Anderson v. Amoco Canada Oil and Gas, [2004] 3 S.C.R. 3, 2004 SCC 49

Carl Anderson Appellant

Amoco Canada Oil and Gas, Amoco Canada Resources Ltd., Amoco Canada Energy Ltd., 3061434 Canada Ltd., Empress Gas Corp. Ltd., Encor Energy Corporation Inc., Gulf Canada Resources Limited, Home Oil Company Limited, Imperial Oil Resources, Imperial Oil Resources Limited, Imperial Oil Resources Production Limited, Jethro Development Ltd., Kerr‑McGee Canada Ltd., McColl‑Frontenac Inc., Mobil Oil Canada, Morgan Hydrocarbons Inc., Murphy Oil Company Ltd., Petro-Canada, Royal Trust Energy Resources II Corporation, RTEC One Resources Inc. and Suncor Inc. Respondents

and between

Carl Anderson and Richard W. C. Anderson, Co‑executors of the Estate of Chris Anderson, deceased, Carl Anderson, Laureen Anderson, Richard W. C. Anderson, Gonda Humble, Margaret May Newland, Mary Ross and Lillian Rowles Appellants

Amoco Canada Oil and Gas, Amoco Canada Resources Ltd., Amoco Canada Energy Ltd., 3061434 Canada Ltd., Canol Resources Ltd., Dominion Explorers Inc., Empress Gas Corp. Ltd., Gentra One Resources Inc., Gulf Canada Resources Limited, Home Oil Company Limited, International Oiltex Ltd., Jethro Development Ltd., Kerr‑McGee Canada Ltd., Mobil Oil Canada, Mobil Oil Canada Ltd., Mobil Resources Ltd., Murphy Oil Company Ltd., Ocelot Energy Inc., Petro‑Canada, Suncor Inc., Talisman Energy Inc. and Westrock Energy Resources II Corporation Respondents

and between

Marguerite J. Bouskill, Executrix of the Estate of Thomas Charles Bouskill, deceased, Marguerite J. Bouskill, Geraldine Sadie McArthur and May Eleanor Winter Appellants

Canadian Fina Oil Limited, Home Oil Company Limited, Petrofina Canada Ltd., Petro‑Canada Enterprises Inc., Petro‑Canada Inc. and Petro-Canada Respondents

and between

Bruce Wesley Burns, Executor of the Estate of Wycliffe Thomas Burns, deceased, Bruce Wesley Burns, Robert Lyle Burns and Stanley Roy Burns Appellants

Amoco Canada Oil and Gas, Amoco Canada Resources Ltd., Amoco Canada Energy Ltd., 3061434 Canada Ltd., Apache Corporation, Canadian Gulf Oil Company, Canadian Pacific Limited, Empress Gas Corp. Ltd., Encor Energy Corporation Inc., Gulf Canada Limited, Gulf Canada Properties Limited, Gulf Canada Resources Limited, Home Oil Company Limited, Imperial Oil Resources, Jethro Development Ltd., Kerr‑McGee Canada Ltd., Mobil Oil Canada, Morgan Hydrocarbons Inc., Murphy Oil Company Ltd., PanCanadian Petroleum Limited, Petro-Canada, Royal Trust Energy Resources II Corporation, RTEC One Resources Inc. and Suncor Inc. Respondents

and between

Roy Hoven and Adolph Hoven, Co‑executors of the Estate of Theresa Hoven, deceased Appellants

Amoco Canada Oil and Gas, Amoco Canada Resources Ltd., Amoco Canada Energy Ltd., 3061434 Canada Ltd., Canol Resources Ltd., Canadian Gulf Oil Company, Dominion Explorers Inc., Empress Gas Corp. Ltd., Gulf Canada Limited, Gulf Canada Properties Limited, Gulf Canada Resources Limited, Home Oil Company Limited, International Oiltex Ltd., Jethro Development Ltd., Kerr‑McGee Canada Ltd., Mobil Oil Canada, Morgan Hydrocarbons Inc., Murphy Oil Company Ltd., Ocelot Energy Inc., Petro-Canada, Royal Trust Energy Resources II Corporation, RTEC One Resources Inc., Suncor Inc. and Talisman Energy Inc. Respondents

and between

Robert John Fielding King, Executor of the Estate of Dorothy Jessie Walker, deceased, and Robert John Fielding King Appellants

and between

Robert Michael Logan, Executor of the Estate of Wilbert Logan, deceased Appellant

Amoco Canada Oil and Gas, Amoco Canada Resources Ltd., Amoco Canada Energy Ltd., 3061434 Canada Ltd., Canol Resources Ltd., Dominion Explorers Inc., Empress Gas Corp. Ltd., Gulf Canada Resources Limited, Home Oil Company Limited, Imperial Oil Limited, International Oiltex Ltd., Jethro Development Ltd., Kerr‑McGee Canada Ltd., Mobil Oil Canada, Morgan Hydrocarbons Inc., Murphy Oil Company Ltd., Ocelot Energy Inc., Petro-Canada, Royal Trust Energy Resources II Corporation, RTEC One Resources Inc., Suncor Inc. and Talisman Energy Inc. Respondents

and between

Angus McNeil Appellant

Amoco Canada Oil and Gas, Amoco Canada Resources Ltd., Amoco Canada Energy Ltd., 3061434 Canada Ltd., Canadian Gulf Oil Company, Canadian Pacific Limited, Empress Gas Corp. Ltd., Encor Energy Corporation Inc., Gascan Resources Ltd., Gulf Canada Limited, Gulf Canada Properties Limited, Gulf Canada Resources Limited, Home Oil Company Limited, Imperial Oil Resources, Imperial Oil Resources Limited, Imperial Oil Resources Production Limited, Jethro Development Ltd., Kerr‑McGee Canada Ltd., Lincoln‑McKay Development Company Ltd., McColl‑Frontenac Inc., Mobil Oil Canada, Morgan Hydrocarbons Inc., Murphy Oil Company Ltd., PanCanadian Petroleum Limited, Petro-Canada, Royal Trust Energy Resources II Corporation, RTEC One Resources Inc. and Suncor Inc. Respondents

