English | 中文版

Chrysten Perry & Alan Harvie
Macleod Dixon LLP

Buying a direct interest in oil and gas (also known as "acquiring mineral rights") in Alberta is not as straight forward as, say, buying a house.  Petroleum and natural gas, or "PNG" is, by nature, fugacious, and under Alberta law these substances cannot typically be "owned" until reduced to possession.  As such, the acquiror generally obtains a lease - an instrument that allows the lessee the right to explore for and produce the minerals.  In Western Canada, the industry has developed on the basis that these leases, sometimes known as "tenure agreements", may be transferred from person to person and constitute an interest in land, an important distinction in Canadian law.

In many countries, mineral resources belong to the state.  In Canada, prior to 1869, all minerals in Alberta and a number of other provinces were owned by the Hudson's Bay Company, one of the oldest merchant companies in the English‑speaking world.  In 1869, the Hudson's Bay transferred the majority of its minerals to the Dominion of Canada and, as part of the bargain, obtained title to some lands opened for settlement, including the mineral rights associated with those lands.  Until 1930, all Crown minerals in Alberta were controlled by the Federal Government of Canada.  Today, these mineral resources are generally owned and administered by the provincial government, although a small minority of oil and gas rights are owned by individuals or organizations in "fee simple" or as "freehold estates".  The Federal Government also owns and administers certain oil and natural gas rights in Canada for Canada's aboriginal people.

In Alberta, approximately 81% of the Province's mineral rights are owned by the Alberta Government, or as we refer to it, the "Crown", and they are administered by the Alberta Department of Energy.  The remaining 19% are freehold mineral rights. 

Agreements that grant rights to explore for and produce minerals come in many forms.  Undeveloped Crown mineral rights are acquired through regular competitive bid auctions where the successful bidder is granted a petroleum and/or natural gas lease or licence.  Prior to each auction, parties are asked to submit or "post" the lands on which they are interested in bidding. Everybody is eligible to bid on the posted lands, subject to meeting some basic requirements.  The lease or licence is awarded the same day to the highest bidder.  Once mineral rights are granted under a tenure agreement, they remain exclusive to the entity to whom the rights are granted, unless they are transferred, surrendered, terminated or otherwise expire.  Only in very limited circumstances can companies directly purchase by private sale any of the Crown's petroleum and natural gas rights.

Freehold mineral rights, on the other hand, are acquired through negotiations with the mineral holder under a form of freehold lease.  The terms of a freehold lease vary depending on when the lease was signed, the negotiating power of the mineral rights holder and the legislation in force at the time.  Like Crown leases, freehold leases may be for all the rights to all of the minerals or the rights may be limited to a particular mineral or zone.  Several standard form freehold leases have been created for Alberta by organizations such as the Canadian Association of Petroleum Landmen, in an attempt to eliminate problems associated with earlier freehold leases. 

Both freehold and Crown tenure agreements include a granting clause giving the lessee certain rights to the substances that are granted under the lease.  Although the language of the granting clause is absolute, a grant under a lease only amounts to a profit a prendre, meaning a "right of taking".  This "right" gives the lessee the right to explore and drill for any of the leased substances and the right to inject substances into the lands for the purposes of aiding recovery and hence the right to "take" those substances that can be reduced into its possession.  However, the lessee does not own any of the substances until they have been removed from the mineral reservoir.  This is known as the "rule of capture".

There are two main Crown tenure agreements for oil and gas development: leases and licences.  Both allow the holder to explore, drill and recover petroleum and natural gas and both are acquired by public bid.  However, there are some subtle differences.  Licences were originally created for use in the short-term, while leases were intended to be for longer term development.  The initial term for a lease is 5 years but may be continued indefinitely so long as there is production from the leased area.  The initial term for a licence can be 2, 4 or 5 years, depending on the area of the province, and they may be continued for 5 years once a "validation well" has been drilled.  The initial licence term may be continued indefinitely if there is continuing production, at which time it will be converted into a lease.  Other types of Crown tenure include oil sands permits and leases, which have different features.

In Alberta, mineral rights are separate from surface rights and the mineral rights owner and the surface rights owner may not necessarily be the same person.  Before any exploration activities may be conducted, one must obtain the consent of the surface rights owner to access the land.  Typically, access rights are obtained through negotiations with land owners and result in the grant of a surface lease which involves providing compensation for this surface access.  If consent is refused, one may apply to the Alberta Surface Rights Board for a right of entry order.  Objections may be dealt with at a hearing before the Alberta Surface Rights Board to determine appropriate compensation to the surface owner.

All Crown and freehold leases and licenses carry the obligation to pay royalties to the granting party.  Royalties are the means by which the mineral owner shares in the minerals produced from the lands.  Many leases provide that the royalty may be payable "in kind", which means the lessor is  entitled to physically take a share of the produced substances as payment of the royalty.  Under most circumstances, however, this has little appeal as most lessors do not have the means to dispose of a share of production and are quite content to receive a cheque in lieu thereof.  Crown royalties are governed by a number of regulations and may be amended by the Minister of Energy. 

Once tenure rights are obtained, the lessee must apply to the Energy Resources Conservation Board for a license to actually carry out drilling and production operations.  This Board's objective is to promote the fair and responsible development of Alberta's energy resources.  It is a quasi-judicial body and has developed a comprehensive set of regulations and directives to regulate Alberta's oil and gas development and operations.