Encana Corporation v. ARC Resources Ltd., 2013 ABQB 352

Court of Queen ’ s Bench of Alberta Citation: Encana Corporation v. ARC Resources Ltd. , 2013 ABQB 352 Date: 20130618 Docket: 0801 14295, 0801 03861, 0601 12766, 0601 12266, 0601 12267, 0601 14382, 0601 12671 Registry: Calgary Between: Docket: 0601 12766 Encana Corporation Plaintiff Defendant by Counterclaim - and - ARC Resources Ltd. Defendant Plaintiff By Counterclaim Docket : 0601 12266, 0601 12267, 0601 14382 And Between: Encana Corporation Plaintiff - and - Devon Canada Corporation Defendant Docket : 0601 12671 And Between:

Encana Corporation Plaintiff Defendants by Counterclaim - and - Quicksilver Resources Canada Inc. Defendant Plaintiffs by Counterclaim Docket : 0801 03861 And Between: Direct Energy Marketing Limited Plaintiff - and - Encana Corporation Defendant Docket : 0801 14295 And Between: Carbon Development Partnership, Carbon Development Corporation and Encana Corporation Plaintiffs Defendants by Counterclaim - and - ARC Resources Ltd. Defendants Plaintiffs by Counterclaim ______________________________________________________

Reasons for Judgment of the Honourable Mr. Justice G.H. Poelman _______________________________________________________ I. General Introduction [ 1 ] The applicants on these

summary judgment applications hold leases from mineral owners giving them the right to explore for and produce natural gas. The mineral owners who granted the leases do not own title to coal. Those rights were reserved by the original freehold owners and are held by the respondents, Encana Corporation and (in one action) Carbon Development Partnership. The dispute in the actions centres on who has the right to produce coalbed methane from the leased lands: the natural gas owners (or their lessees), or the coal owners. [ 2 ] Fundamental to determining this issue is an amendment to the Mines and Minerals Act [1] made in December 2010, which is now

section 10.1 of that statute. It is useful to set it out in full, given its importance to the issues on these applications. It provides as follows: 10.1(1) Coalbed methane is hereby declared to be and at all times to have been natural gas. (2) Subsection (1) does not affect any conveyance, agreement, agreement for sale, lease, joint venture or any other contract that specifically grants, leases, excludes, excepts or reserves right in land in respect of coalbed methane and that was entered into before the coming into force of this

section by (

a) the owner of the title to natural gas in the land, or any person holding natural gas rights through that owner, and (

b) the owner of the title to coal in the land, or any person holding coal rights through that owner.

(3) The owner of the title to natural gas in any land, and any person holding natural gas rights through that owner, has no right of action and shall not commence or maintain proceedings against the Crown, the owner of the title to the surface of the land or the coal in the land, or any person holding coal rights through the owner of the title to the coal for damages or compensation because of extraction, production or removal of coalbed methane from the land if that extraction, production or removal occurred before the coming into force of this section.

(4) It is deemed for all purposes, including for the purposes of the Expropriation Act , that no expropriation occurs as a result of the enactment of this section.

(5) No person has a right of action and no person shall commence or maintain proceedings (

a) to claim damages or compensation of any kind, including, without limitation, damages or compensation for injurious affection, from the Crown, or (

b) to obtain a declaration that the damages or compensation referred to in clause (

a) are payable by the Crown,

as a result of the enactment of this section. II. Background [ 3 ] These applications must be understood in the context of earlier proceedings in these actions. [2] [ 4 ] Beginning in 2006, a number of actions were commenced which involved the right to produce coalbed methane. The dispute was between the parties holding mines and minerals titles to coal and those entitled, under leases, to produce natural gas. [ 5 ] The Canadian Pacific Railway Company and the Calgary and Edmonton Railway Company (“the Railway Companies”) were granted land in fee simple from the Dominion of Canada early in the 20 th century.

Encana is the successor to the interests of the Railway Companies. [ 6 ] These actions relate to lands conveyed by the Railway Companies to third parties, typically settlers or homesteaders. In some cases, Encana retained fee simple title to all mines and minerals, or at least coal and natural gas. In other cases, when transferring the land it retained only an interest in coal or, in some cases, coal and one or both of petroleum and valuable stone. The applicants in this case hold natural gas leases.

