Canadian Natural Resources Limited v. Jensen Resources Ltd., 2012 ABQB 786

Court of Queen ’ s Bench of Alberta Citation: Canadian Natural Resources Limited v. Jensen Resources Ltd., 2012 ABQB 786 Date: Docket: 0901 15258;0901 13584 Registry: Calgary

Between: Docket: 0901 15258 Canadian Natural Resources Limited Plaintiff/Defendant by Counterclaim - and - Jensen Resources Ltd. Defendant/Plaintiff by Counterclaim And Between: Docket: 0901 13584 Registry: Calgary Jensen Resources Ltd. Applicant - and - Canadian Natural Resources Limited Respondent _______________________________________________________ Reasons for Judgment of the Honourable Madam Justice J. Strekaf _______________________________________________________

I. Introduction [ 1 ] Two actions were consolidated by an order granted on November 18, 2009, being an Originating Notice commenced by Jensen Resources Ltd (“Jensen”) against Canadian Natural Resources Limited (“CNRL”) on September 18, 2009 for declaratory relief and an action by CNRL against Jensen commenced by a Statement of Claim filed on October 9, 2009 and Jensen’s Counterclaim. [ 2 ] The primary issue to be determined in both actions is whether Jensen has a royalty interest in two oil sands leases presently held by CNRL.

The answer depends upon whether the oil sands leases that were issued with respect to Mannville zone in Sections 1, 4 and 32 of Township 55, Range 4 W4M, following the removal of that zone from the petroleum and natural gas leases granted with respect to those lands, were “executed in lieu thereof” within the meaning of the applicable gross overriding royalty (“GOR”) agreements. There are two secondary issues which depend upon the answer to the first question. If Jensen has a royalty interest, is it entitled to an accounting from CNRL for royalties owing in respect of the oil sands lease on Sections 1 and 4?

If there is no royalty interest, is CNRL entitled to recover back from Jensen the royalties paid to it in respect of the oil sands lease on

Section 32? II. Relevant Facts [ 3 ] The relevant facts are largely not in dispute. [ 4 ] Kristian Gowertz was employed with Kissinger Petroleum Ltd (“Kissinger”) as a landman from 1978 until 1981 when Kissinger was acquired by Ranger Oil Limited (“Ranger”). Kissinger was primarily involved in drilling wells in north eastern Alberta.

In addition to receiving a salary, Mr Gowertz was also included in Kissinger’s employee royalty pool program as part of his compensation package pursuant to which certain employees were granted a GOR on production from leases earned on wells drilled by Kissinger. [ 5 ] During the course of Mr Gowertz’s employment, Kissinger drilled and completed numerous wells, including three natural gas wells on Sections 1 and 4 of Township 56, Range 4 West of the 4 th Meridian and

Section 32 of Township 55, Range 4, West of the 4 th Meridian (hereinafter referred to as Sections 1, 4, and 32, respectively). The wells were drilled through the Colony and Mannville zones, down to the top of the Paleozoic zone. Pursuant to this arrangement, Kissinger entered into three assignment agreements by which Kristian and Julie Gowertz were assigned a GOR of 0.25% “of all the oil, gas, natural gas, petroleum and other hydrocarbon products produced, saved and marketed under and by virtue of” the petroleum and natural gas (“PNG”) leases on Sections 1, 4 and 32.

Each of the three GOR Agreements provided: The GROSS OVERRIDING ROYALTY interest herein conveyed shall attach to and encumber the Petroleum and Natural Gas Lease above described, and any renewals or extensions thereof, or any new leases which may be executed in lieu thereof , subject to the terms of this agreement. (emphasis added) [ 6 ] On May 26, 1981, the Gowertz’s assigned their rights under the three GOR Agreements to Jensen.

Kristian and Julie Gowertz are the principals of Jensen. [ 7 ] On August 7, 1984, the Energy Resources Conservation Board (“ERCB”) issued Oil Sands Area Order 3 which provided that the strata designated as the Mannville Group in an area which included Sections 1, 4 and 32 would become the Cold Lake Oil Sands Area. As a result, the PNG leases with respect to Sections 1, 4 and 32 ceased to apply to the Mannville zone on those lands.

Oil sands leases were subsequently issued with respect to lands which included the Mannville zone in Sections 1, 4 and 32, as described below. [ 8 ] In November 2007, it came to the attention of CNRL’s land department that it was paying royalties to Jensen on production from the oil sands lease on

Section 32 but not from the oil sands leases on Sections 1 and 4. The matter was brought to the attention of Kristian Gowertz, who happened to be working for CNRL at the time. He took the position that CNRL ought to be paying oil sands royalties to Jensen on production from the oil sands leases on Sections 1 and 4, in addition to the oil sands lease on

Section 32.

