Trident Exploration Corp. (Re), 2012 ABQB 242

Court of Queen ’ s Bench of Alberta Citation: Trident Exploration Corp. (Re), 2012 ABQB 242 Date: 20120416 Docket: 0901 13483 Registry: Calgary Between: In the Matter of Companies' Creditors Arrangement Act, R.S.C. 1985, c.

C-36 , as amended AND In The Matter of a plan of compromise or arrangement of Trident Exploration Corp., Fort Energy Corp., Fenergy Corp., 981384 Alberta Ltd., 981405 Alberta Ltd., 981422 Alberta Ltd., Trident Resources Corp., Trident CBM Corp., Aurora Energy LLC, Nexgen Energy Canada, Inc. and Trident USA Corp. _______________________________________________________ Reasons for Judgment of the Honourable Madam Justice C.A.

Kent _______________________________________________________ [ 1 ] The claimants in this hearing are Mutiny Oil & Gas Ltd., Wolf Coulee Resources Inc., Choya Petroleums Ltd., Arroyo Exploration Ltd., Kenzozyl Resources Ltd. and Marmot Resources Inc., referred to throughout collectively as Mutiny. [ 2 ] Mutiny beneficially owned the mines and minerals lease interest in the north half of

Section 29 in Township 38, Range 20, West of the Fourth Meridian. Blaze Energy Ltd. was the lessee and held the lease in trust for Mutiny. Trident was the lessee of a portion of the south half and Bearspaw Petroleum Ltd. and F.M. Kaplan Technical Services Ltd. held the lease interest in the other portion of the south half of the section.

[ 3 ] A Pooling Agreement was executed by Mutiny, Trident, Bearspaw, and Kaplan on April 12, 2005. Pursuant to the Pooling Agreement, Trident was appointed the Operator. The 1990 CAPL Operating Procedure was incorporated into the Pooling Agreement. [ 4 ] On June 7, 2005, Alberta Energy issued a Gas Offset Notice to Blaze as designated representative for the North Half Lands. Trident and Bearspaw also received notices. The Gas Offset Notice stated that the lease was subject to an offset obligation as a result of gas production on land adjacent to the pooled lands. The offset notice instructed Blaze that it had one of five potential courses of action which were: (

I) Notify Alberta Energy that it had a well on production from the offset zone; (ii) Elect in writing to pay offset compensation; (iii) Provide evidence to satisfy Alberta Energy that the offset zone in the Crown spacing unit was not productive; (iv) Surrender the portion of lands subject to the Offset Notice down to the base of the offset zone; or, (

v) Provide proof that the freehold well was abandoned as to the offset zone, the spacing for the freehold well was reduced and no longer adjoined the Crown spacing unit, or the offset zone within the Crown spacing unit became subject to a unit or gas storage agreement. [ 5 ] The notice also provided that if Blaze failed to respond within 6 months from June 7, 2005, there would be an amendment to the lease which would involve cancellation of the rights to the base of the production zone, described in the offset notice. Essentially, the lease would be lost.

Blaze forwarded a copy of the offset to Mutiny on or around June 13, 2005 and Mutiny advised its partners. [ 6 ] Drilling had commenced on a well on the lands and it was expected that the well would be on production within the 6 months period provided for in the offset notice. However, on November 10, 2005, Trident sent a letter to Mutiny, Bearspaw and Kaplan. The letter began: The Crown Leases that have been pooled by Trident and the referenced parties are subject to an offset obligation as a result of the 02/19- 038-20W4/00 well producing gas from the Edmonton zone.

This obligation must be rectified prior to December 7, 2005. Then, the letter advised that the well would not be on production for two to six months. It continued: In the meantime, it is Trident’s recommendation as Operator that the obligation be satisfied by paying the offset compensation to the Crown. Trident will make the payment to the Crown and invoice the partners at their pooled interest share. Please provide your approval/non-approval of this recommendation in the space below and return it to the undersigned.

As we wish to satisfy this obligation as soon as possible, your prompt response will be appreciated. [ 7 ] Mary Shearer was the Mutiny landman in 2005 and 2006. She had done her education in petroleum land management in the 1980s and received her P. Land designation in 1998. She worked on a contract basis two days a week. She started working for Mutiny in October 2005. She replaced Betty Troniak. She said that she first became aware of the offset notice on the land at an October staff meeting.

