Case considered: Freehold Petroleum and Natural Gas Owners Association v. Alberta (Energy Resources Conservation Board), 2010 ABCA 125
In Freehold Petroleum and Natural Gas Owners Association, Madam Justice Elizabeth McFayden dismisses an application for leave to appeal an Energy Resources Conservation Board (ERCB) hearing costs decision that relates to an earlier ERCB decision concerning a mineral lease dispute. This Court of Appeal decision and the underlying ERCB decisions are noteworthy to me for two reasons: (1) the ERCB granted full hearing participation rights to the Freehold Petroleum and Natural Gas Owners Association (the Freehold Owners Association) despite the fact it does not have an interest in land; and (2) the Court of Appeal defers to the ERCB on what I consider to be an unreasonable exercise of its discretion on the costs matter. I will comment on each of these points in turn after briefly summarizing the facts.
The lease dispute
The landowner in question leased her subsurface mineral rights to OMERS Energy in 2001, who commenced production from a gas well on the property within the five year primary term of the lease. In February 2006, the lease was extended beyond its primary term because the OMERS well was in production. However, shortly thereafter in May 2006 OMERS shut-in the well and it remained such until November 2008. During that shut-in period, the landowner entered into a mineral lease with Montane Energy in November 2007 on the view that the previous OMERS lease had expired due to the shut-in (For a discussion of mineral leases, primary terms, and the effect of shut-in, see Nigel Bankes’ ABlawg post The Independent Operation of The Shut-In Clause of an Oil and Gas Lease). Montane Energy commenced production from a different gas well on the property in February 2008. In June 2008, OMERS recompleted its gas well into a different formation and commenced production which led to a lease dispute between Montane and OMERS which was the subject of an ERCB hearing conducted over 3 days in February 2009. The ERCB suspended both well licenses pending resolution of the dispute.
The February 2009 ERCB hearing concerned the application by Montane Energy for a review of the OMERS well licence pursuant to section 39 of the Energy Resources Conservation Act, R.S.A., c. E-10 to consider whether OMERS held a valid lease. The primary issue for determination was whether the OMERS well was ‘capable of production’ such that the OMERS lease remained in effect subsequent to its May 2006 shut-in. The ERCB decided the issue by considering the terms of the OMERS lease together with technical evidence from OMERS and Montane on the production of the gas well. The ERCB also heard argument on law and policy from the Freehold Owners Association in the matter. The ERCB ruled that the OMERS lease terminated in May 2006, and ordered the continued suspension of the OMERS well license (see Energy Resources Conservation Board Decision 2009-037).
Hearing costs
The Freehold Owners Association sought to participate in the February 2009 hearing to represent the landowner, who was a member of the Association. The ERCB granted the Association full participation rights in the hearing, and ERCB Decision 2009-037 accordingly makes reference to the Association providing argument on applicable law and policy governing the lease dispute and the ‘capacity to produce’ issue, but also notes the Association provided no technical evidence concerning the OMERS well. Subsequent to the hearing, the Freehold Owners Association filed a request for the recovery of hearing costs in the amount of approximately $45,000.
Section 28 of the Energy Resources Conservation Act authorizes the ERCB to award costs to hearing participants, presumably on the rationale that meaningful hearing participation requires adequate financial resources. However, not every hearing participant will receive costs and only those that meet the test of ‘local intervener’ will even be considered by the ERCB:
28(1) In this section, “local intervener” means a person or a group or association of persons who, in the opinion of the Board,
(a) has an interest in, or
(b) is in actual occupation of or is entitled to occupy
land that is or may be directly and adversely affected by a decision of the Board in or as a result of a proceeding before it, but, unless otherwise authorized by the Board, does not include a person or group or association of persons whose business includes the trading in or transportation or recovery of any energy resource.
(2) On the claim of a local intervener or on the Board’s own motion, the Board may, subject to terms and conditions it considers appropriate, make an award of costs to a local intervener.
(3) Where the Board makes an award of costs under subsection (2), it may determine
(a) the amount of costs that shall be paid to a local intervener, and
(b) the persons liable to pay the award of costs.
Note as well that section 28 authorizes the ERCB to determine who shall pay the costs (Part 5 of the ERCB Rules of Practice, Alta. Reg. 252/2007 and ERCB Directive 31 also provide guidance on cost awards in energy matters).