and between

David Lloyd McNeil Appellant

Amoco Canada Oil and Gas, Amoco Canada Resources Ltd., Amoco Canada Energy Ltd., 3061434 Canada Ltd., Canol Resources Ltd., Dominion Explorers Inc., Empress Gas Corp. Ltd., Gulf Canada Resources Limited, Home Oil Company Limited, Imperial Oil Resources Limited, International Oiltex Ltd., Jethro Development Ltd., Kerr‑McGee Canada Ltd., Mobil Oil Canada, Morgan Hydrocarbons Inc., Murphy Oil Company Ltd., Ocelot Energy Inc., Petro-Canada, Royal Trust Energy Resources II Corporation, RTEC One Resources Inc., Suncor Inc., Talisman Energy Inc. and Union Pacific Resources Inc. Respondents

and between

James William Murdoch and Andrew John Murdoch Appellants

and between

Andrew Patterson Murray Appellant

and between

David Lloyd McNeil, Executor of the Estate of Ada McNeil, deceased, David Lloyd McNeil, Evelyn McNeil, Beatrice Ann Philips and Ethel Ada Thornton Appellants

Amoco Canada Oil and Gas, Amoco Canada Resources Ltd., Amoco Canada Energy Ltd., 3061434 Canada Ltd., Canol Resources Ltd., Dominion Explorers Inc., Empress Gas Corp. Ltd., Gentra One Resources Inc., Gulf Canada Resources Limited, Home Oil Company Limited, International Oiltex Ltd., Jethro Development Ltd., Kerr‑McGee Canada Ltd., Mobil Oil Canada, Mobil Oil Canada Ltd., Mobil Resources Ltd., Murphy Oil Company Ltd., Ocelot Energy Inc., Petro-Canada, Suncor Inc., Talisman Energy Inc. and Westrock Energy Resources II Corporation Respondents

and between

Elias Dyrland Appellant

227096 Oil & Gas Ltd., Atlantic Richfield Company, Canadian Gulf Oil Company, Gulf Canada Limited, Gulf Canada Properties Limited, Gulf Canada Resources Limited, Husky Oil Operations Ltd., Conwest Exploration Company Limited, Canadian Pacific Limited, PanCanadian Petroleum Limited and Petro‑Canada Respondents

and between

Roy Edward Engen, Executor of the Estate of Oscar Huseby, deceased, Roy Edward Engen and Allan Henri Posti Appellants

Atlantic Richfield Company, Canadian Pacific Limited, Crestar Energy, Gulf Canada Resources Limited, Lincoln‑McKay Development Company Ltd., PanCanadian Petroleum Limited, Petro-Canada and Sulpetro Limited Respondents

and between

Ronald Hall and Leanne Hall, Executors of the Estate of Constance Huseby, deceased, Dorothy Jean Matthews and Norma June Cherniak, Executors of the Estate of Muriel Engen, deceased, Violet Carroll, Norma June Cherniak, Holly Muriel French, Harvey Raymond Huseby, Kelly Marlene Judson and Dorothy Jean Matthews Appellants

and between

Alick Lawton, Executor of the Estate of Roger Lawton, deceased, and Alick Lawton Appellants

and between

Russell E. Thorp and William J. Thorp, Co‑executors of the Estates of Hilmer Magnus Thorp and Pearl Mary Thorp, deceased, Russell E. Thorp and William J. Thorp Appellants

and between

Ada Irene McKenzie and Robert Douglas Wallace, Executors of the Estate of Elizabeth D. Wallace, deceased Appellants

Canadian Pacific Limited, Canadian Rampart Oil & Gas Ltd., J & K Petroleum Land Management Ltd., LL & E Canada Holdings Inc., PanCanadian Petroleum Limited, Rocky River Resources Ltd. and Sunlite Oil Company Limited Respondents

and between

Mary Diane Peterson, Executrix of the Estate of Evelyn Lucinda Macey, deceased, Mary Diane Peterson, Larry John Macey and Lorna Jean Macey Appellants

Canada Northwest Energy Limited, Canadian Pacific Limited, Canpar Holdings Ltd., PanCanadian Petroleum Limited and Serenpet Exploration Inc. Respondents

and between

Violet Anne Safron Appellant

Apache Corporation, Sunray DX Northern Oil Co. Ltd., Sun Oil Company Limited and Suncor Inc. Respondents

and between

Verdie Ann Lian and Janet Lee Ann Kostiw, Executrices of the Estate of Marjorie E. Stone, deceased Appellants

Bralorne Resources Limited, Bonanza Oil & Gas Ltd., Canadian Hunter Exploration Ltd., Lochend Partnership, Lochwest Resources Ltd., Serenpet Exploration Inc., Serenpet Inc., Serenpet Partnership and Shiningbank Energy Ltd. Respondents

and

Freehold Petroleum & Natural Gas Owners Association Intervener

Indexed as: Anderson v. Amoco Canada Oil and Gas

Neutral citation: 2004 SCC 49.

File No.: 29370.

2004: April 22; 2004: July 16.

Present: McLachlin C.J. and Major, Bastarache, Binnie and Deschamps JJ.

on appeal from the court of appeal for alberta

Real property — Split Title Lands — Oil and gas — Petroleum rights reserved by railway company in sale of land to settlers in early twentieth century — Effect of reservation of petroleum rights on present entitlement to oil and gas from lands encumbered by reservation — Determination of respective rights of “petroleum owners” and “non‑petroleum owners” — Whether initial conditions of natural underground reservoir govern relative ownership between parties to original contracts — Rule of capture.

