P. Burns Resources Limited Plaintiff/Respondent - v. -, 2013 ABQB 129

Court of Queen ’ s Bench of Alberta Citation: P. Burns Resources Limited v Locke, Stock & Barrel Company Ltd., 2013 ABQB 129 Date: 20130318 Docket: 1001 18914 Registry: Calgary Between: P. Burns Resources Limited Plaintiff/Respondent - and - Locke, Stock & Barrel Company Ltd. Defendant/Appellant _______________________________________________________ Reasons for Judgment of the Honourable Madam Justice S.M. Bensler _______________________________________________________ Appeal from the Oral Decision of K.R. Laycock, Master in Chambers on March 16, 2012 Introduction

[ 1 ] This is an appeal from the decision of Master Laycock, granting partial

summary judgment to the Respondent, P. Burns Resources Limited ("P. Burns"), on March 16, 2012. Master Laycock declared that a petroleum and natural gas lease held by the Appellant, Locke, Stock & Barrel Company Ltd. ("LSB"), dated December 19, 1984 (the "Lease") had terminated according to its terms. P. Burns was awarded partial

summary judgment with only the issue of damages to be determined at trial. Background [ 2 ] P. Burns is the owner of all mines and minerals other than coal under Meridian 5, Range 3, Township 26,

Section 13 ("Section 13"). LSB is the successor in interest to the Lease entered into on December 19, 1984, between P. Burns and Mont Resources Limited for the production of petroleum, natural gas and related hydrocarbons on

Section 13. LSB acquired a working interest in and became the operator of a well located on the North East Quarter of

Section 13 ("the Well") on April 1, 2007. [ 3 ] The Lease provides that after the expiration of the one-year primary term, cessation of production for a period of more than 90 days would terminate the Lease except in limited circumstances.

Specifically, the third proviso to the habendum clause in the Lease states: If at any time after the expiration of the said term production of the Leased substances has ceased and the Lessee shall have commenced further drilling or working operations within ninety (90) days after the cessation of said production, then this Lease shall remain in force so long as any drilling or working operations are prosecuted with no cessation of more than ninety (90) consecutive days. (...) If drilling or working operations are interrupted or suspended as the result of any cause whatsoever beyond the Lessee's reasonable control or if any well on the said lands or on any spacing unit of which the said lands or any portion thereof form a part, is shut-in, suspended or otherwise not produced for any cause whatsoever which is in accordance with good oil field practice, the time of such interruption or suspension or non-production shall not be counted against the Lessee. [ 4 ] P.

Burns alleged two periods where production had ceased for more than 90 days, one throughout October, November and December of 2007, the other between March and August of 2008. [ 5 ] LSB's corporate records showed no oil production and no servicing of the Well for the October, November and December 2007 period, and Alberta Energy and Utility Board records also showed no production or hours of production for that period. [ 6 ] Master Laycock accepted the evidence of Mr. Locke, president of LSB, however that small quantities of oil were generated in October of 2007.

Though he cited the Alberta Court of Appeal's decision in Omers Energy Inc. v Alberta , 2011 ABCA 251 at para 59 , where the Court interpreted the word "produce" in an oil and gas contract as synonymous with "produce in payable quantities", Master Laycock ultimately held that he could not grant

summary judgment in relation to the period in October, November and December of 2007 due to some evidence of production supporting LSB's position. [ 7 ] Master Laycock, however, found there was no evidence of "production" (i.e. oil reaching the surface) in the months of April, May, and June of 2008.

He also found no evidence of "working operations" (i.e. meaning work or real efforts directed at the production of oil) from March 2008 until July 23, 2008, when a ring gear kit was installed. [ 8 ] Because there was no production of working operations during April, May or June of 2008, Master Laycock concluded that it was plain and obvious there was no genuine issue for trial with respect to the production or working operations questions, and issued

summary judgment in favour of P. Burns. [ 9 ] LSB appeals Master Laycock's decision, arguing he erred in concluding that Mr. Locke's evidence failed to raise a genuine issue as to the production and working operations. LSB also submits that new evidence added to the record on this appeal from LSB pumper Mr. Ferner and expert Mr. Anderson a petroleum engineer makes it clear that the P. Burns has not satisfied the test for

summary judgment.