The ERCB interpretation of section 28 is that a successful applicant for costs will have an interest in land and will provide the ERCB with reasonable grounds as to how that interest in land may be directly and adversely affected by the ERCB hearing decision. In this case, the ERCB held the Freehold Owners Association did not meet the section 28 test and dismissed its claim for costs (See ERCB Cost Decision 2009-008). The Association subsequently applied to the Court of Appeal for leave to appeal this cost decision.
The standing to participate in the ERCB hearing
The ERCB reasons for dismissing the cost claim leave no doubt that some confusion existed over the participation of the Freeholder Owners Association at the February 2009 hearing. The ERCB notes that OMERS Energy opposed the cost claim, in part, because of its view that the Association had no direct interest in the proceeding, was acting as a representative for the landowner in question, and that evidence submitted by the Association at the hearing was hearsay. The Association in response noted pre-hearing correspondence from the ERCB to the effect that while the Association may not satisfy the test for standing under section 26(2) of the Energy Resources Conservation Act (the test is discussed elsewhere on ABlawg; see here), the Association was granted full participation rights because of “extensive and perhaps unique experience on the principal issues arising in this proceeding”.
The ERCB’s decision to grant full hearing participation rights to the Association in this case, despite the fact it had no interest in land and the landowner in question did not present any evidence, is significant in that it suggests the ERCB may grant full hearing participation rights to other organizations that possess “extensive and perhaps unique experience” on the principal issues in a future hearing, even where such organizations do not have an interest in land. This confirms the ERCB view (a correct view in my opinion) that a person does not have to meet the section 26(2) test (i.e. have an interest in land with proximity to the project in question) in order to be granted full participatory status by the ERCB at a hearing.
This view on who can fully participate in a public hearing, however, is in direct contrast to the limited opportunities historically provided to persons or groups seeking to provide evidence to the ERCB on the environmental impacts of contested energy projects. My experience has been that environmental groups are offered, at best, an opportunity to speak from the podium without any rights to introduce evidence or cross-examine applicant witnesses. A couple of years back, I commented on a specific example where the ERCB denied full hearing participation rights to Michael Sawyer and the Castle-Crown Wilderness Coalition who sought to participate in a public hearing that had been triggered by a landowner who met the section 26(2) standing test in relation to a sour gas well licence application by Shell in southwest Alberta (see Standing Against Public Participation at the Alberta Energy and Utilities Board).
This suggests that the ERCB view as to who is entitled to full participation rights in a public hearing varies depending on the nature of the evidence sought to be submitted by an interested party. And a more critical observation would be that this case confirms the ERCB is partial to some interests over others, something environmental groups have complained about for years.
The nature of the interest affected
While the Freehold Owners Association clearly has no interest in land necessary to meet the section 28 costs test, the lessor of the leasehold interests clearly does have an interest in land as the freehold owner. Given that the lessor did not participate in the February 2009 lease dispute hearing, the only reason I can think of as to why the ERCB considers the interests of the lessor in its cost decision is in relation to the participation of the Freehold Owners Association. But again this is curious to me since the Association itself clearly has no interest capable of meeting section 28.
Nevertheless the facts of this case were such that the decision of the ERCB as to which leasehold interest would survive, would have financial consequences for the lessor including the royalty amount payable on gas production. The ERCB ruled this to be affecting the lessor’s contractual rights, not her rights in land. The ERCB ruled that the lessor provided no evidence that her interest in land may be directly and adversely affected by the ERCB decision on the lease dispute. In the words of the Board: “While there may be consequences for her under the OMERS or Montane mineral leases as a result of the Board deciding that the OMERS lease had ended, her interest as owner of the resource remains unaffected. She was the Freehold mineral owner before the Board’s decision and she remains the owner afterwards” (Cost Decision 2009-008 at 7).Since neither the Freehold Owners Association nor the lessor met the section 28 test, the ERCB denied the cost claim.
Leave to appeal denied
The Freehold Owners Association sought leave to appeal the ERCB cost decision pursuant to section 41 of the Energy Resources Conservation Act (for discussion on the test for leave to appeal see here), asserting that the ERCB committed an error in law by deciding that its decision on the lease dispute would not affect the lessor’s interest in land. Justice McFayden characterizes the ERCB costs decision as discretionary and deserving of judicial deference, and accordingly finds no prima facie merit or significance to the Association’s stated grounds for appeal. While it is difficult to dispute the inference of discretion afforded the ERCB in the language of section 28 in the Energy Resources Conservation Act, I question the extent of deference owed to the ERCB here.