For connecting the west coast with the rest of Canada, the Canadian Pacific Railway (CPR) was paid in money and land by the Canadian government. The CPR then entered into agreements with settlers for the transfer of title to this land. Under these agreements the CPR reserved its right to petroleum, creating “Split Title Lands”. This appeal deals with contracts entered into between 1907 and 1912 and with the ownership of hydrocarbons produced from wells drilled on Split Title Lands. A natural underground reservoir (“pool”) may contain hydrocarbons in both liquid and gas phases. Prior to human intervention, a pool will be under relatively stable pressure and temperature conditions, and the ratio of gas phase to liquid phase hydrocarbons will remain fairly constant. When a pool is drilled into, the pressure changes, causing phase changes which alter this ratio. Some of the hydrocarbons originally found in liquid phase will, if there is a reduction in pressure, “evolve” into gas phase. Once this evolution happens it is impossible to distinguish evolved gas from those hydrocarbons which were originally in a gas phase. Depending on the initial pool conditions and other factors including production techniques, the amount of hydrocarbons that change phase can be quite significant.

In determining the respective subsurface rights of “petroleum owners” and “non‑petroleum owners” under the Split Title Lands, the Alberta Court of Queen’s Bench held that the “non-petroleum owners” were entitled to: (1) primary gas cap gas; (2) primary gas cap gas which migrates from adjoining lands; and (3) condensate and natural gas liquids that derive from primary gas cap gas. The court further held that the “petroleum owners” were entitled to: (1) secondary gas cap gas; (2) secondary gas cap gas which migrates from adjoining lands; (3) solution gas that emerges from connate water; and (4) condensate and natural gas liquids that derive from secondary gas cap gas. “Primary gas cap gas” refers to those hydrocarbons in gaseous phase in a pool containing an accumulation of both gaseous and liquid hydrocarbon solutions prior to human intervention, while “secondary gas cap gas” or “evolved gas” refers to gaseous hydrocarbons which were originally liquid. The Court of Appeal dismissed the appeal, except that it did not agree that the petroleum owner was entitled to the gas from connate water; that issue is not before this Court.

Held: The appeal should be dismissed.

The courts below were correct to find that Borys v. Canadian Pacific Railway Co., 1953 414 (UK JCPC), [1953] 2 D.L.R. 65 (P.C.), decided the reservation of petroleum included all hydrocarbons which were in liquid phase in the ground at the time of the transaction. The reservation of petroleum divided the ownership interest in oil and gas on the basis of the phase the hydrocarbon was in under initial conditions at the time of the contract for the sale of the property. Any phase changes which occurred after a well is drilled into a pool do not alter the ratio of ownership created by the reservation. This applies to the parties to the original contract and also applies to those who derive their interest from these parties. Accordingly, the non‑petroleum owner is entitled to all hydrocarbons which were in gas phase, and the petroleum owner to all hydrocarbons which were in liquid phase, at initial pool conditions, regardless of the phase they are in at the time of recovery. This division will apply to hydrocarbons which migrate from under other lands, subject to any regulatory mitigation of the rule of capture. Dividing ownership based upon original conditions will not lead to great uncertainty in quantifying respective interests. The entire industry relies on estimates of what is under the surface, and these estimates have to suffice for dividing up ownership as well.

A broad ownership theory is not required to be determined in this appeal. Irrespective of any other rights the parties may have in relation to the hydrocarbons in the ground, they chose to divide their interest by contract. It is not open to a party to argue later that division was meaningless on the basis that no rights can attach until the substance is reduced to possession. When the substance, which was not in their possession at the time of the contract, is reduced to possession the date and terms of the contract govern their relative entitlement.

Lastly, the rule of capture does not apply to the division of ownership by phase as it does to divisions of ownership based on surface land ownership. Applying this rule to parties who have agreed to divide their interest under the same tract of land would defeat the purpose of the contract.

Cases Cited

Applied: Borys v. Canadian Pacific Railway Co., 1953 414 (UK JCPC), [1953] 2 D.L.R. 65, aff’g 1952 337 (AB SCAD), [1952] 3 D.L.R. 218, rev’g in part 1951 266 (AB SCTD), [1951] 4 D.L.R. 427; referred to: Bank of Montreal v. Dynex Petroleum Ltd., [2002] 1 S.C.R. 146, 2002 SCC 7.

Statutes and Regulations Cited

Land Titles Act, R.S.A. 2000, c. L‑4.

Oil and Gas Conservation Act, R.S.A 2000, c. O‑6.

Water Act, R.S.A. 2000, c. W‑3.

APPEAL from a judgment of the Alberta Court of Appeal (2002), 5 Alta. L.R. (4th) 54, 312 A.R. 116, 214 D.L.R. (4th) 272, [2003] 1 W.W.R. 174, [2002] A.J. No. 829 (QL), 2002 ABCA 162, affirming in part a judgment of the Court of Queen’s Bench (1998), 63 Alta. L.R. (3d) 1, 225 A.R. 277, [1999] 3 W.W.R. 255, [1998] A.J. No. 805 (QL), 1998 ABQB 620. Appeal dismissed.

Norman K. Machida and Timothy S. Meagher, for the appellants.

Lenard M. Sali, Q.C., for the respondents Amoco Canada Oil and Gas, Amoco Canada Resources Ltd., Amoco Canada Energy Ltd., 3061434 Canada Ltd. and Ocelot Energy Inc.

Randall W. Block and Karen A. McHugh, for the respondents Gulf Canada Resources Limited, Morgan Hydrocarbons Inc., Murphy Oil Company Ltd., Canadian Gulf Oil Company, Gulf Canada Limited and Gulf Canada Properties Limited.

Gwen K. Randall, Q.C., for the respondents Petro-Canada, Canol Resources Ltd., Dominion Explorers Inc., International Oiltex Ltd., Canadian Fina Oil Limited, Petrofina Canada Ltd., Petro‑Canada Enterprises Inc. and Petro‑Canada Inc.

