In a unanimous 5-0 decision Thursday, the Supreme Court of Canada ruled that oil and gas producers may keep the natural gas that they extract from their leases located along the Canadian Pacific Railway (CPR). Landowners for many years had argued that they were entitled to the gas. As a result, the ruling relieves a major legal headache for producers.
In 1912, the CPR began to grant farm-sized portions of its land to settlers, reserving to itself “all coal, petroleum and valuable stone which may be found to exist in upon or under the said land.” These reservations created split-title lands, where one party owned the coal, petroleum and valuable stone (the “petroleum owner”) and the other party owned the other minerals (the “non-petroleum owner”).
The original lawsuit was brought in 1998 by Alberta landowner Carl Anderson against BP plc’s predecessor Canadian units, including Amoco Canada Oil and Gas. Anderson, et al, lost, and on appeal, the Court of Appeal of Alberta dismissed the case in June 2002.
“The question of when entitlement to natural gas is to be determined spawned 84 law suits,” the appeals court review noted. The trial judge was asked to determine a preliminary issue as to the ownership of gas, and found that “ownership of hydrocarbons on split-title lands is determined at initial reservoir conditions.” The appeals court dismissed the case — except with respect to the liquid gas that emerges from below the surface to a gaseous state above ground.
The landowners wanted to determine as to when and where entitlement to various hydrocarbon products, notably evolved gas, or “secondary gas cap gas,” is to be established. The appeals case centered on several questions:
Whether changes in phase condition of hydrocarbons affect ownership rights;
Whether fee simple ownership of petroleum and natural gas in Canada is in a “state of confusion and uncertainty”;
Whether the ownership of petroleum and natural gas in situ is analogous to that of hard minerals — the proposition that absolute ownership of petroleum and natural gas vests on the date of the transfer and reservation; and
Whether substances like petroleum and natural gas may be owned absolutely before recovery or possession.
The Canadian Supreme Court heard the appeal on April 22, and in its ruling Thursday, the Ottawa-based high court dismissed the case and 21 other “test” cases, which covered about 7,000 leased acres. The ruling, written by Supreme Court Justice John Major, said, “for the purposes of these reservations, ‘petroleum’ includes all hydrocarbons in liquid phase under the tract of land prior to any development” (Anderson v. Amoco Canada Oil and Gas, 2004 SCC 49).
A BP spokesman said the ruling would not affect the London-based major’s business, but it “provides certainty” on the royalties.
In western Canada, there is a long tradition of land dispute titles. Nearly 85% of all mineral rights have belonged to provincial governments since 1878 — after that time, land titles did not include mineral rights. However, before 1878, Canadian government land grants included mineral rights, and in fact, mineral rights were given as incentives to CPR. At that time, a lot of land changed hands and CPR either sold it or gave excess land to homesteaders. CPR retained the subsurface rights, and minerals rights’ disputes have been ongoing ever since.
Because mineral rights on most land is government owned, freeholds are “rare,” and could be valuable if they include mineral rights. “The amounts of resources and the money involved are so huge, they will try anything,” said a Canadian energy expert.
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