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Oil & gas

Canada's wealth of natural resources has contributed to the country's status as a leading oil and gas producer and exporter. Understanding the legal framework related to petroleum and natural gas rights is key to successfully doing business in Canada in this sector. As Western Canada is home to 90% of total crude oil production and 99% of total natural gas production in Canada, this guide focuses primarily on oil and gas matters in the Western Canadian provinces of Alberta, British Columbia and Saskatchewan.

  1. Ownership of land and mineral rights in Canada
  2. Governmental and regulatory bodies
  3. Obtaining the right to produce oil and gas
  4. Exercising mineral rights
  5. End-of-life Obligations

1. Ownership of land and mineral rights in Canada

Land in Canada is either held publicly by the federal or provincial government in the name of His Majesty the King (what are known as "Crown lands"), or privately by individuals, corporations or other legal entities (known as "freehold lands"). In Canada, rights to the surface and near-surface of land, and rights to deeper minerals (as well as oil and gas), are distinct from one another. As a results, particularly in Alberta and British Columbia, an individual may own the surface and near-surface rights, while the Crown may own the corresponding mineral rights.

a. Crown lands

In Western Canada, each provincial Crown owns the majority of the mineral rights in its province, but the extent of Crown ownership varies from province to province, increasing as the country was settled from east to west. For instance, the provincial Crown owns 81% of the mineral rights (by area) in Alberta, compared to only 20% in Manitoba (the province directly east of Saskatchewan). The federal Crown owns the mineral rights for lands within national parks and Indian reserves, as well as offshore.

The Crown does not conduct exploration or development of oil and gas resources on its own, as there is no national or state-owned oil company in Canada. Instead, mineral rights are granted to individuals, companies or other entities by the appropriate provincial ministry under a tenure system based on English common law principles (with the exception of Québec). Each province has its own legislation that administers its tenure system.

b. Freehold lands

A "fee simple" estate is the highest form of non-government land ownership that exists in Canada, for both surface / near-surface and for minerals. It is usually characterized by the issuance of a certificate of title and is subject only to certain rights of the federal and provincial governments (e.g. expropriation). An individual, corporation or other entity with a fee simple estate in minerals may choose to explore and develop the oil and gas on their lands, or to grant these rights to another party.

c. Indigenous lands

The Constitution of Canada recognizes three groups of Indigenous peoples: First Nations, Métis and Inuit. The land ownership and mineral rights recognized in the treaties and settlement agreements between these groups and the Crown is typically held by the governing body of the applicable Indigenous group and is akin to Crown land ownership:

  • First Nations: Oil and gas development on First Nations reserve lands is managed and regulated by Indian Oil and Gas Canada, which is a special federal operating agency within Indigenous Services Canada. See "Governmental and regulatory bodies", below.
  • Métis: In Alberta, there are eight Métis settlements comprising approximately 1.25 million acres of land. The settlement lands are owned by the Métis Settlements General Council, and oil and gas development on these lands is co-managed by this council and the Alberta government.
  • Inuit: Inuit reside primarily in Labrador, Northern Québec, Nunavut and the Northwest Territories. The Inuit have settled land claims in these regions, and the related settlement agreements govern the exploration, development and production of oil and gas in these areas.

2. Governmental and regulatory bodies

Listed below are some of the regulatory bodies and agencies that oversee oil and gas projects in Canada. Depending on the nature of the project and where it takes place, a project proponent may have to deal with multiple regulators.

a. Provincial

Each province's government ministries are responsible for managing provincially owned oil and gas resources, as well as entering into agreements granting rights to such oil and gas. In British Columbia and Alberta, separate provincial regulators are responsible for monitoring all phases of oil and gas development in their province, including approving oil and gas project applications, ensuring that projects are in compliance with provincial legislation (including environmental legislation) and granting entry to Crown lands. In Saskatchewan, all of these roles are held by the government ministry. Environmental approvals for oil and gas development are granted by separate regulators in each of these provinces.

  • British Columbia: The Ministry of Energy, Mines and Petroleum Resources is the responsible government ministry, and the British Columbia Oil and Gas Commission is the province's independent regulator, which is also responsible for consulting with First Nations.
  • Alberta: Alberta Energy is the responsible provincial government ministry, and the Alberta Energy Regulator is the province's independent regulator. The Aboriginal Consultation Office co-ordinates and oversees consultations with First Nations in Alberta.
  • Saskatchewan: The Ministry of Energy and Resources, through different departments, is responsible for all aspects of oil and gas development in Saskatchewan.