[ 9 ] CNRL concluded that it should not be paying royalties to Jensen on the oil sands leases on Sections 1 and 4 or on the oil sands lease on

Section 32, thereby giving rise to this dispute. [ 10 ] The lease, agreement and production history with respect to Sections 1 and 4 and with respect to

Section 32 are summarized below. A. Sections 1 and 4 [ 11 ] The Government of Alberta issued PNG Lease 41183 in respect of lands that included

Section 1, and PNG Lease 41184 in respect of lands that included

Section 4, to Kissinger on January 15, 1976. [ 12 ] On July 22, 1980, Kissinger assigned a GOR to Kristian and Julie Gowertz of 0.25% of all the oil, gas, natural gas, petroleum and other hydrocarbon products produced, saved and marketed from

Section 1 under and by virtue of PNG Lease 41183. [ 13 ] On February 27, 1981, Kissinger assigned a GOR to Kristian and Julie Gowertz of 0.25% of all the oil, gas, natural gas, petroleum and other hydrocarbon products produced, saved and marketed from

Section 4 under and by virtue of PNG Lease 41184. [ 14 ] On June 11, 1985, Saskoil Resources Inc, as working interest holder in Sections 1 and 4, applied on behalf of itself and Ranger, Kissinger’s successor, who was a lessee under PNG Leases 41183 and 41184, for an Oil Sands Propecting Permit (“OSPP”) in respect of the Mannville zone located under lands including Sections 1 and 4.

On December 5, 2005, the Government of Alberta granted OSPP 6685060001 to Ranger and Many Islands Pipe Lines (Canada) Ltd, who were the lessees under PNG Lease 41183 and 41184, in respect of the Mannville zone located under lands including Sections 1 and 4.

On July 9, 1990, the Alberta Government granted Oil Sands Lease 7190060346 to Ranger and Saskatchewan Oil and Gas Corporation in respect of the Mannville zone located under lands including Sections 1 and 4 (“Sections 1 and 4 Oil Sands Lease”). [ 15 ] CNRL obtained a 100% interest in the Sections 1 and 4 Oil Sands Lease in January 2004 through its acquisition of assets from Petrovera Resources Inc.

On March 22, 2011, CNRL, applied for a continuation, which was granted as Oil Sands Lease 74411060935 on June 12, 2011.The Sections 1 and 4 Oil Sands Lease and continuation will be collectively referred to as the “Sections 1 and 4 OSL”. [ 16 ] Oil has been and continues to be produced from

Section 4 since May 1997 and from

Section 1 since December 2003 under the Sections 1 and 4 OSL. There are currently 18 wells producing heavy oil from Sections 1 and 4 through wells drilled by conventional methods. Neither CNRL nor its predecessors have paid any royalties to Jensen in respect of such production. [ 17 ] CNRL currently holds a 100% interest in the Sections 1 and 4 OSL but no interest in PNG Leases 41183 and 41184, which are held by Devon NEC Corporation. B.

Section 32 [ 18 ] The Government of Alberta issued PNG Lease 40793 to Standard Oil Company of British Columbia Limited in respect of lands that included

Section 32 on November 21, 1975. On April 28, 1978, Standard Oil’s successor, Chevron Canada Limited, entered into a farmout agreement pursuant to which Chevron assigned Kissinger a working interest in PNG Lease 40793. [ 19 ] On October 23, 1978, Kissinger assigned a GOR to Kristian and Julie Gowertz of 0.25% of all the oil, gas, natural gas, petroleum and other hydrocarbon products produced, saved and marketed from

Section 32 under and by virtue of PNG Lease 40793.

[20] On June 20, 1985, Ranger, successor to the Kissinger working interest, applied on behalf of itself and Chevron, who was thelessee under PNG Lease 40793, for an OSPP in respect of the Mannville zone located under lands including

Section 32. The AlbertaGovernment granted OSPP 668506002 to Chevron on April 11, 1986. On April 23, 1987, the Alberta Government granted Oil SandsLease 7186060309 to Chevron in respect of the Mannville zone located under lands including

Section 32 (“Section 32 Oil Sands Lease”). [21] CNRL obtained a 100% interest in the

Section 32 Oil Sands Lease in January 2004 through its acquisition of assets fromPetrovera Resources Inc. On November 24, 2006, CNRL, who was then the lessee under the

Section 32 Oil Sands Lease, applied for acontinuation, which was granted on June 24, 2007 as Oil Sands Lease 7407060384. The

Section 32 Oil Sands Lease and continuationwill be collectively referred to as the “Section 32 OSL”. [22] Oil has been and continues to be produced from

Section 32 under the

Section 32 OSL since May of 1999 through a welldrilled by conventional methods. CNRL and its predecessors have paid Jensen $53,167.75 between May of 1999 and July of 2009 andCNRL has paid Jensen $10,049.42 between August 2009 and July 2011 in royalties in respect of oil production from the

Section 32 OSL. [23] CNRL currently holds a 100% interest in the

Section 32 OSL and an 8.3333% interest in PNG 40793, which it acquired fromKoch Exploration Canada Ltd on April 10, 2000. III. Positions of the Parties [24] Jensen’s position is that its GORs with respect to Sections 1 and 4 and

Section 32 apply to the Oil Sands Leases that relate tothe Mannville zone in those sections because the Oil Sands Leases were “executed in lieu” of the PNG Leases in respect of the Mannvillezone. Jensen claims that it would have been entitled under the GOR Agreements to a royalty on any production from the Mannville zoneunder the PNG Leases and that it should be entitled to a royalty on any production from the Mannville zone under the Oil Sands Leases.Jensen seeks an accounting from CNRL for all royalties not paid since production commenced under the Oil Sands Leases.