Where Encana (as the Railway Companies’ successor) continues to hold title to coal and natural gas, their lease is from Encana; where Encana holds title only to coal, their lease is from the successor to the party to whom Encana transferred all mines and minerals except coal (sometimes with petroleum and valuable stone). [ 7 ] In the

summary judgment applications before Kent J., it was determined that coalbed methane was a substance granted by Encana to the lessees under their natural gas leases; or, in the technical terms used by the Court of Appeal, the lessees were granted a profit-à-prendre to explore for, win and take whatever natural gas, including coalbed methane, might exist below the surface. [ 8 ] These second

summary judgment applications deal with leases on what are referred to as “split-title lands”: that is, lands for which there are two mineral titles, with the coal title held by Encana and other minerals (including natural gas) held by successors to the original transferees, who have now granted natural gas leases to the applicants. [ 9 ] The applicants argue that the amendment that introduced

section 10.1 into the Mines and Minerals Act applies in these cases as it did in the first

summary judgment applications, and that the principles applied by Kent J. and the Court of Appeal also govern here. Encana argues that there are significant differences that require a trial, and that even if the same principles apply, the court should not grant any relief because some issues will necessarily remain for trial. III. Test for

Summary Judgment [ 10 ] Applications for

summary judgment are governed by Rule 7.3(10) of the Alberta Rules of Court , which provides that grounds for

summary judgment of all or part of a claim may be that there is no defence to a claim or part of it, that there is no merit to a claim or part of it, or that the only real issue is the amount to be awarded. [ 11 ] The parties agree on the legal principles governing

summary judgment applications established in the authorities. Applicants for

summary dismissal must establish that it is “plain and obvious” or “clear” or “beyond real doubt” that the action should be summarily dismissed. [3] When that has been established by the applicants, the evidentiary burden shifts to the respondent to show a genuine issue for trial. [4] In general,

summary judgment should only be granted when the applicant has shown that there is no genuine issue of material fact requiring trial. [5]

[ 12 ] Helpful guidance for the approach to to a

summary judgment application in this type of case was given by the Court of Appeal as follows: There are, however, other types of

summary judgment applications. In some cases the facts are clear and undisputed. The ultimate outcome of the case may depend on the

interpretation of some statute or document, or on some other issue of law that arises from undisputed facts. In such cases the test for

summary judgment is not whether the issue of law is “beyond doubt”, but whether the issue of law can fairly be decided on the record before the court. If the legal issue is unsettled or complex or intertwined with the facts, it is sometimes necessary to have a full trial to provide a proper foundation for the decision. In other cases it is possible to decide the question of law summarily [citing authority]. [6] IV. Pleadings [ 13 ] The respondents in these applications, Encana and Carbon, are represented by the same counsel.

Their pleadings in the various actions are for purposes relevant to these applications the same, with differences as necessary to reflect ownership particulars on various lands. For convenience, I will use the pleadings in the action commenced by Encana against Quicksilver as representative of the pleadings. [ 14 ] Encana’s Statement of Claim alleges that CPR received the land from the Dominion of Canada in 1901, and Encana is the successor to CPR as owner of coal underlying the lands.

Further, CPR transferred, on different dates, parcels of the lands to others, “excepting and reserving unto itself all coal.” [ 15 ] Encana pleads that Quicksilver drilled a well bore on the lands; “perforated the well bore into the plaintiff’s coal” without consent; “is capturing and taking substances that are the property of Encana, in particular coalbed methane which is part of its coal”; and “has been unjustly enriched in consequence of that capture and taking with [Encana] suffering a corresponding deprivation.” [ 16 ] As a remedy, Encana requests declarations that Quicksilver is in trespass to and has converted “the subject coal, coal strata and coalbed methane,” an accounting, and damages. [ 17 ] Responding to Quicksilver’s defence, Encana pleads that, where Quicksilver’s lease was from Encana as the owner of both coal and natural gas, “Quicksilver has no entitlement to coalbed methane as that substance was not conveyed; it was excepted or reserved from the lease as ‘coal’ or gas from coal.” Where Quicksilver’s lease was from a successor to the settler to whom CPR conveyed mineral rights other than coal, Encana pleads that “Quicksilver has no entitlement to coalbed methane as that substance could not be and was not conveyed; it was accepted or reserved from the transfer [of land] as ‘coal’.” [ 18 ] In some actions, Encana filed further pleadings addressing arguments based upon section 10(1) of the Mines and Minerals Act .