These provinces each have a Surface Rights Board (in Alberta, the board is called the Land and Property Rights Tribunal) that facilitates dealings between industry and surface land owners, and has the power to make an order granting a project proponent a right of entry on to freehold lands and determining the appropriate amount of compensation owed to the land owner. On Metis Settlement Land in Alberta, the Metis Settlements Appeal Tribunal deals with such disputes.

b. Federal

While each the provincial government has general authority over its natural resources, federal jurisdiction may overlap these provincial responsibilities. Examples of this include where Indigenous interests are affected, where a project crosses provincial or international boundaries, or where a project takes place offshore. Where a jurisdictional overlap occurs, both federal and provincial regulators may become involved, with the federal regulator having jurisdiction over environmental assessments, tolls and tariffs, and the import and export of oil and gas into and out of Canada. The Canadian Energy Regulator is the federal regulator. Other federal bodies that may be involved in oil and gas projects falling under federal jurisdiction are the Impact Assessment Agency of Canada, Fisheries and Oceans Canada, Transport Canada, Natural Resources Canada, and Land Crown-Indigenous Relations and Northern Affairs Canada.

 

Indian Oil and Gas Canada is the agency that fulfills the federal Crown's fiduciary and statutory duties with respect to all aspects of oil and gas operations taking place on First Nations land. It is also responsible for approving oil and gas leases for First Nations lands (in conjunction with the First Nation), ensuring regulatory compliance, collecting royalties or rent in trust for the band, and providing consultation services to First Nations in their dealings with the petroleum industry.

3. Obtaining the right to produce oil and gas

a. Leases on freehold lands:

The most common way to obtain the right to produce oil and gas from freehold lands is through a lease with the fee simple owner of the mineral rights.

The Canadian Association of Land and Energy Professionals ("CALEP") has developed a commonly used form of oil and gas lease in Western Canada.

 

Freehold leases, like Crown leases, are subject to applicable provincial or federal legislation. However, generally speaking, all the terms of a freehold lease are contained within the document itself. Therefore, negotiating the most favourable terms prior to execution is crucial.

b. Leases on Crown lands:

In Western Canada, mineral rights are acquired from the Crown by way of leases and licences. Crown leases and licences are granted by the appropriate provincial ministry, usually through a public bid process. Requests may be made for particular lands to be posted for sale. Certain circumstances also allow for direct purchases.

Although there is a varying degree of overlap between the two, depending on the province and the type of petroleum substance sought, a Crown licence is generally granted for the exploration of oil and gas deposits, while a Crown lease is generally granted for their production. The provisions of Crown oil and gas leases are generally similar to the ones in a freehold oil and gas leases, however, the terms of Crown leases are often pre-established by provincial regulations.

Oil and gas licence and lease tenure differs across Western Canada, depending on the province and type of petroleum substance sought. In Alberta, Crown petroleum and natural gas leases have an initial term of 5 years, and are normally continued by the government for so long thereafter as the lessee can establish that the lands remain capable of producing oil and gas in commercial quantities. The initial term of an Alberta petroleum and natural gas licence is 2, 4, or 5 years, depending on the geographic region to which the licence relates. The licence will normally be continued for an intermediate term of 5 years once a well has been drilled on the lands, and continued past 5 years to the extent the licencee can establish that the lands are capable of producing oil and gas in commercial quantities. The rights granted pursuant to a Crown lease or licence expire if the instrument is not continued past its initial or intermediate term.

A Crown instrument is subject to the provincial or federal regulations that it incorporates by reference, as well as the applicable terms of the document itself. These regulations set out many additional material details, such as the amount and manner of calculating royalty payments. Changes in these regulations, which the Crown can pass unilaterally, effect changes to the Crown lease or licence.

c. Leases on Indigenous lands

On Indigenous lands and on Metis settlement lands in Alberta, leases are granted through calls for tender, competitive bidding, or direct negotiations with First Nation / Metis groups. Leases are approved by both the applicable First Nation / Metis Band Council and by Indian Oil and Gas Canada / the Metis Settlement General Counsel.