In the eventthat it is found that the GORs do not apply to the Oil Sands Leases, Jensen opposes having to refund the royalty payments it has receivedto date. [25] CNRL’s position is that Jensen does not have a royalty interest in any production from the Oil Sands Leases. Its position isthat Gowertz’s GORs crystallized when Kristian Gowertz left Kissinger in 1981 and that he is now seeking additional royalties, thirtyyears after the fact, on production from wells drilled by other operators on oil sands leases that were applied for and granted to otheroperators long after his employment with Kissinger terminated.

CNRL denies that the

Section 32 OSL and the Sections 1 and 4 OSLwere executed in lieu of the PNG Leases on those sections. CNRL seeks to recover back any royalties paid to Jensen pursuant to the OilSands Leases. In the event that it is found that the GORs apply to the Oil Sands Leases, CNRL argues that Jensen’s claim for unpaidroyalties to date is statute barred. IV. Analysis A.

Issue 1 - Does Jensen’s GOR apply to the Oil Sands Leases? [26] The language used in each of the GOR Agreements provides that the GOR “shall attach to and encumber the Petroleum andNatural Gas Lease above described, and any renewals or extensions thereof, or any new leases which may be executed in lieu thereof.”As a result, oil produced by CNRL from the Oil Sands Leases that relate to Sections 1, 4 and 32 will be subject to Jensen’s GOR if theOil Sands Leases qualify as leases “executed in lieu thereof” for the PNG Leases on those sections which were subject to the GOR. [27] To determine whether that is the case, it is first necessary to interpret what the phrase “executed in lieu thereof” means in thecontext of the GOR Agreements, and then to determine whether the circumstances that occurred qualify. [28] The rules applied by the Court when interpreting a contract are well known and have been outlined in numerous instances.The Supreme Court of Canada stated in Eli Lilly & Co v Novopharm Ltd, (SCC), [1998] 2 SCR 129 at para 54:

The contractual intent of the parties is to be determined by reference to the words they used in drafting the document, possibly read inlight of the surrounding circumstances which were prevalent at the time. Evidence of one party’s subjective intention has no independentplace in this determination. [29] The Alberta Court of Appeal commented on these rules of contract

interpretation in the context of an oil and gas lease inOmers Energy Inc v Alberta (Energy Resources Conservation Board), 2011 ABCA 251, 513 AR 292 per Conrad JA at paragraphs 33 -34: An oil and gas lease is a contract. A tribunal, interpreting such a contract, must search for the intention of the parties by examining thespecific words used with regard to the whole contract and the demonstrated intention of the parties: Kensington Energy Ltd v. B & GEnergy Ltd, 2008 ABCA 151 at paras 13-15, 432 AR 141.

Individual words or phrases may achieve a clear meaning when the entiredocument is read: BG Checo International Ltd v. British Columbia Hydro and Power Authority, (SCC), [1993] 1 SCR12 at 23-24, 99 DLR (4th) 577. Where the words of the contract are unambiguous, the court should not deviate from its clear termsunless the contract is absurd, or has an effect clearly contrary to the intention of the parties: Scott v. Wawanesa Mutual Insurance Co, (SCC), [1989] 1 SCR 1445 at 1467, 59 DLR (4th) 660; Suncor Inc v. Norcen International Ltd (1988), (AB KB), 89 AR 200.

Where the words of the contract are ambiguous, extrinsic evidence can be relied upon as an interpretive aid.It is from the whole of the document coupled with the surrounding circumstances that the general intention of the party or parties is to beascertained: Suncor. The search for the parties' intentions is conducted on an objective basis. What the parties believe their rights to be is not important, butwhat a reasonable person would infer them to be from the words used: ATCO Electric Ltd v. Alberta (Energy and Utilities Board), 2004ABCA 215, 361 AR 1.

In ATCO, at para 77, Fraser CJA adopted the language of Lord Hoffman in Jumbo King Ltd v. FaithfulProperties Ltd, [1999] HKCFAR 279: The construction of a document is not a game with words. It is an attempt to discover what a reasonable person would have understoodthe parties to mean.

And this involves having regard, not merely to the individual words they have used, but to the agreement as a whole,the factual and legal background against which it was concluded and the practical objectives which it was intended to achieve. [30] Both parties referred the Court to dictionaries that defined “in lieu of” as meaning “instead of” or “in place of”: Black’s Law Dictionary, 9th ed; Merriam-Webster’s Collegiate Dictionary, 10th ed.