To the extent relevant to these applications, those pleadings assert that the parties did not agree “that the substances leased, excepted or reserved would be determined by reference to statute,” and that “the instruments ... reserved or excepted the coal formation and all substances therein, including gases producible from the coal, or the parties to the instruments specifically reserved ‘coalbed methane’.” [ 19 ] In one of the actions, Encana is a defendant at the instance of Direct Energy, who seeks a declaration that as a lessee, it has been granted the rights to natural gas, including coalbed methane.

Encana’s responding pleadings are in substance the same as those in actions it commenced. V. First

Summary Judgment Applications A. Queen ’s Bench Decision [ 20 ] Kent J. heard

summary judgment applications seeking declarations, where the applicant lessees held natural gas leases granted by Encana as the holder of mines and minerals titles to both coal and natural gas. She granted the applications for

summary judgment that

coalbed methane was a substance granted to the lessees (para. 70). [ 21 ] She began her analysis by reviewing the parties’ positions. She found the applicants’ argument that “the owner of natural gas owns the CBM”, or coalbed methane (para. 35), based on a statutory

interpretation of

section 10.1, aided by statements in the legislature, to be persuasive on a preliminary basis. [ 22 ] She then reviewed the respondents’ arguments at length, to determine whether they raised a doubt as to the correctness of her preliminary

interpretation of

section 10.1 so that

summary judgment should not be granted (para. 36). The following is a

summary of the arguments she addressed, to the extent relevant to those arguments still alive on these second

summary judgment applications:

a) Section 10.1's declaration that all coalbed methane is natural gas does not affect ownership. Legislation that has the effect of declaring that one person owns a resource and another does not must state both positions. The legislation does not say coalbed methane is not coal; and therefore, as it is gas from coal and is bound up in coal in situ , when coal is reserved in the leases the leases exclude coalbed methane.

b) The Borys [7] holding that natural gas in liquid form or dissolved in oil at initial reservoir conditions belongs to the petroleum rights holder rather than natural gas rights holder means that coalbed methane in situ belongs to the coal owner.

c) Pursuant to common law property principles, a reservation and exception of coal reserves a right of property and absolute ownership over the stratum or strata containing the coal, and is not merely a right to enter the lands to win the minerals.

d) Coal owners could not have intended to grant a lease that would reduce the value of their estate. Coalbed methane extraction by a natural gas lessee would damage the overall value of the coal asset by, among other things, interfering with the coal owner’s ability to undertake gasification projects and even traditional coal mining. [ 23 ] Kent J. dismissed all of these arguments. She found that

section 10.1 of the Mines and Minerals Act deals with ownership, based at least in part on the Minister of Energy’s statement in the legislature. She found that the intention of lessors is irrelevant, because “the legislature has declared, in effect, that by leasing natural gas they also leased CBM” (para. 60). The Borys and stratum analyses were irrelevant to a proper construction of the plain wording of

section 10.1. Finally, she held that an effective reservation of CBM under

section 10.1(2) required a reservation of coalbed methane specifically, not merely “coal.” B. Court of Appeal Decision [ 24 ] The Court of Appeal, in a memorandum of judgment, summarized its decision by finding that Kent J. did little more than apply the legislation to the leases, and found no error (para. 1). [ 25 ] It stated the issue as “one of lease entitlement: does a lease of petroleum and natural gas except coal grant the lessee the natural gas contained in the coal, i.e., the coalbed methane?” (para. 13).

It agreed with Kent J.’s decision that the declaration of the legislature meant it no longer matters what the parties intended to lease or reserve when the lease was entered into (para. 15).