Mary E. Comeau, for the respondents Talisman Energy Inc. and Encor Energy Corporation.

William R. Pieschel, Q.C., for the respondents Canadian Pacific Limited and PanCanadian Petroleum Limited.

No one appeared for the respondents Empress Gas Corp. Ltd., Union Pacific Resources Inc., Crestar Energy, Sulpetro Limited, Canadian Rampart Oil & Gas Ltd., J & K Petroleum Land Management Ltd., LL & E Canada Holdings Inc., Rocky River Resources Ltd., Sunlite Oil Company Limited, Sunray DX Northern Oil Co. Ltd., Sun Oil Company Limited, Bralorne Resources Limited, Bonanza Oil & Gas Ltd., Canadian Hunter Exploration Ltd., Lochend Partnership, Lochwest Resources Ltd., Serenpet Inc., Serenpet Partnership and Shiningbank Energy Ltd.

L. Douglas Rae and W. Tibor Osvath, for the intervener.

The judgment of the Court was delivered by

[1] Major J. — This appeal reviews the effect a reservation of petroleum rights from a sale of land that took place almost 100 years ago has on the present entitlement to oil and gas from lands encumbered by the same reservation.

[2] These reasons rely on the definitions used by the trial judge. The Appendix contains the entirety of these definitions. The following two definitions are used frequently:

“Phase” — a distinct physical state of matter; all matter exists in one or more of three physical states: gas, liquid or solid;

“Pool” — a natural underground Reservoir containing or appearing to contain an accumulation of Gaseous or Liquid Hydrocarbon Solutions or both, and separated or appearing to be separated from any other accumulation.

I. Facts

[3] The completion of a national railway across Canada during the latter part of the nineteenth century was an endeavour that many view as one of the defining moments in Canadian history. As this case demonstrates, effects of this project still linger. For connecting the west coast with the rest of Canada, the Canadian Pacific Railway (“CPR”) was paid in money and land by the Canadian government.

[4] Canada transferred to the CPR not only the surface rights but the entire legal interest in the land. This included all subsurface resources. At the time, the CPR saw the main value of the land as the ability it gave them to encourage settlement near the railway. Settlement was viewed as key to the economic success of the railroad, and the CPR entered into agreements with settlers for the transfer of title to this land. The first of these contracts transferred the CPR’s entire interest in the plots of land to the settlers.

[5] It was approximately 1904 when the CPR recognized the underground value of the land they owned. As a result, they began to exclude the valuable subsurface minerals from the title when they sold land. Initially the CPR reserved only coal from the transfer but by 1912 they were reserving rights to all mines and minerals. This division of title created “Split Title Lands” which are recognized under the Torrens land registration system in Alberta, and two or more separate interests reflecting ownership of surface and subsurface rights can be registered under the Land Titles Act, R.S.A. 2000, c. L-4.

[6] The current appeal deals with contracts entered into between 1907 and 1912, even though the structure of the purchase and sale agreements resulted in some of the actual transfers not being executed and registered until later. Under these agreements, the CPR reserved its right to petroleum in addition to just coal, or coal and valuable stone. It is a reasonable assumption that the settlers were primarily interested in the surface rights because of their intended use for farming which, to the extent any is needed, explains their agreement to the split title reservations.

[7] Over time the substances reserved by the CPR varied. This appeal is only about the reservation of “petroleum”. The dispute over the meaning of “petroleum” is not new. Its meaning in a reservation similar to those at the core of this appeal was considered by the Judicial Committee of the Privy Council: Borys v. Canadian Pacific Railway Co., 1953 414 (UK JCPC), [1953] 2 D.L.R. 65, aff’g 1952 337 (AB SCAD), [1952] 3 D.L.R. 218 (Alta. C.A.), rev’g in part 1951 266 (AB SCTD), [1951] 4 D.L.R. 427 (Alta. S.C.).

[8] The parties agree that in the Borys appeal the Privy Council decided that because “petroleum” included liquid hydrocarbons but not gaseous ones, ownership was governed by the phase of the hydrocarbon in the ground. They disagree on when the Privy Council said the determination of the phase was to be made. The appellants submit Borys held that the determination should be made when a molecule enters the well bore under ground, and the phase of the hydrocarbon at that point in time should be determinative. The respondents reply that the determination should be made at initial pool conditions, at the time of purchase prior to development. The respondents submit that the Supreme Court of Alberta, the Appellate Division and the Privy Council in Borys have already decided that phase changes should not alter relative ownership.

[9] When ownership is determined by the phase of a substance, as Borys held was the case for hydrocarbons, the moment in time that phase is examined becomes important. This is because an underground pool may contain hydrocarbons in both liquid and gas phases. Before the pool is perforated by drilling, the pressure and temperature remain relatively constant; so does the ratio of gas to liquid. But once the pool is invaded by drilling, the pressure in the pool changes, usually decreasing. This has a number of effects; the one of primary concern to this appeal is that some of the hydrocarbons in a liquid phase will “evolve” into a gas phase. Once this evolution happens, it is impossible to distinguish evolved gas from those hydrocarbons which were originally in a gas phase. Depending on the initial pool conditions and other factors including production techniques, the amount of hydrocarbons that change phase can be quite significant. The appellants would prefer the determination of ownership based on phase to be made as late as possible to give more hydrocarbons the opportunity to evolve into a gas phase as it would maximize their entitlement. The Borys decision was that the petroleum reservation did not include those hydrocarbons naturally in a gas phase.

II. Judicial History

[10] Eighty-four separate law suits were filed by parties in relation to land once owned by the CPR, twenty-one were selected as test cases, and fifteen of those cases directly involved this particular type of split title issue. On July 10, 1997, Moore C.J. of the Alberta Court of Queen’s Bench, set out a preliminary question of law to determine the respective subsurface rights of the “Petroleum Owner” (the party owning petroleum, or coal and petroleum within or under the Split Title Lands) and the “Non-Petroleum owner” (the party owning all mines and minerals except petroleum, or coal and petroleum, within or under the Split Title Lands).