I agree that this is what the parties intended by using that phrase inthe GOR Agreements and that the phrase is not ambiguous. [31] Where the provisions of a contract are impacted by legislative provisions, parties will generally be taken to have contractedwith reference to the law that existed at the time of the contract, unless ‘“by apt words” they express an intention to bind themselves to“..any future state of the law”’: Atlantic Richfield Co v Petro-Canada (1983) 49 AR 109, (CA) at para 42. [32] At the time that the GOR Agreements were executed, each of the PNG leases provided that they were subject to the Minesand Minerals Act and “the provisions of The Mines and Minerals Act and any Act passed in substitution therefor, and any regulationsthat at any time may be made under the authority of the said Acts, and all such provisions and regulations that prescribe, relate to oraffect the rights and obligations of lessees of petroleum and natural gas rights, the property of the Crown, shall be deemed to beincorporated into this lease”. [33] I will now consider how the GOR Agreements, as interpreted, apply in the circumstances that occurred. [34] In 1978 and 1980 when the GOR Agreements were executed,

section 116 of the Mines and Minerals Act, RSA 1970, c 238; asamended by SA 1976, c33, s.9; SA 1978, c23, s35 stated: 116 A petroleum and natural gas lease grants the rights to the petroleum and natural gas that are the property of the Crown in thelocation subject to any exceptions expressed in the lease.

[ 35 ] At the time that the GOR Agreements were executed, the Gowertzs would have been entitled to have the royalty calculated on any production from the Mannville zone, had there been any. Further, as the oil from the Mannville zone in the three sections was capable of being, and has ultimately been, developed through conventional means, this zone would not have qualified as “oil sands”, which at that time were defined in section 2(1) (20) of the Mines and Minerals Act as: (

i) sands and other rock materials containing crude bitumen, (ii) the crude bitumen contained in those sands and other rock materials, and (iii) any other mineral substances in association with that crude bitumen or those sands and other rock materials, but does not include petroleum or natural gas that in its naturally occurring state is recoverable through a well by conventional methods. [ 36 ] The Mannville zone in the sections covered by the three PNG Leases also did not fall within the definition of “bituminous sands”, defined at the time in section 2(1) (2) of the Mines and Minerals Act as being “...the oil sands being within townships 84 to 104 inclusive in ranges 4 to 18 inclusive, west of the 4 th meridian, and occurring in the McMurray formation, being the stratigraphic formation lying above the upper Devonian carbonate sediments and below the Clearwater formation” as Sections 1, 4 and 32 were within Township 55. [ 37 ] At the time that the PNG leases and GORs were granted, the process for obtaining an oil sands lease was set out in Oil Sands Regulation, Alta Reg 317/78.

That regulation permitted the holder of a petroleum and natural gas lease who had drilled a well determining the presence of oil sands, or any other person subject to the rights of the lease holder, to apply for an oil sands prospecting permit, which application was accompanied by a $250 fee, the first year’s rental at $.05/acre and a deposit of $50,000. Once the oil sands prospecting permit was granted, the operator was to conduct a plan of examination.

If the plan was successful, the permittee, or any other person, could apply for an oil sands lease. [ 38 ] With the passage of the Oil Sands Conservation Act, SA c 0-55 in l983, the definition of “oil sands” was amended to provide: 1(1)(q) “oil sands” means (

i) sands and other rock materials containing crude bitumen, (ii) the crude bitumen contained in those sands and other rock materials, and (iii) any other mineral substances, other than natural gas, in association with that crude bitumen or the sands and other rock materials referred to in subclauses (

i) and (ii), and includes a hydrocarbon substance declared to be oil sands in section 7(2) of the Oil Sands Conservation Act. [ 39 ] In 1984, the ERCB issued Oil Sands Area Order 3 pursuant to section 7(2) of the Oil Sands Conservation Act which “deemed the hydrocarbon substance, with the exception of natural gas and coal, found in certain geological zones from the top of the Mannville formation through to the base of the Woodbend formation in the Athabasca, Cold Lake, and Peace River areas” to be oil sands.

This included the lands under the three PNG Leases and had the effect of reducing the rights held under the three PNG Leases. [ 40 ] On September 11, 1984, Alberta Energy and Natural Resources (“AENR”) issued Information Letter 84-15 which outlined how PNG lease-holders affected by the removal of the Mannville zone could apply for substitute agreements.

