Abstract

Split title leases in which oil rights and gas rights are divided, have resulted in disputes over solution gas ownership. A recent judgment of the Alberta Court of Appeal in Prism Petroleum Ltd. et al v. Omega Hydrocarbons Ltd.1 affirmed earlier decisions including the Borys2 case.

This paper discusses some of the relevant engineering and legal issues, including issues that have not been fully addressed or resolved by the recent court decision. Engineering issues include terminology, PVT behaviour, producing mechanisms, the significance of an initial GOR, how gas is evolved in the reservoir, concurrent production, classification of oil and gas wells, enhanced recovery requirements, solution gas conservation, and the effects of offset production. The impracticality of periodic testing of reservoir conditions is outlined.

Legal issues include previous case law, the specific wording of the lease considered in the recent decision and its interpretation. and issues where some uncertainty remains. These issues include the responsibility for costs of drilling, completion, surface facilities and operations where there has been a trespass or conversion, the related issue of unjust enrichment, estoppel (by deed, conduct and representation) and limitation periods_ It is suggested that improvements could be made to agreements to more clearly define oil and gas rights.

Organization

This paper represents the experience gained in preparing for a specific litigation case. It has, however, been written lo address problems that can arise in general. The organization is therefore as follows:

  1. Split titles and how they arise is outlined;

  2. A basic explanation of the relevant engineering issues;

  3. The general legal issues are presented, followed by an explanation of these issues;

  4. The background, legal process, technical preparation, trial results and appeal decisions of Prism et al v. Omega1 is discussed in detail;

  5. A number of issues that have not been resolved by the Courts are discussed;

  6. Recommendations and Conclusions are made.

This paper has a number of purposes. First, to report the results of a recent decision. Second, we hope to show some of the problems that can occur with split leases and to provide an overview of a complex issue. Finally, we recommend some changes which may mitigate some of these problems.

The paper is multi-disciplinary covering both legal and engineering issues. Wherever possible, an attempt has been made 10 make the paper suitable to be read by either discipline. The paper is not a substitute for legal or technical advice, and readers should seek such advice in relation to the unique circumstances applicable to their case.

Introduction

Split titles where the natural gas rights and the petroleum (oil) rights have been separated, occur from three sources:

  1. The Crown has the right to reserve either the oil or natural gas rights (egg. Section 92(2)(a) and (b) of The Alberta Mines and Mineral Act). Hence split leases or licenses may be granted by the Crown;

  2. An oil company may farm out a portion of its Crown Petroleum and Natural Gas (P&NG) lease 10 another operating company (or individual);

  3. On freehold land, The lessor may sell part of its P&NG rights and reserve the remaining portion.

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