[11] At trial, Fruman J. found the non-petroleum owners were entitled to: (1) primary gas cap gas; (2) primary gas cap gas which migrates from adjoining lands; (3) condensate and natural gas liquids that derive from primary gas cap gas: (1998), 1998 ABQB 620, 63 Alta. L.R. (3d) 1. Primary gas cap gas refers to those hydrocarbons in gaseous phase in a mixed pool prior to human intervention while secondary gas cap gas refers to gaseous hydrocarbons which were originally liquid. She also held that the petroleum owners were entitled to: (1) evolved gas; (2) secondary gas cap gas which migrates from adjoining lands; (3) solution gas that emerges from connate water; and (4) condensate and natural gas liquids that derive from secondary gas cap gas.

[12] The Court of Appeal dismissed the appeal except to the extent they did not agree that the petroleum owner was entitled to the gas from connate water: (2002), 2002 ABCA 162, 5 Alta. L.R. (4th) 54. It said (at para. 53):

However, we do not agree with the trial judge’s conclusion that gas which emerges from connate water belongs to the petroleum owner. The reservation did not reserve water. Therefore, gas which was in solution within connate water at initial reservoir conditions does not belong to the petroleum owner. [Emphasis added.]

[13] The Court of Appeal did not determine who owned the hydrocarbons from connate water. It appears that in Alberta this water is owned by the province as a result of the Water Act, R.S.A. 2000, c. W-3. All of the parties to this appeal were content with this disposition by the Court of Appeal so that a determination of who is entitled to any hydrocarbons recovered from the connate water is no longer an issue here.

III. Issues

[14] The two preliminary questions set by Moore C.J. were:

(a) the ownership of hydrocarbons produced from a well drilled on Split Title Lands (as defined below) and the respective rights of:

(i) the Petroleum Owner (the party owning petroleum, or coal and petroleum within or under the Split Title Lands); and

(ii) the Non-Petroleum Owner (the party owning all mines and minerals except petroleum, or coal and petroleum, within or under the Split Title Lands); and

(b) the obligation of any lessee to account to the owner of the respective mineral interest for hydrocarbons produced.

“Split Title Lands” are lands in which all petroleum, or all coal and petroleum, was reserved unto the Petroleum Owner in a transfer to the Non-Petroleum owner prior to human disturbance of any subsurface reservoirs containing hydrocarbons within or under the lands.

[15] Only part (a) was addressed by the courts below and is the only question in this appeal.

IV. Analysis

[16] The history that led to these Split Title Lands has been previously outlined. In addition, the scientific evidence of the characteristics of hydrocarbons in the ground is also worthy of brief review.

A. The Science

[17] The expert evidence was that the substances that are often referred to as oil and gas are actually both similar hydrocarbons, and the general distinction is the phase they exist at under what is referred to as Standard Temperature and Pressure (“STP”). At temperatures and pressures higher than STP, some “gas” will actually be found in liquid phase. The word gas is used to describe both the actual hydrocarbon substance and the phase of a substance, which understandably leads to some confusion when reading the cases. In addition, the substance gas referred to is properly described as natural gas and is not the petroleum product used to fuel most vehicle engines.

[18] In the ground, pools may initially contain only liquid hydrocarbons (oil pools), only gaseous hydrocarbons (gas pools), or a mixture of both (mixed pools). In addition to the hydrocarbons, a layer of water is also usually found on the bottom of all three types of pools. This water is referred to as connate water.

[19] Prior to human intervention, a pool will be under relatively stable pressure and temperature conditions, and the ratio of gas phase to liquid phase hydrocarbons also remains fairly constant. When a pool is drilled into, the pressure changes, causing phase changes which alter this ratio. Some of the hydrocarbons originally found in liquid phase will, if there is a reduction in pressure, “evolve” into gas phase. As in the courts below, I refer to this as “evolved gas”. This evolved gas is, technically, natural gas — it would tend to be in gas phase at STP. But in the pool, prior to human intervention, the “evolved gas” was in liquid phase. The dispute in Borys was about entitlement to all natural gas in the pool, while the current dispute centres on this evolved gas.

B. What Did Borys Decide?

[20] In the late 1940s, significant amounts of oil were found near Leduc, Alberta, production and exploration was at a high pitch, and oil and gas law was in its infancy but evolving. Borys was a farmer who obtained title to his land from the CPR subject to a petroleum reservation similar to the one at issue in these appeals. When Imperial Oil Ltd. (“Imperial”) began drilling on his lands, Borys sued to determine a question that had been inevitable from the moment both oil and gas were discovered under Split Title Lands — what was included in the reservation of “petroleum”?

[21] Borys’ argument was that gas was not included in the reservation of petroleum. He challenged Imperial’s right to produce oil, arguing it would interfere with his natural gas. Imperial counterclaimed and submitted that petroleum be given one of the following three progressively less inclusive definitions: (1) petroleum included all hydrocarbons in the pool, regardless of phase; (2) if the reservation did not include the ownership of the gas, it did include the right to work, win or carry away the gas; and (3) at the very least, the petroleum reservation included the right to all liquid hydrocarbons in the ground.

[22] Howson C.J.T.D. decided the vernacular, not the scientific, meaning of petroleum was to govern what was reserved from the transfer. He found petroleum included only “mineral oil”, by which it can be assumed he meant crude oil and not the medication. He decided Borys was entitled to all natural gas under his land even if it was in solution with the liquid, and that Imperial could not continue drilling if it would interfere with the natural gas in any way (pp. 443-44).

