIL & GAS RIGHTS IN CANADA

Canada is a bit of an odd place

About 35 million people (less than California)

Most of our landmass is north of the 49th parallel

However over 60% of the population lives south of the 49th parallel (most of the population of Ontario and Quebec)

Contrast this to oil & gas, which is almost exclusively located north of the 49th parallel and far outside most populated Provinces and cities

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CANADA - CRUDE OIL

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CANADA - CRUDE OIL PIPELINE


CANADA – NATURAL GAS


CANADA – NATURAL GAS PIPELINE


CONSTITUTIONAL MONARCHY Monarchy Part:

Crown is the root authority for all law (laws and statutes)

All tenure ownership originates and ultimately vests in the Crown

Constitutional Part:

The Crown is bound to act in accordance with Constitutional documents

Bound by Rule of Law (not men)

One government cannot bind a subsequent government

CONSTITUTIONAL MONARCHY The Crown is bound by the Constitutional documents (the “Supreme Law”)

For individuals, the most important document is the Constitution Act (1982) which includes the Charter of Rights and Freedoms

For oil & gas, the most important is the British North American Act of 1867 (now called the Constitution Act, 1867) which divided powers among provincial and federal governments

Very similar in overall structure to the United States Constitution, but some important practical differences

FEDERAL STRUCTURE Federal Structure

Division of Powers between

Federal Crown

Provincial Crowns (10 Provinces)

We also have 3 Northern Territories (think Puerto Rico) – the “North”

Yukon, NWT and Nunavut

Until recently, Northern Territorial powers were federal and delegated

Very recent changed for the NWT – devolution of powers to Territory

Beginning of Province like status (but not yet a Province)

DIVISION OF POWERS Sections 91 & 92 of the Constitution Act, 1867, divide the power to govern

Canada between the federal and provincial governments

By virtue of the doctrine of “ultra vires” (cannot do something beyond your power)

Courts will step in and find legislation invalid if it impedes upon the powers of the proper level of government (Federal or Provincial)

PROVINCIAL JURISDICTION Province Governments have primary jurisdiction over oil & gas by virtue of:

“Property and Civil Rights in the Province” (92.13)

“Local works and undertakings…” (92.10)

“Exploration for non-renewable natural resources in the Province” (92A.1) – added by Constitutional amendment in 1982

PROVINCIAL JURISDICTION These Constitutional powers result in Provinces being the primary owner and

regulator of oil & gas activities in Canada. The Provinces are responsible for:

Mineral land tenure (Crown and Freehold)

Surface land tenure (Crown and Freehold)

Land Titles and Land Registry legislation for privately held fee simple lands

General regulation and licensing of oil & gas companies and activities

FEDERAL JURISDICTION The Federal Crown (Parliament of Canada) has exclusive jurisdiction over certain

important matters that impact oil & gas:

“Trade and Commerce” (91.2) – interprovincial and international commerce

“Navigation and shipping” (91.10)

“Sea Coast and Inland Fisheries” (91.12)

“Indians, and Lands reserved for the Indians” (91.24)

Federal Crown also has jurisdiction over the Territories

Subject to recent devolution of powers in NWT

FEDERAL JURISDICTION With respect to tenure, the Federal Crown retains direct jurisdiction over:

Federal lands (limited impact in Canada)

Administration of Indian Lands (IOGC)

Larger impact

Applies to Treaty Lands

Some devolution of Treaty land administration

Of more direct impact is the Federal power to regulate activities with respect to:

Interprovincial or International pipelines

International treaties (think Kyoto)

Railways

the Territories

POGG - FEDERAL Matters not coming within the class of subjects described within the

Constitution Act, 1867 (new matters) fall within the general Federal Crown power to legislate with respect to

“..the Peace, Order and good Government of Canada”

[Aside - Funny how the US Declaration of Independence speaks to “life, liberty and the pursuit of happiness” and we odd Canadians speech to Peace, Order and good Government]

Anyway, POGG exists as a very limited Constitutional doctrine in Canada

NEW MATTERS NOT CONTEMPLATED More generally, new matters not enumerated under the Constitution Act, 1867

are subject to common law rules of interpretation:

Federal Paramountcy; with

Concurrent Jurisdiction allowed for Provinces

In oil & gas matters we care because many significant aspects of our business are not enumerated in the Constitution Act, 1867.