[ 10 ] The Respondent argues that Master Laycock found, correctly, that on the evidence produced by LSB, it was plain and obvious LSB could not succeed at trial, and that the Lease terminated in accordance with its terms. Law

i) Standard of Review [ 11 ] Rule 6.14 of the Alberta Rules of Court , Alta Reg 124/2010, governs appeals from a Master's judgment. Specifically, subrules 6.14(3) and 6.14(4) state:

(3) An appeal from a master's judgment or order is an appeal on the record of proceedings before the master and may also be based on additional evidence that is, in the opinion of the judge hearing the appeal, relevant and material.

(4) The record of proceedings is (

a) the application before the master, (

b) affidavits and other evidence filed by the parties respecting the application before the master, (

c) any transcript of proceedings before the master, which must be ordered and paid for by the appellant, unless the Court determines, or the parties agree, that transcripts are not needed, and (

d) the master's judgment or order and any written reasons given for the decision. [ 12 ] An appeal from a Master's decision is a de novo hearing and the standard of review is one of correctness ( Bacheli v Yorkton Securities Inc , 2012 ABCA 166 at para 3 , 524 AR 382). The Judge may exercise any discretion anew and substitute their own views for that of the Master. [ 13 ] Subrule 6.14(3) clearly provides that new evidence is admissible if it is relevant and material. The Rule is clear, and is a continuation from the former rules ( Gudzinski Estate v Allianz Global Risks US Insurance Co. , 2012 ABCA 5 at paras 21-22 , 519 AR 215). [ 14 ] The test on an application for

summary judgment is equally clear: an application for

summary judgment requires the applicant to prove there are no genuine issues to be tried ( Gayton v Lacasse , 2010 ABCA 123 at para 10 , 482 AR 179 [ Gayton ]).

Summary judgment may only be granted on legal issues and where the facts are undisputed. As the Alberta Court of Appeal stated at para 13 of Gayton , "summary judgment is not the place to resolve disputes on material facts". [ 15 ] The Respondent to a

summary judgment application also has obligations. This Court quoted from Degroote v Canadian Imperial Bank of Commerce , 18 OTC 93, 1996 CarswellOnt 4244 , in Bank of Montreal v Jarjoura , 2010 ABQB 103 at para 63 , on the evidence required to defeat an application for

summary judgment: In order to resist a motion for

summary judgment, a responding party has an obligation to put his or her 'best foot forward' and must adduce coherent evidence with an organized set of facts showing a real issue to be tried on admissible evidence. ii) No production [ 16 ] Oil and gas leases are to be interpreted according to the plain and ordinary meaning of the terms, unless doing so would result in an absurdity (Freyberg v Fletcher Challenge Oil & Gas Inc. , 2005 ABCA 46 at para 57 , 363 AR 35 [ Freyberg ]).

[ 17 ] As stated, the Lease provides that cessation of production for a period of 90 days will terminate the Lease. Canadian case law in this area is clear: "when a lessee does not perform - in the sense of drilling, paying, or producing - and any term is dependent on such performance, the lease terminates" ( Freyberg at para 58 ). [ 18 ] Here, the parties dispute the level of production required to comply with the Lease. P.

Burns relies on Omers Energy Inc. v Alberta , 2011 ABCA 251 , 513 AR 292, in which the Alberta Court of Appeal reviewed a decision of the Energy Resources Conservation Board, and held that "(t)he Board did not err in finding that the phrase "capable of producing the leased substances" means the "demonstrated, present ability of a well on the lands to produce the leased substances in a meaningful quantity within the time frames contemplated in the lease"." [ 19 ] I note however that the Lease does not contain the phrase "capable of producing the lease substances." Instead, the habendum clause speaks merely of "production".

Since the plain and ordinary meaning of the terms is what a court must rule on, minor changes in the terms of a lease may have an effect. [ 20 ] LSB refers to John Ballem's influential text, The Oil and Gas Lease in Canada , 4th ed. (Toronto: University of Toronto Press Incorporated, 2008) and a decision of the Saskatchewan Court of Queen's Bench, Montreal Trust Co. v Williston Wildcatters Corp. , 2001 SKQB 360 [ Williston Wildcatters ], aff'd 2002 SKCA 91 , 223 Sask R 276). [ 21 ] Specifically, LSB points to Ballem at p. 154, where he states that in contrast to American jurisprudence, Canadian courts have been reluctant to "include any economic or volume conditions" on terms in oil and gas leases involving production.

He adds that "if an operator is prepared to physically produce a well (...), it is submitted that a Canadian court would hold that the ‘are produced’ test had been met." In other words, minimal production is sufficient to comply with the production provisions of an oil and gas lease. [ 22 ] Ballem's analysis seems to be confirmed by the trial level decision in Williston Wildcatters .

