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Halsbury's Laws of Canada: Oil & Gas | Partnerships
Michael A. Thackray, Q.C.
Maurice Coombs

The energy sector continues to be perhaps the major influence on both Canadian economic growth and national policy. Natural resource extraction has played an important role in Canadian development since North America opened to European trade in the 1500’s and Canada’s economy has been driven by the energy sector throughout and beyond Canada’s history as a British and French colony. Since its inception in the late 1800’s, the Canadian oil and gas sector has steadily expanded its overall share of, and impact on the Canadian economy.

Driven by large reserves and global energy demand, the oil and gas industry is now the largest single private investor in Canada. The industry currently propels $54 billion in annual capital spending and contributes $26 billion in taxes and royalties to government revenue.[1] Provincial and federal governments collect revenue from three sources: they sell the right to explore, they gather royalties from production, and they collect corporate taxes. Despite this nascent dominance in Canadian industrial and political spheres, Canada does not have a unified statement of national policy that sets out measures regarding energy planning, energy use, fiscal policy or energy security. Recently, business leaders have called for the creation of a unified policy. In the summer of 2011, those calls prompted the federal government to commit to discussing a national energy strategy in cooperation with local and provincial governments and other stakeholders.[2]

Just as Canada lacks a comprehensive national energy policy, the practice of law as it pertains to the oil and gas industry has yet to develop clear, definable boundaries.  Traditionally, there has been no such thing as an independent category of Canadian ‘oil and gas law.’  This stems partially from the end use of the commodities themselves. Oil and gas are products. The laws governing products in Canada are diverse, and engage any number of traditional legal disciplines, from commercial, contract, criminal and tort law to administrative, securities, trust, environmental and real property law.

Practicing law in the energy sector is further convoluted by Canada’s settlement history and parliamentary system. Most national regimes are based on the idea of public ownership of mines and minerals. Canada’s freehold system is an exception to the global norm. Early in Canada’s settlement, and until 1887, freehold land owners took the mineral rights to the in situ interest of oil and gas resources along with their surface land. Canada also made large land grants that included mineral rights to corporations such as railways. As the value of the mineral rights were realized, those companies began to reserve mineral rights from land transfers, and the government began to separate minerals out from freehold surface rights in its land grants to settlers. As a result, over 80% of the mineral resources in Alberta are owned by the provincial government, and about 10% remain freehold. The remaining 10% fall under the jurisdiction of the federal government by virtue of Canada’s parliamentary system, which gives federal control over national parks and lands reserved for aboriginal groups. Any company dealing with those lands must navigate a separate licensing system than that used for provincially-controlled or freehold lands. In response to their separate powers and responsibilities, provincial and federal regimes have also developed separate regulatory regimes to handle the practical aspects of energy exploration and development. At bottom, any given project may engage a private landowner, two levels of government and a number of their attendant administrative bodies.

The oil and gas industry in the United States developed roughly at the same time as it did in Canada, and American investment and companies have played a role in the development of Canada’s industry throughout its history. However, Canadian courts have repeatedly treated the American body of law in relation to oil and gas matters with caution. This caution arises by virtue of the fact that different American jurisdictions have often adopted varied approaches to basic concepts of oil and gas law. At times, those concepts distinctly contrast those of Canadian courts. An example of this can be found in the contrasting ownership theories adopted by different American States. It is a peculiarity of oil and gas development that a mineral rights holder who uses a drilling rig to recover oil and gas from under his land can also recover oil and gas from his under his neighbour’s land. The adoption of different theories of ownership will produce different outcomes in the event of a dispute between two landowners extracting oil and gas from a shared reservoir. In Louisiana, for example, the Qualified Ownership theory dictates that until substances are actually reduced to possession, a rights holder has no title whatsoever to them as owner. In Texas, on the other hand, the Ownership in Place theory dictates that a landowner owns the oil and gas beneath his land but if that oil or gas migrates, title is lost. Unlike American Courts, Canadian Courts have yet to decisively settle on a single theory of oil and gas ownership. Instead, Canadian Courts proceed on a case-by-case basis, and avoid characterizing the ownership of oil and gas and related products in situ.

Despite Canada’s English heritage, Canadian Courts have also applied English common law with caution. Canadian courts hold that a strict reliance on common law principles that developed in vastly different circumstances may lead to results that are out of touch with the realities of the industry and that deviate from the sorts of solutions needed by the affected party.[3] Even within domestic jurisprudence, prior judicial decisions are not entirely persuasive, because such decisions are commonly rendered long after the formation of contract in question.  Finally, some traditional Canadian common law concepts are not applicable to the oil and gas industry, because, as noted by the Supreme Court of Canada, common law concepts which developed in different social, industrial and legal contexts are inappropriate in the unique context of the oil and gas industry and its practices.[4]

Regardless of how difficult it may be to ascertain, interpret and apply the law, legal matters have a major impact in the sphere of Canadian oil and gas exploration and production. In 2009, the Alberta Court of Appeal ordered a regulator to reopen a hearing on two sour gas wells because it erred in not allowing neighboring residents to intervene. In the wake of that order, Alberta’s energy regulator suspended licensing of all new sour gas and sour oil wells for 9 days. That suspension left 69 licenses in the lurch. In effect, the Alberta Court of Appeal was telling the oil and gas industry how to conduct business.

The continual evolution of documents developed by the Canadian Association of Petroleum Landmen (CAPL) further reflects the importance of oil and gas law to the industry. CAPL has developed a series of model forms, leases and industry agreements that are widely used throughout Canada. Those procedures, agreements and lease forms are the product of over 30 years of industry and legal experience. Each document incorporates changing legal precedent into its terms to create a practical, accessible industry document. For example, the annotated version of the 2007 Operating Procedure explicitly sets out instances where court decisions have influenced the structure of certain clauses or aid in interpreting how such clauses would be viewed if they were subject to litigation. Clearly, this unique industry practice grows out of tangible instances where the law actually matters to and impacts business decisions.

For industry executives, land negotiators, and oil and gas lawyers, the need to assess and react to the law’s impact on their industry is paramount. This need is generating coherent attempts to assemble the convoluted and ever-evolving aspects of oil and gas law in Canada into a recognizable form. While there are no magic formulas available, recent publications such as Halsbury’s Laws of Canada - Oil and Gas have tried to bring all aspects of Canadian oil and gas law within the four corners of one book. As with other publications, the Halsbury’s how-to on the rules of the game isn’t exactly casual reader friendly, but it is a valuable step in gathering and framing this developing legal discipline.