Section 10.1 meant that a lessee of natural gas has the right to recover coalbed methane, unless it expressly excluded coalbed methane. [ 26 ] The Court of Appeal did not purport to deal with the actions in their entirety. In its words: That is not to say, however, that the chambers judge’s order is dispositive of all the matters raised by the appellants in the litigation. Other issues remain to be addressed, and yet other issues may arise in the future as between concurrent estate owners. The order on appeal (and these reasons) do not address those issues. [para. 21]

VI. Coalbed Methane Rights Under Split Titles [ 27 ] The respondents argue that the decisions on the first

summary judgment applications do not apply to these applications, and that there is at least sufficient doubt about how

section 10.1 of the Mines and Minerals Act would apply in this instance, so that

summary judgment should not be granted. [ 28 ] It is correct that the prior decisions in Queen’s Bench and the Court of Appeal do not necessarily apply here. The rights of the lessees on these applications were not before those courts. That does not mean the principles of those decisions have no application. [ 29 ] The transfers of land conveyed all of the Railway Companies’ estate and interest in the lands, excepting and reserving coal, sometimes with either or both of petroleum and valuable stone.

It is not disputed that title to the natural gas was transferred as part of these conveyances. [ 30 ] The transferees (or their successors), now owners of title to natural gas, then granted leases to the applicants. The question is whether coalbed methane rights as between the lessees and the coal owners, who have no contractual relationship, is different than where the coal owners leased natural gas rights directly to the lessees. [ 31 ] In my view, the issue turns on how

section 10.1 applies to a transfer of land between the respondents and the transferees from whom the applicants hold their leases. The plain wording of the

section does not support an

interpretation that depends on whether the coal owner is a lessor or a transferor to the lessor. The declaration in

section 10.1(1) is stated in the most general terms. The proviso in

section 10.1(2) dealing with specific exceptions or reservations applies to “any conveyance, agreement, agreement for sale, lease, joint venture or any other contract.” [ 32 ] Kent J. and the Court of Appeal both held that for a coal owner to hold coalbed methane rights, the instrument must specifically reserve coalbed methane. A reservation of coal is not enough: Kent J., para. 63; Court of Appeal, para. 16. With respect, I agree than no other conclusion is consistent with the plain words of the statute. [ 33 ] Further, absent express statements, the nature of the instrument itself is of little significance.

When construing mineral rights, the words of the deed are more important than the character of the deed. [8] [ 34 ] It remains to consider whether by not expressly transferring natural gas in the transfer of land, but rather making a general conveyance excepting only coal, a different result should obtain. That argument, advanced to some extent by the respondents, is in my view untenable. If title to natural gas was conveyed (which it indisputably was), then the fact that it was not specifically listed in the transfer of land is irrelevant. Title to natural gas passed and, as declared by

section 10.1(1), so did title to coalbed methane. [ 35 ] However, the respondents argue that it is at least a triable issue whether

section 10.1 addresses “ownership”; or that issues of “concurrent ownership” must be determined at trial. [ 36 ] In my view,

section 10.1 is clearly directed at resolving issues of ownership. The statement in subsection (1) that “coalbed methane is hereby declared to be and at all times to have been natural gas” must be read in light of the provisos in subsections (2) and (3), which mitigate some of the consequences of the declaration for owners of title to coal in the land and owners of title to natural gas in the land. Reading the

section as a whole, the only sensible

interpretation of subsection (1) is that coalbed methane is owned by the owner of title to natural gas in the land. [ 37 ] That was the conclusion reached by Kent J. (para. 50), based in part on her reading of the legislative record. I agree that the record of debates unequivocally supports the conclusion that the amendment was intended to “clarify” and “provide certainty” for coalbed methane ownership. However, in this case that intention can also be found by the plain words of the statute.

[ 38 ] The purpose of the legislation being to deal with ownership, and indeed to clarify and provide certainty to issues of ownership as between those holding title to coal and those holding title to natural gas, I cannot accept the contention that other words should have been used to parallel ownership provisions elsewhere in the statute, or in other statutes; nor the argument that the legislature had to say that both coalbed methane is natural gas, and that it is not coal. [ 39 ] Those arguments were addressed and dismissed by Kent J., with whose view I respectfully agree.