It stated in part: The objective of the policy enunciated in this Information Letter of Alberta Energy and Natural Resources is to ensure that a holder of petroleum and natural gas rights is not deprived of the right to any such “...hydrocarbon substance declared to be oil sands ....” by virtue of the change in definition of oil sands and the establishment of the Oil Sands Area Orders. In order to facilitate this, the Department is prepared to entertain applications under section 8(1) (

f) of the Mines and Minerals Act for substitute agreements in the following manner: 1.1 Holders of Crown petroleum and natural gas agreements which have term dates commencing prior to October 19, 1984, may apply

for a substitute oil sand agreement to the whole or any part of the location upon completion of a well located on the location, or the part of the location to be substituted, respectively, where the “hydrocarbon substance” is able, in its naturally occurring viscous state, to flow to a well and has sustained recoverability to the satisfaction of the minister. [ 41 ] Section 8(1) (

f) of the Mines and Minerals Act , provided: 8(1) The Minister may: (

f) if he consider that the circumstances warrant it, agree with a lessee to grant an agreement to the lessee in substitution for an agreement held by the lessee. [ 42 ] On April 29, 1985, Saskoil, on behalf of itself and Ranger (Kissinger’s successor) submitted an application to AENR for an OSPP for the Frog Lake Prospect in Township 56, Range 4 W4M.

AENR responded by a letter dated May 14, 1985 headed “Re: Oil Sand Prospecting Permit Application Out of P & NG Leas Nos, 41183, 41184, 41186, 41187 and 41188 Frog Lake Prospect” which stated in part: Thank you for your permit application out of these P & NG leases on behalf of Ranger Oil Ltd and Many Islands Pipelines (Canada) Limited. At this point in time, the Department can only process your application as of 1985 May 1, when the application letter was received, for P & NG Lease Nos 41183, 41184, 41186 and 41187, which are within the T56, R4, W4M area you requested.

P & NG Leas No 41188 can not be included because it is outside this area, and also because the lease is registered in the name of Ranger Oil Limited (100%), which does not conform with the ownership of the other four leases. Although I am aware that a transfer is to take place on P & NG Lease No 41188, it cannot be included in the application until such time as the transfer is registered. You can take these steps to include all five leases in one application: 1. File a transfer on P & NG Lease No 41188 to change the ownership to agree with the other four leases. 2.

After registration of the transfer, make a new request for an oil sands prospecting permit. This request must be made prior to 1985 June 13, when the P & NG leases expire. Please state in your new application: .... [ 43 ] By letter dated June 11, 1985, Saskoil advised AENR that is was resubmitting “an application for an Oil Sands Prospecting Permit on the following Alberta Crown P&NG leases: CR 41183... CR 41184".

An OSPP covering lands which included Sections 1 and 4 was granted on December 5, 1985. [ 44 ] Ranger advised AENR by a letter dated December 6, 1985 entitled “Re: Application for Oil Sand Lease out of P&NG No.’s 40792 and 40793; Sections 22, 24, 28, 32, 34 and 36, Twp. 55, Rge. 4 W4M; Frog Lake Alberta” which stated in part: We refer to our telephone conversation with your Mr Tyl on the 5 th instant, concerning Ranger’s earlier application for an oil sand lease out of the subject P&NG leases.

We understand that its not possible for you to grant us an oil sands lease on the entire six sections because we are unable to map oil sand reserves on three of the

section -

section 22, 24 and 34. Alternatively, we can do either:

i) change our application to an Oil Sands Prospecting Permit (OSPP) over the entire six sections, with a work commitment to be carried out by July 11, 1986; or

ii) drop

section 22, 24 and 34 from our existing application, and obtain an oil sand lease on

section 28, 32 and 36 only. After consideration of the matter, we have decided to change our application to an OSPP, and commit to drill a well to satisfy the plan ofexamination for the first term. [45] In a letter to various parties dated December 18, 1985, Ranger stated in part: Attached for each of you is a copy of our letter to AENR dated December 6, 1985 concerning an application for an Oil Sand ProspectingPermit (“OSPP”) out of P&NG Lease No.’s 40792 and 40793.

You will recall that both of these leases reached the end of their primary term on July 11, 1985, at which time it was necessary to submitto AENR an application for continuation of the conventional P&NG rights. Prior to the expiry of the leases we had determined that itwould be necessary to protect the oil sands bearing Mannville right by applying for either an Oil Sands Lease or an OSPP. We werecorrect as it turned out because the only Mannville right which AENR was prepared to continue were those underlying sections 32 and36 (pursuant to

Section 97 of the Act). The balance of the lands were either severed back to the Viking zone or completely terminated. Our initial application to AENR was for an Oil Sands Lease which carried no work commitment. However, since we are unable to mapoil sands reserves underlying three (3) of the sections, AENR will only consider an OSPP over the entire six (6) sections, whichnecessarily involves a work commitment. We have no difficulty in committing to a well (probably on

section 32) which will satisfy thework commitment for the first term of the OSPP... [46] An OSPP covering lands which included

Section 32 was granted to Chevron (the lessee under PNG Lease 40793) on April 11,l986. [47] CNRL submits that it would be inappropriate to have reference to the application correspondence and the Alberta GovernmentInformation Letter 84-15 because that would constitute improper reference to extrinsic evidence and would offend the parol evidencerule. It further submits that Information Letter 84-15 is merely a statement of policy and has no legislative effect and that policy was notreferred to in the PNG Leases. I agree that the parol evidence rule applies.