Especially significant in environmental legislation and regulation.

Creates a large Federal role in environmental regulation

With overlapping Provincial regulation

TENURE All land tenure and title ultimately vests in the Crown

The Crown holds “absolute title” to land

All Crown grants of a title or estate are subject to the absolute title of the Crown (think right of eminent domain on steroids)

Huge amount of Crown Land in oil & gas areas due to our sparse population

The Crown grants various degrees of title ownership:

Crown lease or license – statutorily granted and subject to changes in legislation

Sale of Fee Simple Title – greatest estate known to man

Historically, a certain amount of fee mineral rights were sold

Today, only surface rights can be acquired in fee simple from the Crown

FIRST NATIONS The legal concept of absolute title being vested in the Crown provides us with a

clear and stable framework for Crown and Freehold tenure

With respect to First Nation Treaty Lands (reservation lands), the system remains somewhat predictable as the rules are generally known and followed and are based upon written treaties between the Crown and the First Nation

The Crown administers Treaty Lands for and on behalf of the Band through Indian Oil and Gas Canada (IOGC)

FIRST NATIONS Federal Crown has a

“duty to consult”, and

“duty to accommodate” with First Nations inherent in the honour of the Crown

Applies to Treaty Bands and Non-Treaty First Nations

Additional claims to use of broader areas outside Treaty Lands or settled lands - “Traditional Lands”

Not full rights, but some rights

Less certain whom represents the First Nations

Generally don’t buy into the basic idea of the Crown holding absolute title

FIRST NATIONS Unfortunately, many First Nations are not parties to Treaties (especially in BC)

Less certain rights and obligations

Less certain whom represents the First Nations

THE COURTS Canadian Courts mirror the Federal division of government

Provincial Courts

Courts of Queen’s Bench

Provincial Court of Appeal

Federal Courts

Trial and appeal

Supreme Court of Canada (SCC)

THE COURTS General oil and gas matters are almost always Provincial Court of Queen’s

Bench issues

Contract Law

Property Law

Issues with respect to Provincial regulators

Federal Courts deal with limited but important matters

First Nations issues

Issues with respect to Federal regulations

Most general oil & gas matters end at Provincial Courts of Appeal

Many First Nation and other Federal Matters end at the SCC

THE PROVINCES Let’s now take a quick look at the major (and minor) oil & gas producing

Provinces

The North

BRITISH COLUMBIA

THINK OF CALIFORNIA WITH MORE RAIN

BRITISH COLUMBIA


BC TENURE HISTORY Large and sophisticated First Nations throughout BC

Captain James Cook arrives in the late 1770s

British colonies established on Vancouver Island and grow inland

Very little Treaty activity with First Nations

Different approach than in WSB

BC TENURE Almost all oil & gas activity is in the far NE of the Province

Mineral Tenure is almost entirely Crown

Surface is largely Crown, but there is Fee Simple surface title

Very close to Alberta and away from the main population centers of BC

Until recently largely ignored in BC and mostly operated out of Calgary

BC TENURE

Almost all Crown oil and gas rights.

