“Petroleum” Rights – Who owns what?

With increasing interest in oil and gas production and subsurface gas storage, questions may arise with respect to ownership of hydrocarbon resources. Where by reservation or separate conveyance, “petroleum” rights are owned separately from other subsurface mineral resources, who owns the liquid and gaseous hydrocarbons which may be produced and at what point in time should these respective ownership interests be determined?

The Alberta Court of Appeal recently considered these issues in a case where “all …. petroleum… which may be found to exist in upon or under” the land had been reserved at the time of conveyance of the land by the Canadian Pacific Railway to the original settlers. The successors in title of the original settlers asserted ownership of all gas captured at the well bore. The successors in title of the petroleum rights maintained that such gas included “solution gas” which, prior to drilling, was dissolved in the liquid hydrocarbons to which they were entitled as owner of the petroleum rights.

In addressing the issue of gas ownership, the court noted that, in “mixed reservoirs, before drilling, the percentage of liquid and gaseous hydrocarbons is fixed. However, after drilling, as a result of changes in temperature and pressure, the proportion of liquid and gaseous substances changes. Declining pressure as a result of production also results in conversion of liquid hydrocarbons into gaseous hydrocarbons in the reservoir. This “evolved gas” is to be distinguished from the “free gas” which exists at initial reservoir conditions before drilling.

The trial judge had concluded that “petroleum” includes oil and any other hydrocarbons and natural gas existing as liquid in their natural condition and that this “petroleum”, including all hydrocarbons in solution or contained in the liquid before drilling, is the property of the petroleum owners. In upholding the trial judge’s conclusion, the Court of Appeal stated:

    “In summary, the trial judge concluded…: the reservation was to be interpreted and title determined as at the time of the grant at which the hydrocarbons were at initial reservoir conditions; solution gas belongs to the petroleum owners; free gas or primary gas cap gas belongs to the non-petroleum owners; and solution gas (evolved gas) that emerged from the liquid hydrocarbons in the reservoir, at the bottom of the well bore, at the surface or anywhere in between, belongs to the petroleum owners. She found that condensate and natural gas liquids, which derive from primary gas cap gas, belong to the non-petroleum owners; and condensate and natural gas liquids, which derive from the evolved gas, belong to the petroleum owners.

    “…the trial judge’s conclusion that evolved gas belongs to the petroleum owner along with solution gas that emerges at the surface was correct…

    “Although the trial judge did not specifically consider the meaning of the words “which may be found to exist” used in the reservation, the correctness of her decision is not undermined. At the time the CPR reservation was created, it was not known if petroleum existed below the surface of the land. Therefore, the reservation would only attach to petroleum which might be found to exist through exploration or production. Those words merely express a limitation on the operation of the reservation. Those words do not mean that petroleum must be reduced to possession before it can be subjected to ownership.”

At least based on the wording of the reservation under consideration in this case, the court determined that separate ownership of “petroleum” rights entitles the petroleum owner to “petroleum” resources as they existed at the time of the reservation, including the solution gas which has emerged from the liquid hydrocarbons after drilling. Despite the fact that this “evolved gas” mingles indistinguishably with the “free gas” within the reservoir, ownership of this gas must be determined on the basis of initial reservoir conditions.

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