However, there is a significant difference between usingextrinsic materials as an aid to interpreting what an agreement means, which is not appropriate, and using such materials to determinewhether circumstances have occurred that would trigger application of the agreement. In my view, it is the latter that is occurring in thiscase, which represents a legitimate use of such materials, including statements of government policy. [48] By contrast, the

interpretations of the GOR Agreements which were adopted by the parties and their predecessors, and thesubsequent conduct of the parties and their predecessors in either paying or not paying royalties on the Oil Sands Leases many years afterthe GOR Agreements were executed, particularly by employees of corporate parties who did not negotiate the GOR Agreements, are oflittle, if any, assistance in determining whether royalties are payable under the GOR Agreements: Canadian National Railway vCanadian Pacific Ltd. (1979), (BC CA), 95 DLR (3D) 242 (BCCA) at para 83; aff’d (SCC), [1979]2 SCR 668; Mesa Operating Ltd Partnership v Amoco Canada Resources Ltd. (1994), 1994 ABCA 94 , 149 AR 187 at para 52. [49] CNRL also submits that the Master Agreement between Kissinger and Gowertz dated January 3, 1980 supports theirinterpretation.

It stated in part: Gowertz may receive during his employment with Kissinger, from time to time, as Kissinger may decide at its sole discretion, anoverriding royalty interest on leases and land or interests therein, acquired by Kissinger in the Dominion of Canada.

It is understood bythe parties hereto that nothing contained in this paragraph shall be construed to obligate Kissinger to create any such overriding royalty,or, if created, to convey or transfer any interest therein unto Gowertz or any other employee associated with Kissinger, it beingunderstood that the division by Kissinger of any such overriding royalty created shall be entirely at the discretion of Kissinger.

It isfurther understood that any such overriding royalty interest which Kissinger conveys or transfers unto Gowertz as aforesaid, shall belimited to those leases and lands involved in drilling prospects which are actually originated, promoted and drilled by Kissinger or itsrelated companies, and shall be conveyed only on the drainage unit upon which wells are drilled during Gowertz’s employment withKissinger.

[ 50 ] CNRL points out that Gowertz’s employment with Kissinger terminated on March 31, 1981 and suggests that his GOR rights crystalized on that date and that all wells drilled after that date could not possibly be the subject of GORs granted to Gowertz; particularly on an oil sands lease issued to another party years later. [ 51 ] I do not find the terms of the Master Agreement helpful in determining whether the Oil Sands Leases were issued in lieu of the petroleum and natural gas leases within the meaning of the GOR Agreements.

The Master Agreement provided Kissinger with discretion with respect to the royalty interests it granted to Gowertz. While the Master Agreement indicated that such grants would be limited in the fashion set out in the last sentence, that sentence cannot override a specific GOR Agreement that contains different provisions. Further,

Section 32 GOR Agreement predated the Master Agreement and neither the

Section 1 GOR Agreement or the

Section 4 GOR Agreement made any reference to or indicated that they were subject to, the Master Agreement. [ 52 ] To the extent that Kissinger may have exercised its discretion to issue GOR Agreements that went beyond the scope of the last sentence in the Master Agreement, it is the terms of those GOR Agreements that govern. [ 53 ] The relevant question is whether Jensen’s rights under the GOR Agreements with respect to Sections 1, 4 and 32 apply to the Oil Sands Leases, which depends upon whether those Oil Sands Leases were issued in lieu of the PNG leases for those sections. [ 54 ] In conclusion, I am satisfied that the Jensen’s GOR does apply to the Sections 1 and 4 OSL and to

Section 32 OSL on the basis that the Oil Sands Leases were issued in place of the PNG Leases with respect to the Mannville zone for those sections.

The PNG Leases on Sections 1, 4 and 32 and the related GOR Agreements would have applied to any oil production from the Mannville zone at the time that they were executed, had there been any. [ 55 ] Oil Sands Area Order 3 issued by the ERCB on August 7, 1984 declared all Mannville petroleum (including heavy oil recoverable by conventional means) in the Cold Lake area, which included the sections in question, to be the Cold Lake Oil Sands Area, which had the effect of designating that zone as “oil sands” for the purposes of the Mines and Minerals Act , thereby removing it from the PNG Leases.