[23] Parlee J.A. for the majority on appeal agreed with the trial judge that the vernacular meaning of petroleum at the time of the transfer was to govern its interpretation. But he did not agree that this limited CPR’s rights to actual mineral oil. He determined that the reservation gave CPR rights to all liquid hydrocarbons in the ground, regardless of any subsequent phase changes (p. 230). He also found the petroleum owners had the right to work and recover their oil, even if it interfered with Borys’ gas (p. 237).

[24] The Judicial Committee of the Privy Council agreed with the Alberta courts that in determining “the meaning which is to be attributed to ‘petroleum’ in the original reservation”, the vernacular meaning at the time of the transfer should be used, if one could be discerned (p. 70). Their Lordships recognized that the meaning of petroleum could “vary according to the circumstances in which it is used”, and then defined it only for the purposes of the reservation (p. 71). The Privy Council had to decide what petroleum meant in relation to a substance in the ground. On that, they concluded that it reserved to the CPR all liquid hydrocarbons in the ground (p. 74). They also upheld the Appellate Division’s finding that the reservation included an implied right to work and produce the petroleum (p. 79).

[25] The parties agree that three points were determined by Borys:

(1) the petroleum owner is entitled to all liquid hydrocarbons in the pool, while the non-petroleum owner is entitled to all hydrocarbons in gas phase;

(2) the determination of ownership based on phase is to be made in the ground; and

(3) the petroleum reservation included an implied right to work and produce the product.

[26] The parties disagree in their interpretation of Borys over what mistakenly appears to be a minor detail but which in fact is of significant economic importance. The dispute is over what point the Privy Council found was the appropriate time to determine what phase a molecule of hydrocarbon was in and therefore to whom it belonged.

[27] The appellants submit that in Borys the Privy Council decided ownership is to be determined based on the phase of the hydrocarbon only at the time of recovery in the ground. They interpret this as the point in time when the hydrocarbon first enters the well bore. As the pressure in a pool decreases after development, more liquid evolves into gas phase over time. The interpretation of Borys sought by the appellants would maximize their entitlement because the hydrocarbons within the pool will have the most opportunity to evolve into gas phase.

[28] The respondents contend, and I agree, that both the Appellate Division and the Privy Council held that the time for interpreting petroleum and determining relative ownership was at the time of the contract as opposed to the time of development. The rationale for this was that the pools had not been interfered with by human contact at the time of the reservations, and it is therefore the appropriate time to determine the phase of the hydrocarbons.

[29] Parlee J.A. held that petroleum included all liquid hydrocarbons in a pool and expressly stated that this ownership should not be affected by subsequent phase changes (at p. 230):

It is true that by change of pressure and temperature, gas is released from solution when the liquid is brought to the surface but such a change ought not to affect the original ownership.

In other words, petroleum includes oil and any other hydrocarbons and natural gas existing in its natural condition in strata.

In my opinion, all the petroleum reserved, including all hydrocarbons in solution or contained in the liquid in the ground, is the property of the defendants who are entitled to do as they like with it, subject, of course, to the observance of all relevant [statutory] provisions and regulations.

All gas not included in the reservation of petroleum as indicated is the property of the plaintiff. [Emphasis added.]

[30] The appellants isolated certain words and phrases from this passage in an attempt to support their argument. They pointed to “exists” and “existing” as an indication that Parlee J.A. intended the phase of the hydrocarbons was to be determined from time to time, and argued that if he wanted the ownership ratio to remain fixed in the past he would have used “existed”. The appellants make a similar argument in relation to the phrase “original ownership”. They submit this acknowledges that ownership may change over time, and argue this supports their view that relative ownership is not decided until the substance is reduced to possession. I agree with the rejection of these arguments by the courts below. The tense of the word “exists” that Parlee J.A. chose to use does not negate the fact that he was focussed on determining the meaning of petroleum at the time of the reservation and must be read in the context of the entire judgment. The use of the phrase “original ownership” indicates that Parlee J.A. was only interested in determining what interest each party received as a result of the transfer, and not the effects of any subsequent transfers of those interests.

[31] The Privy Council recognized the complications that could be caused by phase change and sought to minimize these by determining ownership based upon the most stable conditions possible. Lord Porter found that the most stability and certainty would be while the substances were still in the ground. Because he was fully aware of the phase changes that occur in a pool once it was drilled into, it is implicit that he intended relative ownership to be based on conditions in the ground prior to human intervention. This is the only interpretation that is consistent with his desire for stability (at p. 71):

To discriminate between two substances, found in solution, one from the other is difficult enough in any case, but when changes of temperature and pressure can alter the respective relative quantities of one and the other, the difficulty is enhanced. In the ground there is a distinction, one is then liquid and the other gaseous and the liquid may naturally be called petroleum and the gaseous gas. Any other distinction must depend on a purely conventional assumption that liquid at a particular temperature and pressure corresponding more or less to that found on the surface of the earth is petroleum and the rest of the substance is gas. This is a purely chemical formula and in no way elucidates the meaning which the word bears on the lips of landowners, business men or engineers, and except as a convenient conventional formula has no logical basis. [Emphasis added.]

[32] The Privy Council determined that the evidence provided at the trial was not directed to determining the vernacular meaning of petroleum in the ground. As a result, Lord Porter said they had to “form their own opinion purely as a matter of construction as to the meaning which the word ‘petroleum’ bears when the substance referred to is in situ in a container below ground” (p. 73). Their Lordships expressly agreed with the above passage from Parlee J.A.’s judgment on the meaning of petroleum (pp. 73-74).

[33] While plain English has its admirers, Lord Porter’s use of the latin phrase “in situ” provides a precise indication that his focus was on the substances in their original position. This pre-development position was in the ground, in a pool that had never been subjected to human intervention.