In that case, the Court of Queen's Bench found that the production of only 0.6 cubic metres of oil and 1.6 cubic metres of water in each of the three months in which the plaintiffs alleged breach was sufficient to continue the terms of the lease (at paras 27 and 32). iii) No operations [ 23 ] The third proviso to the habendum of the Lease provides that even if production ceases, the Lease will continue if further drilling or working operations occur within 90 days. [ 24 ] In Kensington Energy Ltd. v B & G Energy Ltd. , 2008 ABCA 151 , 432 AR 141 [ Kensington ], the Alberta Court of Appeal considered the effect of wording pertaining to "working operations" similar to that in the Lease.

At para 21, the Court held: It is also useful to consider the function of the third proviso. It applies in two circumstances that may occur at or after the end of the primary term: when there is no production at the end of the primary term on the leased lands or on lands with which the lands are pooled, but the lessee is engaged in drilling or working operations, or if, after the end of the primary term, production has ceased but is followed by drilling or working operations within 90 days.

In both circumstances the Lease remains in effect so long as there is no cessation of drilling or working operations for more than 90 days. A sub-proviso at the end of this third proviso has the effect of not counting time against the lessee if operations are interrupted or suspended as a result of a cause beyond the lessee's control, or if any well on the lands or on a spacing unit of which the lands form a

part is shut-in in accordance with good oil field practice. The latter portion of the sub-proviso to the third proviso is central to this case. [ 25 ] In contrast to my reading of the case law on production, to establish "working operations" requires a lessee to expend more than a bare minimum of effort.

[26] Williston Wildcatters is the most helpful case in this regard. At para 49, the Court stated: "In my opinion, the phrase "workingoperations" and the prosecution of them as contemplated by the habendum clause must be activities which are directed to bringing aboutthe production of oil". The Court noted two attempts to thaw the flow line over the period of inactivity, but found at para 50 that theseattempts "were isolated acts, widely spaced in time and pursued only briefly.

They can best be described as minimal and futile." [27] The Court of Appeal agreed, noting at para 21 of its decision: As the respondent put it, the lease was directed toward the production of the oil, the relationship between the parties centered on theproduction of oil and the

interpretation, in that context, of "working operations" as something more than merely casual general work orthinking about the well was correct. The trial judge rejected correctly the argument put forth by one of the witnesses for the appellantsthat "everything has something to do with oil production any time you work on it". In the context of this agreement, in my view, he didnot err in law or commit any palpable and overriding error of fact. iv) Interruption for any cause outside the lessee's control or in accordance with good oilfield practice [28] The parties failed to provide any case law on courts'

interpretations of the meaning of "any cause outside the lessee's control"or "in accordance with good oilfield practice". The case law is sparse in this area. I can find no decision analysing the meaning of a causeoutside the lessee's control and only several cases on the meaning of good oilfield practice.

What case law exists is not particularlyhelpful. [29] For example, in Novalta Resources Ltd. v Ortynsky Exploration Ltd., (AB KB), 151 AR 161 at para 70, 18Alta LR (3d) 4, this Court held that the Defendant could not rely on the good oilfield practice clause to recoup shared expenses for aroad upgrade project that was an imprudent expenditure because the road was desired by and suited the Defendant's purposes. [30] In Durish v White Resource Management Ltd., (AB KB), 82 AR 66 at para 14, 55 Alta LR (2d) 47, aff'd1988 ABCA 368 , 63 Alta LR (2d) 265, this Court held that the failure of a lessee to resolve a dispute arising over transmissionand processing fees was not in accordance with good oil field practice. [31] Finally, in Canadian Superior Oil Ltd. v Crozet Exploration Ltd., (AB KB), 34 AR 256 at para 45, 18 AltaLR (2d) 145, this Court held that prior to the expiration of the primary term, good oilfield practice requires a producer to take a numberof preparatory steps with "reasonable diligence and dispatch". [32] While none of these cases are directly on point, I note that good oilfield practice appears to be a highly factual area in whichcourts will consider the knowledge and expectations of the parties, as well as their actions and omissions.

Application [33] On appeal, I have considered new evidence from Mr. Ferner, the "pumper" in charge of the Well, and from Mr. Anderson,who advised LSB on the operation and management of the Well. [34] I have also considered the evidence before Master Laycock. [35] On the issue of lack of production, I find that in light of the new evidence of Mr. Ferner, there was no production during bothperiods: October, November and December of 2007, and between March and August of 2008. [36] According to the new evidence of Mr.