Her understanding at that time was that a well was being drilled and the goal was to have the well on production by the date specified in the notice. She testified that on November 4, 2005, she received a phone call from Kelly Pypers of Trident. He advised that

the well was not going to be on production on time. He wanted to pay compensation royalty. She agreed. She testified that as a result of that conversation she understood that Trident would be responsible for advising the Crown that the lessees of the land would pay compensation royalty. She produced a handwritten note of the conversation that she had with Mr. Pypers. She acknowledged that she received the November 10 letter referred to above.

She did not respond to that letter because she was of the view that her verbal confirmation to Trident on November 4 that Mutiny was in agreement with paying compensation royalty was sufficient. She did nothing further to follow up. The next time that this matter came to her attention was the following spring when the lease administrator at Mutiny discovered through public documents that Mutiny no longer had rights on the land. Ms. Shearer called Mr.

Pypers who said that he acknowledged that the original plan was for Trident to submit the notice for all parties but that Bearspaw was of the view that each party should put in their own notice. She responded to Mr. Pypers that noone told her that. She then prepared a memo the day following her conversation with Mr. Pypers, confirming her description of events and her conversations with Mr. Pypers. [ 8 ] Ms. Shearer knew that once a lease had been terminated by the passage of the six months, there was a 60-day period to appeal the termination. She knew that that 60-day period had passed.

However she still contacted the Crown to determine if there was any way to have the rights reinstated. She said that she did not receive the notice of termination that would have been sent to Blaze as designated representative of Mutiny. That notice of termination was issued January 18 so that the 60-day period would have ended on March 18, 2006. [ 9 ] The land was reposted for sale and Mutiny bid on the land. However Bearspaw outbid Mutiny so that Mutiny lost its rights to the land. [ 10 ] Under cross-examination, Ms.

Shearer did admit that Trident could not submit the response to the offset notice on behalf of Mutiny without authorization from Blaze as Blaze was the designated representative. Likewise, Mutiny could not submit the notice without an authorization from Blaze. All Blaze would do is prepare a letter of authority. She also admitted that there was no system at Mutiny to remind her that notices like the offset notice were due. [ 11 ] David Laws, the President of Mutiny, first realized there was a problem with the land in April 2006. He attempted to talk to the vice-president of land at Trident and also Blaze. Mr.

Laws says that he approached Trident to see if all the land was lost and also to ask Trident and Bearspaw not to bid against Mutiny when the land was reposted. Bearspaw refused not to bid and Trident gave an unclear answer. He also asked Blaze why the termination of January 18, 2006, was not forwarded to Mutiny. Blaze replied that it did not get the letter. [ 12 ] Suzanne Stahl, qualified by me as an expert in land administration and management in the oil and gas business, was called on behalf of Mutiny. It was Ms.

Stahl’s opinion that when Trident realized that the well would not begin producing on time, she would have expected Trident to take charge and represent all the parties to the pooling agreement. The November 10 letter that Mr. Pypers sent out was not an uncommon letter and it would mean that the operator would be responsible for responding on behalf of the parties. In her view, Trident intended to take charge to ensure that the pooled rights were not lost.

She says that it is not uncommon for parties to a pooling agreement to give verbal approval to the operator with respect to an option like paying compensatory royalty. [ 13 ] She said that Blaze acted appropriately when it forwarded the offset notice to Mutiny but it did not act appropriately when it failed to pass along the notice from the Crown that the lease was terminated. At that point, Blaze could have preserved the land by requesting reinstatement. She agrees that the only party that could respond to the offset notice on behalf of Mutiny was Blaze unless Mutiny or Trident had authorization from Blaze.

In her examination in chief, she confirmed what was contained in her expert report, which reads: Normal industry practice would then follow that, in this case, had Trident been responsible and efficient in both its role as Operator, as well as undertaking to act on behalf of all parties to the Pooling Agreement for the matter at hand, as they had stated, in writing, in their Nov 10 2005 letter, they would have: - Requested the Authorization Form from Blaze for the N/2 lease (or requested Mutiny to obtain it from Blaze and forward it to Trident), or - Clarified through communication with Mutiny that they were going to submit their own offset response (to the S/2 lease obligation notices), and that they expected Mutiny would do the same with respect to the offset obligation notice on the N/2 lease. [ 14 ] In cross-examination, Ms.

Stahl acknowledged that offset notices are treated on a high priority basis and that, as a result, all

[ 14 ] In cross-examination, Ms. Stahl acknowledged that offset notices are treated on a high priority basis and that, as a result, all companies should have a mechanism to follow-up on the notices. Trident and Mutiny should have had such a system in place. She said that the November 10 letter led her and anyone in the industry to conclude that Trident was going to act on the offset notice. She considered that Trident was nonchalant in its response to this issue.