[34] There is no doubt that the Privy Council was concerned with what was included in the reservation of petroleum at the time of the transfer. When the contracts for the transfer of land in Borys and in the current appeals were agreed to, the pools of hydrocarbons under the lands had not been disturbed. Borys should be read as indicating it is the initial conditions of the pool that govern the relative ownership between the parties to those original contracts. As Lord Porter recognized, “petroleum” can have many meanings. For the purposes of these reservations, “petroleum” includes all hydrocarbons in liquid phase under the tract of land prior to any development. Phase changes that occur once a pool is drilled into do not affect the ratio of hydrocarbons the petroleum owner and the non-petroleum owner are entitled to.

C. Ownership Theory

[35] The traditional categories of property law may not easily match the realities of oil and gas ownership, a problem this Court acknowledged in Bank of Montreal v. Dynex Petroleum Ltd., [2002] 1 S.C.R. 146, 2002 SCC 7. The traditional categories of property law are not to be indiscriminately applied; similarly a new view of global ownership theory for oil and gas must be subject to the same caution. There is no need to determine an overarching ownership theory in this appeal because the question posed by Moore C.J. simply asks for a determination of the respective rights of the petroleum and non-petroleum owners. Borys decided that the reservation of petroleum determined the parties’ interest at the time of the transfer. The appellants raise two ownership theory arguments based on possession, and these need to be considered to see if they distinguish this case from the Borys decision.

[36] The appellants submitted that Canada is not an ownership in situ jurisdiction and therefore no rights vest in hydrocarbons until they are reduced to possession. They relied on this ownership theory as support for their position that it is not until the time of possession that the phase of the hydrocarbon becomes important for determining ownership, because no one has any rights before that. This is the type of broad ownership theory that is not required to be determined in this appeal. Irrespective of any other rights the parties may have in relation to the hydrocarbons in the ground, they chose to divide their interest by contract. It is not open to later argue that division was meaningless on the basis that no rights can attach until the substance is reduced to possession. When the substance, which was not in their possession at the time of the contract, is reduced to possession, the date and terms of the contract govern their relative entitlement.

[37] The appellants also relied upon the “rule of capture” to support their position that evolved gas belonged to them. The rule of capture developed as a rule of non-liability between owners of separate tracts of land. Since underground pools often extend beyond a single tract of land, it prevents A from having a valid claim against B when B captures from under his land a substance that was originally under A’s land. In Borys, Lord Porter found this rule would apply to oil and gas and A’s only remedy was to drill its own well and begin production. The unhindered application of this rule would lead to a race to produce, and because this uncontrolled development actually reduces overall hydrocarbon recovery, that rule has been subsumed by the regulatory environmental reserve and preservation provisions of legislation such as the Oil and Gas Conservation Act, R.S.A. 2000, c. O-6.

[38] The appellants did not seek an unbridled application of the rule of capture to phase changes that occur in the ground but instead a modified extension of this rule. They submitted that when hydrocarbons which were initially in liquid form enter the well bore in gas phase, they should be said to be “captured” by the gas owner, regardless of whose well it is. In essence, they would like the rule of capture to only apply until that point in time when the phase change occurs. This illogical use of the rule cannot be right. If the rule were applied to defeat the original ownership division based on phase, it follows that all ownership based on phase could be defeated.

[39] The rule of capture does not apply to the division of ownership by phase as it does to divisions of ownership based on surface land ownership. Applying the rule of capture to parties who have agreed to divide their interest under the same tract of land would defeat the purpose of the contract. This is because if it applied, the party who reduced the substance to possession by drilling the well and producing the hydrocarbons would be entitled to all of them, and the other party would have no claim. At the time the CPR sold the land to the settler they agreed to divide the property on certain terms. To hold that either party could later take the other party’s property with impunity would defeat the purpose of the reservation.

D. Application

[40] The appellants submit that dividing ownership based upon original conditions will lead to great uncertainty in quantifying their respective interests. Fruman J. answered this concern by explaining that the entire industry relies on estimates of what is under the surface, and these estimates have to suffice for dividing up ownership as well. The fact that modern estimation techniques are more advanced and more accurate than those in existence in 1953 when the Privy Council first determined that original conditions in the ground governed relative ownership supports the trial judge’s conclusion.

[41] In addition, while the estimates will no doubt be the subject of some debate, no system is flawless and a determination made at the time of recovery could be subject to manipulation by a dishonest producer. Improved production techniques help to accurately monitor the evolution of liquid hydrocarbons into gas phase, but for the foreseeable future this measurement will also lack perfection.

[42] In my opinion the courts below were correct to find that Borys decided the reservation of petroleum included all hydrocarbons which were in liquid phase in the ground at the time of the transaction. The Alberta courts’ answer to the preliminary questions posed by Moore C.J. was:

(a) The petroleum owner is entitled to all hydrocarbons which were in liquid phase at initial pool conditions, regardless of the phase they are in when recovered.

(b) The non-petroleum owner is entitled to all hydrocarbons which were in gas phase at initial pool conditions, regardless of the phase they are in at time of recovery.

This division will apply to hydrocarbons which migrate from under other lands, subject of course to any regulatory mitigation of the rule of capture. The only hydrocarbons in the well which this decision does not deal with are those which are dissolved in the connate water at initial conditions.

E. Costs

[43] The trial judge considered the issue of costs in detail and as this was within her discretion no variation to her order should be made. We agree with the Court of Appeal that she made no reviewable error in exercising this discretion.

V. Conclusion

[44] In the Split Title Lands at issue in this appeal, the reservation of petroleum divided the ownership interest in oil and gas on the basis of the phase the hydrocarbon was in under initial conditions at the time of the contract for the sale of the property. Any phase changes which occur after the well is drilled into a pool does not alter the ratio of ownership created by the reservation. This applies between the parties to the original contract and to those who derive their interest from these parties. As a result, the appeal is dismissed with costs to the respondents.

APPENDIX

Glossary of Terms

(1) Agreed Terms (from trial judgment, at para. 15)

“Compound” — any substance containing two or more elements chemically combined in specific proportions.