The rights holders under the PNG Leases for Sections 1 and 4 and

Section 32 proceeded to participate in the applications for the Oil Sands Prospecting Permits and Oil Sands Leases with respect to those Sections in the manner outlined above. The OSPPs and Oil Sands Leases were ultimately awarded to them as a result. The correspondence with AENR suggests that parties were viewing the applications for the OSPPs, which were a prerequisite to obtaining the Oil Sands Leases, as arising out of the PNG Leases. While those parties needed to complete additional steps and the Oil Sands Leases were not automatically issued to the PNG Leaseholders or pursuant to section 8(1) (

f) of the Mines and Minerals Act , nor was the issuance expressly stated to be “in substitution” for the removal of the Mannville zone from the PNG leases resulting from the issuance of the Oil Sands Area Order 3, I am satisfied, after taking all of the circumstances into account, that the Oil Sands Leases were issued in place of the PNG Leases with respect to the Mannville zone in Sections 1, 4 and 32. As a result, the Jensen GOR applies to the Oil Sands Leases for Sections 1, 4 and 32. B. Issue 2 - Is Jensen entitled to an accounting from CNRL for royalties on production from the

Section 1 and 4 OSL? [ 56 ] Jensen claims that it should be entitled to royalties on production from

Section 1 and 4 going back to when production commenced. [ 57 ] CNRL’s position is that the Jensen’s claim is statute barred by virtue of the provisions of the Limitations Act , RSA 2000, c L- 12. [ 58 ] Section 3(1) of the Limitations Act codified and refined the common law discoverability rule which provided that a cause of action arose for the purposes of a limitation period when the claimant discovered, or ought to have discovered by the exercise of reasonable diligence, the material facts upon which the claim is based. Section 3(1) states: 3(1) Subject to

section 11, if a claimant does not seek a remedial order within (a) 2 years after the date on which the claimant first knew, or in the circumstance ought to have known,

(

i) that the injury for which the claimant seeks a remedial order had occurred, (ii) that the injury was attributable to the conduct of the defendant, and (iii) that the injury, assuming liability on the part of the defendant, warrants bring a proceeding, or (

b) within 10 years after the claim arose. whichever period expires first, the defendant, on pleading this Act as a defence, is entitled to immunity from liability in respect of theclaim. [59] When a limitations claim is advanced with respect to periodic payments under an agreement such as the Oil Sands Leases,each missed payment is a separate injury, giving rise to limitations considerations. See for example Meek (Trustee of) v San JuanResources Inc., 2005 ABCA 448, 376 AR 202, paras 48-49. [60] Applying the criteria in section 3(1)(a)(

i) of the Limitations Act in the context of this case, the injury at issue was a failure topay a royalty when due under the GOR Agreements, which first occurred after production began under the Sections 1 and 4 OSL in 1997. [61] With respect to Section 3(1)(a)(ii), injury attributable to the conduct of CNRL first occurred in 2004, when it acquired the twoOil Sands Leases from Petrovera and failed to pay royalties to Jensen on the Sections 1 and 4 OSL. [62] With respect to Section 3(1)(a)(iii), knowledge of an apparent breach of an agreement to pay royalties would constituteknowledge of conduct that would warrant bringing legal proceedings.

I am satisfied the Jensen had no actual knowledge of these mattersuntil November 2007 when it was brought to Mr Gowertz’s attention by someone in the CNRL land department that Jensen was beingpaid royalties on oil sands production from the

Section 32 OSL but not from the Sections 1 and 4 OSL. The question then becomeswhether Jensen ought to have known about these matters in the circumstances at an earlier date and, if so, when. [63] In Meek, supra, the Alberta Court of Appeal considered how the “ought to have known” test should be applied in the contextof a claim for unpaid royalties under an oil and gas trust agreement, stating at paragraph 21 that “(t)he test for ‘ought to have known’ is that of ‘reasonable diligence’ analyzed in the light of the three s. 3(1)(

a) factors: De Shazo v Nations Energy Co., (2005), 256 DLR (4th)502 (Alta C.A.), 2005 ABCA 241, at para. 28". In that paragraph, the Court articulated the test as being what the claimant knew orwould have been reasonably able to discover: The statute specifies the type of knowledge that must have been available to the claimant in order to trigger the running of the limitationperiod. The claimant must know or have been reasonably able to discover that: (

i) the injury occurred; (ii) the injury was attributable tothe conduct of the defendant; and (iii) the injury warrants bringing a proceeding. [64] Luscar Ltd v Pembina Resources Ltd. (1994), 1994 ABCA 356 , 162 AR 35 (CA) involved a dispute amongst severaloil companies arising out of a failure to give written notice pursuant to an area of mutual interest clause in an operating agreement.

In thatcase, the Alberta Court of Appeal concluded that the limitations defence applied because the corporate plaintiffs had access to all thefacts required to determine that they had a cause of action. [65] The Alberta Court of Appeal in Meek, distinguished Luscar, stating at paras 31 - 33: The second argument concerns the Meeks' responsibility to ensure that the contract was being performed correctly.

San Juan relies onthe following statement from Luscar at para. 131: ... it is the responsibility of a party to monitor its own contract, and put into force such mechanisms as may be required to aid it inidentification of breaches, if it feels such mechanisms are necessary. If not, then it is the risk of the party whose mechanisms are notsufficient.

In Luscar, the respondents were sophisticated oil companies with all the necessary information and documentation in their possession. They attempted to argue, in part, that there was no discoverability because their land department was disorganized. The above passage adverted to their obligation to employ the information they actually had. This case is totally different. The Meeks are well-educated and have some business experience but are not directly part of the oil industry. They lived in the United States, without easy access to material information.