It is important, she said, that everyone in a Pooling Agreement protects everyone’s title documents because the loss of title by one could affect the others. [ 15 ] A copy of Ms. Stahl’s draft report was produced.

It is notable that report provided more commentary on Mutiny’s responsibility, specifically that they should have clarified with Trident that Trident was assuming responsibility for the response and that they should have requested Blaze to provide the authorization to Trident for Trident to respond. [ 16 ] Kelly Pypers testified that he received his Petroleum Land Certificate in 2004 and began working with Trident in 2005. He said that this was a non-cross conveyed Pooling Agreement which meant that each party was responsible for maintaining its own lease and each party was responsible for its own title.

He defined Trident’s responsibilities as operator as being to drill, to invoice and to operate the well. Trident received the offset notice for its lease on this land. He diarized the notice in Trident’s computer notification system. In the Fall, Trident concluded that the well would not be on production on time, so he had discussions with all partners. He spoke with Betty Troniak in late October or November. He said he would have advised that the well would not be on production and that offset compensation would need to be paid. Then he sent the follow-up letter.

He said that Trident’s responsibility would be to make the offset compensation payments but that each party would be responsible for sending its own response to the Crown. [ 17 ] He said that he received written responses to his November 10 letter from Wolf Coulee and Choya and a verbal response from Mutiny. He said that Russ Jensen of Bearspaw advised that Bearspaw would handle everything on its own including sending the response to the Crown and paying its share of the compensation. As a result, Bearspaw declined to sign and return the November 10 letter. That information was confirmed in an email. Mr.

Pypers did not forward that email to the other partners. [ 18 ] Mr. Pypers said that he first became aware that Mutiny had not responded to the offset notice in April, 2006. He said that he was surprised that this had happened because a landman is responsible for ensuring that leases are in good standing. He said that he reviewed his notes with his team. Trident decided to post the land and bid on it. Bearspaw outbid Trident. [ 19 ] In cross-examination, he agreed that he first discussed the offset notice with Mutiny in November. He said he believed it was Betty Troniak that he spoke with. After reviewing Ms.

Shearer’s notes of her conversation with him on November 4 th , he admitted that is was possible that he spoke with Ms. Shearer. He admitted that he does not have any notes of that conversation or any of the dealings on this matter. He would not agree that Trident agreed to handle the response to the notice or that it was common for the operator to handle the response, even if the operator would be paying the compensation royalty. Mr.

Pypers was asked whether the sentence in the November 10 th letter that reads “As we wish to satisfy this obligation as soon as possible your prompt response would be appreciated” indicated that Trident was going to respond to the offset notice. He denied that that was the meaning; rather he wanted to know whether the partners agreed to pay offset compensation. He did agree that there would be no payment to the Crown before December 7 and that the invoice actually arrived in late April, 2006.

He was asked about the sentence in the email from Bearspaw which reads “In following with the above we will not be signing and returning a copy of your letter of November 10, 2005 concerning this matter.” He agreed that it was possible that Bearspaw said that because Bearspaw did not want Trident to respond on Bearspaw’s behalf. He denied, however, that it was possible to interpret the November 10 letter to mean that Trident would respond on behalf of the parties. He agreed that it would be possible to get authorization from Blaze to respond for Mutiny so long as Mutiny gave permission. He was asked about Ms.

Shearer’s notes of April 4, 2006 when she called him once Mutiny realized that they had lost the lease. The note said that after she asked if Trident had submitted the offset notice for all the leases, he responded that that was the original plan, but Bearspaw had sent him a note saying that everyone should submit their own notice. He denied that he made that statement. In reexamination, he said that on April 4, 2006, Ms. Shearer said that Mutiny ‘screwed up’ but in recross-examination, he phrased it as ‘there was a screw up’. [ 20 ] The relevant provisions of the agreements between the parties are as follows.

S. 4(a)(

I) of the Pooling Agreement provides that each party will continue to comply with the terms of title documents to keep title in full force and effect. By s. 6, Trident is appointed the Operator. S. 10 incorporates the 1990 CAPL Operating Procedure.

Article 309 of the CAPL Operating Procedure provides that the Operator shall do all things necessary to maintain the title documents in good standing and in full force and effect.

Article 401 limits the Operator’s liability to its partners to gross negligence. [ 21 ] The facts in this case are relatively easy to sort through. The two principle witnesses were the landmen for Trident and Mutiny. Both were new to their jobs. The differences between the two are remarkable. First, Ms. Shearer had significantly more experience as a landman. Mr. Pypers was just out of school. More importantly, Ms. Shearer kept notes of her conversations with Mr. Pypers. Although at one point in his testimony, Mr.