“Hydrocarbon” — a Compound made up of the elements carbon and hydrogen which may or may not contain traces of the elements sulphur, nitrogen and oxygen.

“Phase” — a distinct physical state of matter; all matter exists in one or more of three physical states: gas, liquid or solid.

“Fluid” — a substance which has a low resistance to flow and a tendency to assume the shape of its container.

“Liquid” — a Fluid which occupies a definite volume. A liquid Fluid is the more dense of two equilibrium Phase Fluids separated by an interface or any single Phase Fluid having properties such as density, viscosity, etc. similar to those normally associated with the more dense of two equilibrium Phase Fluids.

“Gaseous” — a Fluid which expands to occupy its container. A gaseous Fluid is the less dense of two equilibrium Phase Fluids separated by an interface or any single Phase Fluid having properties such as density, viscosity, etc. similar to those normally associated with the less dense of two equilibrium Phase Fluids.

“Hydrocarbon Solution” — a mixture of Hydrocarbons in a single Phase Fluid.

“Reservoir” — a porous, permeable rock formation or formations capable of containing and transmitting Fluids.

“Standard Temperature and Pressure” — temperature and pressure used for reporting Hydrocarbon Solution volumes (15 degrees C. and 101.325 kPa, respectively).

“Mixed Pool” — a Pool containing or appearing to contain an accumulation of both Gaseous and Liquid Hydrocarbon Solutions.

(2) Other Defined Terms (not agreed to by the parties, but defined by the trial judge, at para. 17)

“Solution gas” means gas which is dissolved in liquid hydrocarbons in the pool prior to human disturbance, but emerges as gas at the surface.

“Evolved gas” or “secondary gas cap gas” means solution gas which emerges from liquid hydrocarbons in the pool due to changes in pressure.

“Free gas” or “primary gas cap gas” means hydrocarbons in a gaseous phase in the pool under initial reservoir conditions. I do not include any solution gas, evolved gas or secondary gas cap gas in this definition.

“Condensate” means hydrocarbons which are in gaseous phase in the pool, dissolved in primary gas cap gas or secondary gas cap gas, but are recovered in liquid phase at surface pressure and temperature.

“Natural gas liquids” means hydrocarbons which are in a gaseous phase in the pool, dissolved in primary gas cap gas or secondary gas cap gas, are still in gaseous phase at surface pressure and temperature, but are recovered in processing plants as liquids under higher pressure or lower temperature than surface conditions.

“Connate water” means all water present in a pool. It includes water present within the voids or pores, edge water and bottom water.

The terms “initial reservoir conditions”, “virgin reservoir conditions”, “prior to human disturbance” and “prior to human intervention” are used interchangeably. Because of the distinction the parties have made between “reservoir” and “pool” in the glossary of agreed terms, initial or virgin reservoir conditions also mean initial or virgin pool conditions.

Appeal dismissed with costs.

Solicitors for the appellants: Machida Mack Shewchuk, Calgary.

Solicitors for the respondents Amoco Canada Oil and Gas, Amoco Canada Resources Ltd., Amoco Canada Energy Ltd., 3061434 Canada Ltd. and Ocelot Energy Inc.: Bennett Jones, Calgary.

Solicitors for the respondents Gulf Canada Resources Limited, Morgan Hydrocarbons Inc., Murphy Oil Company Ltd., Canadian Gulf Oil Company, Gulf Canada Limited and Gulf Canada Properties Limited: Borden Ladner Gervais, Calgary.

Solicitors for the respondents Petro‑Canada, Canol Resources Ltd., Dominion Explorers Inc., International Oiltex Ltd., Canadian Fina Oil Limited, Petrofina Canada Ltd., Petro‑Canada Enterprises Inc. and Petro‑Canada Inc.: Davis & Company, Calgary.

Solicitors for the respondents Talisman Energy Inc. and Encor Energy Corporation: MacLeod Dixon, Calgary.

Solicitors for the respondents Canadian Pacific Limited and PanCanadian Petroleum Limited: Parlee McLaws, Calgary.

Solicitors for the respondents Home Oil Company Limited, 227096 Oil & Gas Ltd., Husky Oil Operations Ltd., Conwest Exploration Company Limited, Canada Northwest Energy Limited and Serenpet Exploration Inc.: Carscallen Lockwood Cormie, Calgary.

Solicitors for the respondents Imperial Oil Limited, Imperial Oil Resources, Imperial Oil Resources Limited, Imperial Oil Resources Production Limited, McColl‑Frontenac Inc. and Atlantic Richfield Company: Gowling Lafleur Henderson, Calgary.

Solicitors for the respondents Jethro Development Ltd., Kerr‑McGee Canada Ltd., Gascan Resources Ltd. and Lincoln‑McKay Development Company Ltd.: Fraser Milner Casgrain, Calgary.

Solicitors for the respondents Mobil Oil Canada, Mobil Oil Canada Ltd., Royal Trust Energy Resources II Corporation, RTEC One Resources Inc., Suncor Inc., Gentra One Resources Inc., Westrock Energy Resources II Corporation, Mobil Resources Ltd. and Canpar Holdings Ltd.: Burnet, Duckworth & Palmer, Calgary.

Solicitors for the respondent Apache Corporation: Peacock Linder & Halt,

Calgary.

Solicitors for the intervener: Rae and Company, Calgary.

Anderson v. Amoco Canada Oil and Gas, 2004 SCC 49

Case Summary

Anderson v. Amoco Canada Oil and Gas, [2004] 3 S.C.R. 3, 2004 SCC 49

I. Facts

II. Judicial History

III. Issues

IV. Analysis

A. The Science

B. What Did Borys Decide?

C. Ownership Theory

D. Application

E. Costs

V. Conclusion

APPENDIX

Judges

Counsel

Parties

Areas of Law

Fact Patterns

Issues

Statutory Provisions 3

Legal Tests 1

Legislation 3