BC TENURE Land Survey system – and odd mix of two survey systems

Most of Province is subject to the National Topographical System (NTS)

However, a significant portion of the NE producing area was surveyed under the Dominion Land Survey and uses the Township System

Balance of Western Sedimentary Basin (WSB) uses the Township System

Mostly nice tight square spacing units

BC TENURE Leasing of Crown mineral and surface rights regulated by the BC Oil and Gas

Commission (BCOGC)

Fee Simple lands governed under the Land Titles Act and administered by the Land Title & Survey Authority of BC (LTSA)

Mixed Torrens and Registry system

BC REGULATOR Licensing and development of oil and gas matters regulated by the British

Columbia Oil and Gas Commission (BCOGC)

Single desk regulator

Normal well spacing

¼ section (1 unit) oil

1 section (4 units) gas

Normal spacing does not apply to “Unconventional” zones

See BC Drilling & Production Regulation

Set back and inter-well spacing only

Recognition of Horizontal Wells

BC – LNG The recent dramatic increase in discovered NG in NE BC has lead to possible

LNG export from terminals on the west coast via pipelines through the interior of the Province.

Many issues arise

Are pipelines Provincially or Federally regulated

Pipelines and First Nations

Terminals

Kitamat and/or Prince Rupert

Shipping

Environmental Issues

BC – LNG

0

10

20

30

40

50

60

70

1940 1950 1960 1970 1980 1990 2000 2010 2020

Average Reserves per Square Mile (10 wells per sq. mile)(BCF/Sq. Miles)

Montney & HRB

00's

90's

80's

70's

60's

50s

Average Reserves per Square Mile(Bcf)

*

BC – LNG PIPELINE ROUTES

BC – OIL PIPELINES The growth of Alberta Oil Sands and Conventional production has resulted in

applications for new or expanded pipeline access to the west coast

Enbridge Northern Gateway (to Kitimat)

Expansion of Trans-Mountain Pipeline (to Vancouver)

Please ask President Obama to approve the Keystone Pipeline

BC – CURRENT ISSUES Now people in Vancouver (largest city) and Victoria (capital) care

No real history of working with the oil & gas industry

Environmental concerns

Industrial expansion at terminal sites

Possible pipeline spills

Possible tanker spills

“Social License” – whatever that means

What it is in it for BC?

The lack of Treaties for many of the interior First Nations on the pipeline routes are causes of material delays and issues

ALBERTA

THINK OF TEXAS WITH SNOW

ALBERTA

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ALBERTA

WSB – TENURE HISTORY Alberta and Saskatchewan are late comers to Provincial status

Part of the NWT until 1905

Mineral Tenure not transferred to AB and SK until 1930’s

More defined process of settlement

Dominion Land Survey and Township System in place

Focus on Treaties with First Nations

Not complete, but much more complete than BC

WSB – TENURE HISTORY Largest area of Fee Simple Mineral Title ownership outside of the USA

Three main categories of Fee Simple Title:

First - Hudson’s Bay legacy lands

1670 King Charles II granted all rights within the Hudson’s Bay drainage basin to “The Govenors and Company of Adventures of England Trading into Hudson’s Bay

Oldest stock company in the world

1869 rights traded back to Crown, reserving 1/20 of surveyed lands

Becomes the Section 8 and 26 fee simple mineral lands

Now widely held by oil & gas companies

WSB – TENURE HISTORY Second - Individuals granted Fee Simple Title

prior to Crown figuring out that “all mines and minerals ought to be reserved”

Into late 1880s

More Freehold Land the farther East you go, due to Canadian settlement patterns

Ergo, Manitoba oil & gas producing areas are almost all Freehold Land

WSB – TENURE HISTORY Third – Railway Land Grants – 1880s

Dominion of Canada broke

Needed to build a nation wide railway

Granted Canadian Pacific Railway (CPR) lands grants (mineral and surface) rather than cash to build (a portion of the payment was in land)

25 million acres (lots with mineral rights)

Odd numbered Sections within 24 miles on each side of the railway main line (full mineral and surface rights)

Every other section (Checker board)

Some exchanges of land occurred creating massive Freehold blocks of mineral rights

Other railways granted similar rights resulting in more railway mineral fee simple

WSB – TENURE HISTORY Third – Railway Land Grants – 1880s, cont’d.