Ferner, there was no production from the Well during the months of October,November and December 2007. This is consistent with the amount of production reported by LSB to the Alberta Energy and Utilities

Board: for each of these months, LSB reported production of 0.0m³ of oil. In particular, I note that LSB Monthly Production Records show no production for October, November and December 2007. While the Record for October shows an small increase in inventory from 4.4m³ to 4.5m³, Mr. Ferner insisted there was no production that month and the Record shows no production. He has, as stated by counsel for P.

Burns, the only firsthand knowledge of production and operations at the Well. [ 37 ] As for the second period of no production, between March and August of 2008, I agree with Master Laycock that there was in fact no production during this time. Referring again to LSB Monthly Production Records for this time period, the Records show reported production of 0.0m³ of oil for the months of March, April, May, June, July and August 2008.

Although the Well level shows minor changes during some of the months (March, April and July), LSB's own records show no production at all. [ 38 ] I do not have to consider whether to apply the Omers standard advanced by P. Burns or the more restrictive standard advanced LSB. The LSB’s Monthly Production Records show no production during both of the contested periods. Whether I determine the production issue based on economic and volume conditions or not, the result is the same: there was no production at all. [ 39 ] The next issue is whether the Lease is saved by LSB performing "working operations".

It is clear from Kensington , not to mention the plain reading of the Lease, that if LSB was conducting working operations on the Well, the Lease would survive an interruption in production. I find however, that LSB was not performing working operations as Well operations were minimal attempts that were not actively directed at the production of oil. [ 40 ] Mr. Ferner was the individual responsible for monitoring production and operations on the Well. For this reason, his evidence is most relevant to the issue of working operations on the Well. Mr.

Ferner stated in the cross-examination on his affidavit that he occasionally turned the pump on and off, adding diesel and tapping the Well, from May through September 2007. [ 41 ] When Mr. Ferner found the Well was not producing on October 8 however, he decided to merely leave the pump running for the next 11 days. He returned on October 19 and shut down the Well. Over the next two months, Mr. Ferner did nothing more than to shut down and start up the Well occasionally. I note that within five days of repairing the pump on January 17, 2008, LSB was once again able to produce.

LSB could have repaired the pump at any point during the period of no production but chose not to. Its efforts during this time were minimal and not directed at the production of oil. Accordingly, I find that it was not engaged in working operations on the Well during October, November or December 2007. [ 42 ] For the period between March and August of 2008, Mr. Ferner periodically turned the Well pump on and off but did little more. Additionally, LSB's own records show no well servicing activity between March and July of 2008.

On July 23, 2008 a ringgear starter kit was finally installed in an effort to increase production. I find no working operations on the Well from March 2008 until the ringgear starter kit was installed on July 23. [ 43 ] As noted, there is little case law on what constitutes good oilfield practice. However, the lack of production and working operations for two extended periods of time cannot consist of good oilfield practice. While Mr.

Anderson stated that LSB's efforts were all in accordance with "good oilfield practices" and "standard for these types of wells, in order to maintain production," his opinion was generalized and not directed to the particular operations carried out by Mr. Ferner on the Well. [ 44 ] Finally, I do not find that the failure to produce was the result of "any cause outside the lessee's control". Neither the pump malfunctions referred to in the Cross-examination of Mr.

Locke nor the elevated concentration of wax and acetate found in the oil are the type of event that allows a lessee to disregard its obligation to produce. The lack of production was not caused by anything outside LSB's control, but by its inattentiveness to the Well conditions. Conclusion [ 45 ] LSB failed to produce or carry on working operations for two periods over 90 days, one throughout October, November and December of 2007, the other between March and August of 2008. The failure to produce was not the result of a cause outside LSB's control or in accordance with good oilfield practice.

[ 46 ] I find therefore that the Lease terminated at the end of the first period of non-production by January 1, 2008. [ 47 ] If counsel are unable to agree on costs, they may appear before me within 60 days. Heard on the 12 th day of September, 2012. Dated at the City of Calgary, Alberta this 18 th day of March, 2013. S.M. Bensler J.C.Q.B.A. Appearances: S.B. Gavin Matthews Peacock Linder & Halt LLP for the Plaintiff/Respondent Peter S. Jull, Q.C. and Laura Easton Davis LLP for the Defendant/Appellant