The ERCB’s view that the effect of its lease decision would not affect the lessor’s interest in land seems to rest on a very narrow interpretation that the lessor’s property interest is solely that of possession or control of the land. This interpretation leads to the ERCB conclusion that the absence of evidence that the lease decision would affect the lessor’s possession or control of her property means her interest in land is unaffected. I fail to see how this can be a reasonable interpretation of the law. Surely the entitlement to a revenue stream from the removal of minerals located in the land is an interest in land, such that a change to that revenue stream affects the interest in land.
Justice McFayden however concurs with the ERCB on this interpretation, and she expressly disagrees with the submission of the Freehold Owners Association that the ERCB’s interpretation is contrary to the rule set out by the Court of Appeal in Scurry-Rainbow Oil v. Kasha, 39 Alta. L.R. 153, that a lessor’s royalty interest is an interest in land:
The Board’s decision does not contradict the position taken by this court in Scurry-Rainbow. Here the Board did not find that Ms. Cymbaluk had no interest in land, but that any such interest was not directly and adversely affected by the Board’s ruling. In other words, the Board, did not decide whether Ms. Cymbaluk’s interest under her lease was an interest in land or in contract, but was simply assessing whether OMERS’ lease was valid for the purpose of maintaining its well licence (at para 12).
From this quote, it strikes me that in her reasoning Justice McFayden has improperly conflated the ERCB lease decision with its subsequent cost decision. In particular, the last sentence refers to the subject matter in the February 2009 hearing, not the subsequent cost decision.
In my opinion, the grounds for appeal set forth by the Freehold Owners Association have prima facie merit, are of significance to the practice, and the leave ought to have been granted in this case.
Jonnette Watson Hamilton
Interesting post, Shaun, and I agree that the ERCB’s interpretation of “an interest in land” is a very narrow one. It also seems to focus exclusively on a lease as a contractual relationship, ignoring its dual nature in law as a contractual relationship and an estate in land. If I understand the facts correctly, the lessor held an estate in fee simple in land, i.e., she is the person commonly referred to as the “owner” of the land. It is her fee simple estate — her legal relationship to the land — that makes her a “local intervener” under section 28.
The traditional and very conventional understanding of “ownership” is found in A.M. Honore’s chapter on “Ownership” in Oxford Essays on Jurisprudence (London: Oxford University Press, 1961) 107. Honore lists (at 113) eleven “standard incidents of ownership” or “necessary ingredients in the notion of ownership” as being:
– the right to possess
– the right to use
– the right to manage
– the right to the income of the thing
– the right to the capital
– the right to security
– the right of transmissibility
– the right of absence of term
– the prohibition of harmful use
– liability to execution
– the incident of residuarity
When the ERCB looks for evidence that its lease decision would affect the owner/lessor’s possession or control of her property it looks only at two (or three) of the incidents of ownership (possession and management, and possibly use). Indeed, the ERCB seems to focus exclusively on the owner’s status as a lessor when that is not the status that is relevant under section 28. It is as though only some of the incidents of ownership are relevant and that narrower set of incidents is dictated by the owner/lessor’s relationship to OMERS and Montane and not her relationship to the land. In other words, the ERCB position seems to ignore the fact the owner/lessor has a fee simple estate for her “interest in land” and that interest includes a property right to the income from the land. So while it is true that when the ERCB decision affects the royalty amount payable on gas production it affects the owner/lessor’s contractual rights, as the ERCB decided, its decision also affects her property rights, i.e., her interest in land.
L. Douglas Rae
The decision is also interesting in view of:
1. the Board’s previous decision with respect to standing for FHOA in the Board’s Coal Bed Methane hearing and its awarding of costs in that instance;
2. the Board’s and OMERS’ submission (and Justice McFadyen’s acceptance) that the impact MUST be direct and adverse, versus the wording in the statute whereby the impact MAY be direct and adverse; the result being that one only qualifies for costs if you get an unfavourable decision from the Board, as opposed to a favourable decision; and
3. the fact that the freehold owner whose leases are at issue hasn’t been invited to participate by the Board or the producers in front of either the Board or the Court and that decisions in regard to leases to which she is a party are being made without her participation.