d. Secondary rights agreements

It is very common to share the risk and reward of exploring for and producing oil and gas in Western Canada. This sharing is done through agreements between the lessee / licencee of oil and gas rights and other oil and gas companies – usually ones with similar oil and gas rights in the surrounding area. The names and details of these agreements differ depending on the circumstances, but whether they are called farmout agreements, pooling agreements, participation agreements or joint operating agreements, they all provide for the sharing of the costs and revenues involved in producing oil and gas. CALEP has widely used forms of farmout agreements and joint operating agreements.

e. Registration

The extent to which oil and gas rights are registrable differs from province to province, and between Crown lands and freehold lands. However, it is prudent to register oil and gas rights with the applicable land registry wherever possible. Interests in Crown oil and gas rights can generally only be registered by the named lessees / licencees to the applicable Crown instrument, whereas freehold oil and gas rights can be registered whether the party is a recognized lessee or acquired its rights pursuant to a secondary rights agreement.

4. Exercising oil and gas rights

a. Access to land

If the mineral rights owner does not own the corresponding surface land, a separate surface lease will have to be negotiated with the surface land owner. An annual rental must be paid in consideration for the right of entry to the surface covered by an oil and gas lease, as well as, usually, a larger initial bonus payment.

In Western Canada, if a surface owner and lessee of an oil and gas lease are unable to agree on the terms of a surface lease or in the event of a subsequent dispute, the provincial surface rights board has the power to authorize a right of entry and determine the appropriate amount of compensation owed (see "Governmental and regulatory bodies", above).

For surface access on First Nation lands, project proponents are typically required to submit an environmental review form to both the First Nation and to Indian Oil and Gas Canada as part of its surface lease or right-of-way application.

b. Drilling requirements

Each province in Western Canada requires that a separate licence be granted before any drilling operations or building activities are conducted in connection with oil and gas development. The governments have broad discretion in granting these licenses, and a number of conditions must be met before a licence will be issued, many relating to ensuring that the well or other infrastructure will be properly abandoned, and the affected lands reclaimed and, as necessary, remediated when it is no longer economical to operate the well, or if the licencee becomes insolvent. The government must also approve the transfer of all licences, a process which can be just as onerous as the initial application.

c. Spacing requirements

Drilling spacing units are prescribed by the relevant governmental authority for the purpose of conservation and efficient production of petroleum resources. They impose a minimum distance required between wells, and between a well and the boundary of the applicable drilling tract. Where the area covered by an oil and gas lease is less than the prescribed drilling spacing unit, a pooling agreement between lessees may be used to combine leases (or portions thereof) to the extent necessary to encompass an entire drilling unit. In Alberta, pooling arrangements may be voluntary or compulsory, in order to prevent unnecessary and uneconomic wells, as well as to avoid stranding developable lands.

5. End-of-life obligations

In Western Canada, oil and gas infrastructure (including the affected lands) must be abandoned and reclaimed once they have reached the end of their productive life cycle. Regulators prescribe mandatory requirements for licencees and non-licencee owners with respect to such end-of-life activities in order to ensure the protection of the public and the environment.

"Abandonment", or "decommissioning", consists of the permanent dismantlement of a well or facility, and includes both surface and subsurface abandonment.

"Reclamation" consists of returning the land around oil and gas infrastructure to its original state. A reclamation plan is typically required as part of the application for an oil and gas drilling or construction licence. In Alberta, drilling licences and surface leases can only be terminated once a reclamation certificate has been issued by the Alberta Energy Regulator.

"Remediation" is required in the event of a spill or contamination and can be very expensive. If remediation is required, it must be performed prior to reclaiming the land. In Alberta, once a spill has been remediated, licencees may apply for a remediation certificate. The Alberta Energy Regulator may conduct inspections or audits, and reclamation certificates may be cancelled.

In Alberta, licencees and non-licencee owners of oil and gas facilities remain liable for surface reclamation issues for 25 years after termination of the applicable drilling license, and remain permanently liable for contamination issues.

There are tens of thousands of inactive oil and gas wells and related infrastructure in Western Canada that have yet to be properly reclaimed. Different liability management programs have been implemented in each province in an attempt to ensure that oil and gas producers will be responsible for the abandonment and reclamation of the sites they own and operate, even in the event they become insolvent. In Alberta, oil and gas sites owned by bankrupted oil and gas producers become the responsibility of the Orphan Well Association.

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