CPR maintained ownership of these fee simple mineral rights

CPR creates Canadian Pacific Oil and Gas Company to administer these rights

CPOGC becomes PanCanadian Petroleum Limited

Fee simple administration and active oil & gas produces

PCP becomes Encana Corporation

2014 – Encana Corporation spins off the fee simple mineral rights into a new company – Prairie Sky Royalty Ltd.

Encana received $1.46 billion for 46% of the new company

One of the largest fee simple mineral companies in the world

ALBERTA – TENURE HISTORY

ALBERTA – TENURE Crown mineral and surface rights granted and administered by Alberta Energy

Fee simple lands governed by the Land Titles Act and administered by Alberta Registries (Land Titles office)

Full Torrens system and rights for fee simple lands in Alberta and Saskatchewan

Common law principles on Freehold Lease validity and continuation

ALBERTA – REGULATOR Licensing and development of oil and gas matter regulated by the Alberta

Energy Regulator (AER)

Single desk regulator

Newly reformed in 2014, some growing pains

Responsible Energy Development Act

Oil and Gas Conservation Act

Oil Sands areas are Crown mineral and are governed by separate legislation (Oil Sands Conservation Act) but are still regulated by the AER

ALBERTA – FUN TENURE FACTS The Alberta Crown has no qualms about taking or revising Crown land ownership,

even with respect to existing Crown leases

Deep rights reversion

Shallow rights reversion (in force but enforcement pending)

Oil Sands areas stripped out of existing Crown PNG Leases

Gas over Bitumen production restrictions

Crown expropriation of “pore spaces” within privately held fee simple mineral tenure

Fort McMurray town site vs. existing Oil Sands leases

And we, in Alberta, are the redneck property rights lovers

ALBERTA – NG AND LIQUIDS Conventional NG in crisis due to annoying American gas production

A significant percentage of conventional NG is on freehold lands, which creates tenure certainty issues

Newish play is for liquids rich gas in NW Alberta (Montney)

More likely to be on Crown lands

Capacity issues for processing and transportation out of this area

ALBERTA – CONVENTIONAL OIL Boom in Alberta conventional oil production due to HZ drilling

Wide area of tight oil plays, but many occur on Freehold tenure

Individual Fee Simple owners

Within the Checkerboard

Regulatory issues due to old “one well per pool” legislation

Adopted density drilling provisions in AB

Oil and Gas Conservation Rules

Applies to oil & gas wells in certain defined areas

Production Allocation Unit Agreement (of some type) required

ALBERTA –OIL SANDS Defined areas with massive projects

Crown mineral rights

Significant regulatory hurtles and processes

First Nations areas

Some large mining projects, but the vast majority of new production will come from in situ projects

ALBERTA – OIL TRANSPORTATION WOES

Unfortunately, we cannot fly our oil to market

Moves for pipelines to

BC

Eastern Canada

USA

Delays are moving more oil to rail

Federally regulated

Existing infrastructure and right of way

SASKATCHEWAN

THINK OF OKLAHOMA WITH EVEN FRIENDLIER PEOPLE

SASKATCHEWAN


SASKATCHEWAN Second only to Alberta in oil production, 20% (or so) of Canada’s oil production

Lots of small conventional pools and resource plays in SW Province

Massive Weyburn unit (currently in tertiary CO2 recovery)

Also has significant gas resources – mainly dry gas, not liquids

Massive move to HZ drilling

Spacing units almost dead

horizontal drainage area and ultimate drainage area used for HZ wells

Larger freehold footprint leads to more freehold validity issues and PAUA issues

SASKATCHEWAN Crown surface and mineral tenure administered by the Saskatchewan Ministry of

the Economy (SECON)

Licensing and development of oil and gas matters also regulated by SECON

Fee simple tenure governed under Land Titles Act, 2000 and Information Services Corporation (ISC)