Carrington was well-organized and used the information available to her. Royalty interest holders often do not have ready access to the documentation that would enable them to determine if there is production from a particular well and whether they have been paid the royalty owing on that production. A royalty interest holder is entitled to expect the royalty payor to honour its obligations. Absent clear information to show improper payment, royalty interest holders are not obliged to take positive steps aimed at ensuring that they are being correctly paid.

Although Imperial's new reporting procedures in 2000 made it easy to know what wells were the subject of royalty payments, Carrington did not have up-to-date information from the AEUB that would indicate what wells were in production. In other words, she did not simultaneously have the information that would enable her to put together the two critical pieces of the royalty puzzle.

Nor was she obliged to procure the AEUB reports. (emphasis added) [ 66 ] CNRL submits that Mr Gowertz was an experienced landman who had access to Accumap from at least 2001, that production information was available from the ERCB and that he had access to CNRL mineral files during his employment at CNRL commencing in 2003, that he was receiving a royalty in respect of production from the

Section 32 OSL and that, but for his lack of effort, he would have been reasonably able to discover that the

Section 1 and 4 OSL had been issued, that production had commenced and that he was not receiving any royalties. CNRL argues that the circumstances are distinguishable from those in Meek, supra , due to Mr Gowertz’s sophistication and expertise, and are analogous to those in Luscar, supra . [ 67 ] Mr Gowertz acknowledged that he did not take steps to monitor his royalty rights from 1985 to 1990 and that after he came to understand that he was receiving royalty payments under an oil sands lease with respect to

Section 32, that he did not make inquiries regarding Sections 1 and 4. [ 68 ] Nonetheless, I find the circumstances in this case more analogous to Meek , supra , than to Luscar, supra . While Mr Gowertz was knowledgeable, he was entitled, like any other royalty holder, to expect the royalty payor to honour its obligations. There was no clear information made available to him indicating that the royalty payments were improper. Absent that, a royalty interest holder should not be expected to be required to take positive steps aimed at ensuring that they are being correctly paid.

I do not think it reasonable to suggest that Mr Gowertz should have been expected to utilize his access to CNRL records in the course of his employment with CNRL to monitor whether any royalty payments were potentially owing to him by CNRL. [ 69 ] I find that the Section 3(1) (

a) of the Limitations Act does not preclude Jensen from proceeding with its claim against CNRL for failure to pay royalties on the Sections 1 and 4 OSL. Jensen’s application was commenced on September 18, 2009. To the extent that any royalties are payable, they would be subject to the 10 year limitation period contemplated in section 3(1)(

b) of the Limitations Act . [ 70 ] Jensen is entitled to an accounting from CNRL with respect to unpaid royalties. Jensen is claiming royalties in respect of the Sections 1 and 4 OSL predating CNRL’s acquisition of its interest in the

Section 1 and 4 OSL from Petrovera. Both parties have proceeded on the basis that CNRL would be the successor entity responsible for Kissinger’s royalty obligation to Jensen, in respect of the

Section 1, 4 and 32 GOR Agreements, however, no documentation tracing this chain of responsibility was produced. [ 71 ] The Agreed Statement of Facts states in part: 31. Through it acquisition of assets from Petrovera Resources Inc in January of 2004, CNRL obtained a 100% interest in the

Section 32 OSL and in the

Section 1 and 4 OSL, including all benefits and liabilities associated therewith. That interest was registered by Alberta Energy on May 28, 2004. CNRL continues to hold a 100% interest in both of these OSLs, as continued under the

Section 32 OSL Continuation and the

Section 1 and 4 OSL Continuation. [ 72 ] Its not clear whether the assumption of liabilities by CNRL contemplated in paragraph 31 of the Agreed Statement of Facts, or otherwise, included the obligation to be responsible for any royalties owing to Jensen by CNRL’s predecessors. Until such issues are determined, an accounting is not possible. If the parties are unable to agree on when CNRL’s responsibility for unpaid royalty

obligations would commence, they are at liberty to contact me to arrange to address this issue further. V. Conclusions [ 73 ] CNRL’s claim is dismissed. Jensen is entitled to a declaration that production from Sections 1, 4 and 32 of the Sections 1 and 4 OSL and

Section 32 OSL is subject to Jensen’s GOR Agreements. Jensen is entitled to an accounting from CNRL with respect to the royalties payable thereunder, subject to determining the commencement date for that obligation. Jensen is also entitled to interest on unpaid royalties, in accordance with the Judgment Interest Act , RSA 2000, c. J-2 . [ 74 ] If the parties are unable to agree on costs they are at liberty to arrange to address that issue before me. Heard on the 9 th and 10 th of November, 2011 and the 23 rd day of January, 2012. Dated at the City of Calgary, Alberta this 21 st day of December, 2012. J.

Strekaf J.C.Q.B.A. Appearances: Allan Guty/Scott Watson for the Plaintiff Christian Popowich/Robert Moyse for the Defendant