Surface Facilities – Loss of Use Compensation

AgriLaw: March 2008

Oil and gas wells, gas storage, wind turbines and telecommunication towers all require the construction of surface facilities and access roads. Where these installations are developed on agricultural lands, farmers suffer not only loss of production from areas now occupied by the surface facilities but also increased costs and decreased efficiency in attempting to work around these obstacles. Are landowners entitled to compensation for this interference with their operations?

In a recent case before the Alberta Court of Queen’s Bench, the court considered an appeal by the operator of oil and gas production facilities from a decision of the provincial Surface Rights Board increasing annual lease payments for surface facilities located on both dryland and irrigated sites. The Board had determined annual compensation for dryland sites at $350 per acre for loss of use and $2,500 for adverse effect. Comparable annual compensation values for irrigated sites were determined by the Board at $600 per acre for loss of use and $4,000 for adverse effect.

On appeal, the court upheld loss of use and adverse effect compensation values for dryland sites and adverse effect values for irrigated sites but reduced loss of use for irrigated sites to $500 per acre. In coming to this conclusion, the court reviewed various cases defining “adverse effect” for which landowners are entitled to compensation and determined that this includes:

“… any extra requirements of time and costs necessarily incurred in farming around the obstruction in the field; any likely incidental production losses outside the area granted due to compaction or pulverization of the soil, overlaps or misses, and combining losses; any effect on management decisions and practices; added strain and stress on all machinery from turning and manoeuvring; and the probable need for more attention to effective weed control around the area …”

“… inconvenience to a farmer in having to farm around the well site in question, the extra turns required for his tractor and farm equipment and the general inconvenience which will result due to the location of the well site in the farmer efficiently and effectively carrying out his farming operations …”

“… such things as extra time needed to cultivate or care for land which is obstructed by a well head, or for extra time needed to supervise or inspect lands because of the operator’s right to enter thereon.”

The court determined that there were both “tangible and intangible components to adverse effect”. The court stated that:

“For example, while there is quantifiable equipment cost to working the same piece of land two or more times, simultaneously, there is an added stress on the operator to ensure that he or she does not hit any of the structures on the well site. Simultaneous with the extra caution being taken with each extra pass, there is extra time being expended.”

Other additional factors which the court considered relevant to assessment of adverse effect included the effect of access roads, drainage, development limitations and lease administration. In this regard, the court commented:

“While there must be actual proof of the existence of these factors before they are properly compensated for under adverse effect, I do find merit to what I believe to be the over-arching theme of (the landowner’s) factors. The theme is that the adverse effect does not arise fully from the exclusion of the leased parcel from the landowner’s operation, the existence of the physical structures, or, the presence of an access road. It also arises from the need to interact with the operator as a business associate. The problem for the landowner is that it did not voluntarily choose to have this business relationship, and the operator constitutes a business associate that does not have the same objectives for the use of the now mutually-held business asset, the land, as the landowner.

Generally speaking, the landowners in question are engaged in agricultural operations. Like the operators, they are operating a business, but in effect, are forced to hand over the use of one of their major business assets, their land, for contrary use by a third party. It is difficult to conceive that any business owner would ever willingly engage in voluntarily relinquishing use of its business assets. Yet that is what the farmer, the rancher, must do”.

Farmers whose operations are impeded by surface facilities are entitled to compensation for this interference. Such compensation is not limited to simply loss of production but should recognize increased costs, loss of efficiency and other factors related to the loss of use of their business asset.