Full Torrens system like Alberta

Many oddly split and complex fee simple titles

SK – FUN TENURE FACT SK is notorious for the “stealing” of foreign (US) fee simple mineral rights for

producing lands during the 1970s oil crisis

Oil and Gas Conservation, Stabilization and Development Act, 1973

Deemed transfer and vesting of private fee simple rights in Crown

Producing tract, down to and including producing zones

Anyone holding more than 1,280 acres (2 sections) fee simple mineral rights

Only lessor (fee simple owner) rights expropriated, not lessee (WI) rights

Actually stripped the lands out of the fee simple title and created new Crown acquired mineral titles

Creates very confusing and custom Crown acquired splits in producing areas

MANITOBA


MANITOBA Around 40,000 boe/d of oil production

Light sweet oil

Massive move to HZ drilling

Spacing units almost dead

horizontal drainage area and ultimate drainage area used for HZ wells

Production allocation required

MANITOBA Largest fee simple mineral footprint (percentage wise) in the WSB, so lots of

freehold validity issues and PAUA issues

Land Titles system is a mix of Torrens and registry

Manitoba Land Titles Office of the Property Registry

Land is Township survey, but many more meets and bounds splits due to the longer and greater individual fee simple mineral ownership

Regulation of oil & gas activities by Manitoba Innovation, Industry and Mines

ONTARIO


ONTARIO Minor oil producer

Legacy oil pools near or under great lakes

Really hard to drill through the Canadian Shield

QUEBEC


QUEBEC Little or no existing production

No historical oil & gas industry

Very tentative steps in the early 2000s to explore for NG

No fracking way

THE EAST COAST

ATLANTIC OFFSHORE

THE EAST COAST Large offshore production and potential production

Relatively settled Crown ownership and regulation

Historical disputes between Federal and Provincial Crowns

Atlantic Accord (1985) NFLD

Canada-Nova Scotia Offshore Petroeleum Resources Accord

More recent disputes between Provinces

Generally administered through combined Federal Provincial Boards

THE NORTH

THE NORTH Onshore plays

Southern NWT

Central Mackenzie Valley

Offshore plays

Beaufort Sea

Artic Islands of Nuavut

Eastern Artic Shore

Some 1950’s legacy oil pools

Normal Wells

Administered through Federal Government in cooperation with Territories

Aboriginal Affairs and Northern Development Canada

BEFORE YOU BUY I am sure you are all now super eager to come up and buy oil & gas assets or

companies in Canada

Before you buy, there are a few pesky rules regarding foreign ownership and competition laws in Canada

BEFORE YOU BUYForeign Investment

Investment Canada Act

Regulates foreign investment using a “net benefit test”

Investment Canada will review direct and indirect acquisitions of Canadian businesses by foreign nationals where acquisition exceeds $5M (if direct) and $50M (if indirect)

For WTO member states, acquisitions are only reviewable if direct and in excess of $354M (indirect acquisitions are not reviewable)

Acquisitions of control by state owned enterprises are subject to certain specific net benefit to Canada tests, including the corporate governance and reporting structure of the non-Canadian acquirer

Any acquisition or establishment of a new business in Canada by an non-Canadian whether subject to review or not may be reviewed and prohibited if “injurious to national security

BEFORE YOU BUYCompetition and Merger Control

Competition Act (Canada)

Governs the acquisition of operating businesses in Canada

Requires advance notice to the Federal Competition Commissioner where:

parties to transaction have assets or gross revenues from sales from or into Canada in excess of $400M in aggregate

the aggregate value of target assets in Canada exceeds $82M or gross revenue from sales in or from Canada exceeds $82M

an initial waiting period of 30 days is imposed subject to a supplemental information request

an advance ruling certificate may be applied where no or minimal competition issues apply

THANK YOU

PAUL M. NEGENMANPhone: 403.218.7542

Email: [email protected]

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FROM MOOSEs TO MOLASSES