Pypers made mention of checking some notes, no notes were produced and he admitted that he did not make notes of at least one conversation. My impression of Mr. Pypers as he was testifying was that he was piecing together what he thought should have happened rather than what actually did happen. This is not to say he was not telling the

truth. He simply could not remember what actually took place. He could not be sure who at Mutiny he talked to in November. Accordingly, to the extent that there are differences in what occurred, Ms. Shearer’s evidence is the evidence that I accept. [ 22 ] The key document to determine what happened is Mr. Pypers’ November 10 letter. Ms. Shearer’s

interpretation of the letter is reasonable. She read it to mean that Trident would take care of responding to the offset notice. Why else would Trident be requesting that the parties sign the agreement and return as soon as possible? Royalties were not due yet, but a response to the offset notice was. This was obviously also the view of Mr. Jensen at Bearspaw. When I read the first and second paragraphs of his email, I conclude that he thought that Trident was proposing to respond to the notice on behalf of all parties and he was rejecting that proposal. Finally, Ms.

Shearer’s reaction in April when she discovered that the Mutiny lease was lost is consistent with her reading of the November 10 letter, which, as indicated above, is a reasonable

interpretation of that letter. Finally, Mr. Pypers’ evidence that Trident could not respond for the parties is simply wrong. Trident could have responded had it had authorization from Blaze. Who bears responsibility for not obtaining that authorization is a different matter. Trident’s failure to advise the parties that each was responsible for responding to the offset notice once Bearspaw took the position that it did was negligent. Given the provisions of

Article 401, I must decide whether that negligence amounts to gross negligence. In coming to these conclusions, I have not relied on the expert opinion other than her confirmation that Trident could have responded to the offset notice for Mutiny. All it needed was authorization from Blaze. [ 23 ] In Adeco Exploration Company Ltd. v. Hunt Oil Company of Canada, Inc. , 2008 ABCA 214 , the court was required to determine if Hunt Oil was grossly negligent as operator in failing to keep title documents in good standing.

The facts of the case and the relationship between the parties to the CAPL agreement are sufficiently different so that the result in the case is not on point. However, in the course of making its decision, the Court summarized the meaning of gross negligence at para 55.

The phrases which the Court cites from the cases are “very great negligence”, “conscious wrongdoing”, “a very marked departure” from the standard of care, “the character and the duration of the neglect to fulfill [the] duty, including the comparative ease or difficulty of discharging it [are] important, if not vital, factors in determining whether the fault (if any) . . . is so much more than merely ordinary neglect that it should be held to be a very great, or gross negligence”, and “conscious indifference”. [ 24 ] What Trident did was not a momentary lapse.

It wrote a letter that can reasonably be interpreted as meaning that Trident would respond to the offset notice on behalf of all the partners. It received word from Bearspaw that it did not want Trident to respond on its behalf and that each partner should look after its own lease. Trident’s failure to advise Mutiny that the plan had changed was something that could have been easily accomplished. Moreover, it was not a mistake which happened in a few seconds or a few minutes after which nothing could be done. The responses had to be to the Crown by December 7. Bearspaw gave its reply to Trident on November 15.

There was plenty of time for Trident to ensure that all partners understood what their obligations were, given Bearspaw’s response. That is gross negligence. [ 25 ] Mutiny also alleges that Trident had a fiduciary duty to Mutiny which it breached when it did not agree to bid jointly with Trident on the lease when it was posted after the lease had been lost by Mutiny, but rather bid on its own for the lease. There are times when an operator can be in a fiduciary position with its partners: Adeco Exploration at para 68. Mr.

Pypers said that Trident’s plan was to bid and then Mutiny would be responsible for the costs. Whether or not that was Trident’s intent is irrelevant. Bearspaw, who owed no fiduciary duty to Mutiny, was the successful bidder. As a result, even if there was a fiduciary to owe to Mutiny by Trident, any breach made no difference to the outcome. [ 26 ] This matter was set down by order. The application was to determine whether Trident had any liability. It does. I have not been asked to apportion liability with any other party. Heard on the 27 th , 28 th , 29 th days of February, 2012.

Dated at the City of Calgary, Alberta this 16 th day of April, 2012.

C.A. Kent J.C.Q.B.A. Appearances: R. Craig Steele Carscallen LLP for the Applicants Sean Collins McCarthy Tétrault LLP for the Monitor