Tuesday, September 13, 2011

Alberta Court of Appeal interprets oil and gas lease

The Alberta Court of Appeal has dismissed the appeal by Omers Energy Inc. of a decision of the Energy Resources Conservation Board (ERCB) that suspended two gas well licences because the underlying lease had expired.  Omers attempted to rely on the Suspended Wells Clause in the lease to extend its term.  The clause would continue the lease as though operations were being conducted, provided the well was "capable of producing the leased substances".  The ERCB had found that "capable of producing" for the purposes of the lease meant capable of producing the leased substances in "meaningful quantities" in its present state and configuration.

The Court of Appeal agreed:
The Board did not err in finding that the phrase “capable of producing the leased substances” means the “demonstrated, present ability of a well on the lands to produce the leased substances in a meaningful quantity within the time frames contemplated in the lease.” (Board Decision 2009-037 at 9, hereafter Board Decision) The lease is a contract through which the lessor and lessee agreed to develop the leased substances for mutual benefit. This purpose would be defeated if the lease were interpreted in a manner that allowed it to continue almost indefinitely at a time when a drilled well is incapable of producing a meaningful quantity of oil or gas in its present state and operations are not being conducted to make it produce. Requiring a “meaningful” volumetric quantity was sufficient to determine this case. Considering each lease and its surrounding circumstances will allow this test to develop in a contextual setting. [emphasis added]
Read the decision at: Omers Energy Inc. v. Alberta (Energy Resources Conservation Board).

Omers Energy Inc. is an investment of OMERS - the Ontario Municipal Employees Retirement System - which has over $53 billion in net assets (at December 31, 2010).