Oil and Gas Lease: Operate at a loss or nominal return or lose your lease?

This case involves five freehold petroleum and natural gas (PNG) leases that cover most of a section of land in Alberta.  The Plaintiffs are some of the current owners of the land plus a top-lessee, whose lease will only become effective if it is determined that the five existing leases have terminated.  The main issue in the case was whether those leases terminated as a result of the stoppage of operation and production from a well on the land between 1995 and 2001.  More specifically, the Court asked whether the Defendants (or their predecessors) were required to operate the well at a loss or nominal return during those years in order to preserve and continue the leases.

The Alberta Court of Queen's Bench heard evidence from a number of factual and expert witnesses about the decision made to shut-in the well in question for economic reasons.  In the end, the Court ruled that the well was shut-in for reasons permitted under the leases, and the leases did not terminate as a result of the cessation in operations and production.  The Plaintiffs' action was dismissed as a result.

Read the decision at: Stewart Estate v TAQA North Ltd.

Court of Appeal confirms gas storage rights expired - farm still owns rights

The Ontario Court of Appeal recently confirmed that a farm operation (through a related company) owns the right to inject and store gas into and under its lands.  As a result, the gas storage company that wishes to commence storage operations is going to have to pay compensation for those rights.  In most cases, landowners have already transferred the storage rights to an oil and gas extraction company for less than the current market value of those rights. 

In this case, the Court of Appeal confirmed a lower court decision that found a 1998 gas storage lease between Tribute Resources Inc. and the landowner had expired because Tribute had not taken the issue of designation of the lands as a Gas Storage Area had not been taken to the Ontario Energy Board within 10 years of the date of the agreement:

This Gas Storage Lease Agreement shall terminate on the tenth anniversary date, if an only if, the Lessee or some other person has not applied to the Ontario Energy Board to have the said lands or any part thereof designated as a Gas Storage area on or before the tenth anniversary date hereof.

In spite of that clause, Tribute had argued at first instance and on appeal that its gas storage rights were not limited to the 1998 agreement.  There were earlier agreements (an Oil and Gas Lease and a Unit Operation Agreement) that mentioned gas storage rights.  However, both levels of court ruled that the 1998 agreement was intended to and did replace the earlier agreements.  When that agreement expired, Tribute retained no gas storage rights.

The issue of compensation for the storage rights will be determined by further agreement or by the Ontario Energy Board pursuant to the Ontario Energy Board Act.

Read the Court of Appeal decision at: 2195002 Ontario Inc. v. Tribute Resources Inc.

Court rules that oil and gas production lease does not grant gas storage rights

This is another decision in the ongoing McKinley Farms and Tribute Resources battle over gas storage rights on 200 acres of land in Huron County.  Tribute, through its predecessor(s), had obtained an oil and gas lease and a gas storage lease for the land in question.  The Court of Appeal has earlier ruled that the 1998 gas storage lease is no longer valid, but the Court upheld the oil and gas lease. 

 

Tribute now argues that it has gas storage rights under the oil and gas lease.  However, in the meantime, McKinley Farms has granted a gas storage lease to a different numbered company and now seeks an order from the Court that this lease is the only lease of the McKinley Farms lands that validly grants storage rights.  Justice Rady of the Superior Court of Justice in London has granted this order.

 

Justice Rady agreed with Tribute that its oil and gas lease contained language that could be interpreted to convey rights to storage; but she also concluded that the storage lease agreement (which was found by the Court of Appeal to be invalid or expired) was intended by the parties to replace those rights. 

Read the decision at: 2195002 Ontario Inc. v. Tribute Resources Inc.

Ontario Court rules it can decide gas storage lease case

Justice Bryant of the Ontario Superior Court of Justice has ruled in favour a landowner in a gas storage related case, finding that the Court is in a position to determine issues related to leases.  Recently, Ontario courts have ruled on the exclusive jurisdiction of the Ontario Energy Board over gas storage in Ontario.  However, that exclusive jurisdiction only arises where there has been an order designating a gas storage area pursuant to the Ontario Energy Board Act. 

In this particular case, Justice Bryant found that the Court retained its inherent jurisdiction to rule on the leases because no designation order had yet been made by the Ontario Energy Board.  This decision is another in a growing line of decisions related to this matter.  Originally, Tribute Resources had taken over oil and gas and gas storage leases on the lands of McKinley Farms Limited in Huron County.  However, a previous ruling of the court, upheld on appeal, found that the gas storage lease terminated.  The Court of Appeal did rule that the oil and gas lease remained effective.  McKinley then signed a new gas storage agreement and oil and gas lease with a numbered company related to McKinley. 

In 2011, the numbered company applied to the Superior Court for declarations that its gas storage lease permits the storage of gas beneath the McKinley lands and that Tribute has no right under its gas and oil lease (which was not declared void by the Court of Appeal) to store gas.  Tribute then filed an application asking the Court to rule that it had no jurisdiction to decide the application by the numbered company and that the relief sought by the numbered company was within the exclusive jurisdiction of the Ontario Energy Board.  This application, as reported above, was dismissed.

Read the decision at: Tribute Resources v. 2195002 Ont. Inc.