It is always possible to come up with more exact, comprehensive words that might have been used. Their absence cannot defeat a reasonable, purposive

interpretation of the words that were used. To suggest that by declaring coalbed methane “to be and at all times to have been natural gas” the legislature left open the possibility that it might also be coal deprives the amendment of any meaning or purpose. [ 40 ] The respondents also submit that because Kent J. and the Court of Appeal left alive other issues that may arise, including those between “concurrent estate owners,”

summary judgment should not be granted on these applications. However, I am satisfied that in light of my finding on the effect of the transfers of land, there are no “concurrent estate” issues different from those on the first

summary judgment applications. [ 41 ] In both cases, the dispute is between natural gas lessees and the coal owner. In both cases, their rights are determined by

section 10.1 , applied to the words of the grant of natural gas rights and the substances excepted and reserved. Encana’s claims in trespass, conversion and unjust enrichment do not depend on whether the lessee takes its natural gas rights from Encana or from an owner of natural gas title who took a conveyance from Encana. [ 42 ] In light of

section 10.1, when Encana transferred title to natural gas and obtained a “re-grant” of its coal (which is the effect of a reservation [9] ), it must have granted the right to recover coalbed methane notwithstanding the coal reservation. [ 43 ] Neither Kent J. or the Court of Appeal said that other issues could not be decided summarily. They did not decide them because they were not part of the first

summary judgment applications. [ 44 ] In short, I am satisfied that the natural gas leases held by the applicants granted them the rights to coalbed methane in the leased lands. VII. Competing Interests [ 45 ] Encana argues that, even if the applicants are lessees of coalbed methane rights,

summary judgment should not be granted because issues of trespass, conversion, compensation and “where to draw the line” between activities of coal owners and coalbed methane lessees must be determined. I am not persuaded by these arguments. [ 46 ] In its pleadings, Encana alleges causes of action based on it owning the coalbed methane. I have found that Encana’s transferees (or successors) have title to coalbed methane, and have granted rights under lease to explore for, win and take whatever coalbed methane may exist on the lands.

As a result, the actions in trespass, conversion and unjust enrichment are bound to fail. [ 47 ] Encana also argues that even if the lessees have the right to recover coalbed methane, exploitation of that right will harm the value of the coal estate. Again, this was a point argued before Kent J., and I respectfully agree with her dismissal of the argument (implicitly concurred in by the Court of Appeal). There are several reasons why this argument does not assist Encana in opposing the

summary judgment applications. [ 48 ] The authorities have repeatedly found that holders of mineral rights are entitled to extract those rights, even if there is interference with and wastage of another’s mineral rights. [10] [ 49 ] Encana has not pleaded that the lessees have acted outside of reasonable natural gas production practices; as I have said, that is

not what these actions are about. [ 50 ] Furthermore, the legislature has implemented a regulatory scheme to address disputes that arise because of concurrent ownership. The Energy Resources Conservation Board is charged with the responsibility of effecting the purposes of the Energy Resource Conservation Act and other legislation [11] .

The purposes of the Energy Resources Conservation Act include “to effect the conservation of, and to prevent the waste of, the energy resources of Alberta” and “to secure the observance of safe and efficient practices in the exploration for, processing, development and transportation of the energy resources of Alberta.” [12] [ 51 ] The Coal Conservation Act [13] , also within the purview of the Board, has purposes that relate to the concerns about concurrent ownership raised by the respondents.

Section 4 provides as follows: Purposes of Act 4 The purposes of this Act are (

a) to provide for the appraisal of Alberta’s coal resources; (

b) to provide for appraisals of coal requirements in Alberta and in markets outside Alberta; (

c) to ensure orderly, efficient and economic development of Alberta’s coal resources in the public interest; (

d) to effect conservation, and prevent waste, of the coal resources of Alberta; . . . (

f) to ensure the observance of safe and efficient practices in (

i) the exploration for, and the mining, storing, processing and transporting of, coal, and (ii) in situ coal gasification and in situ coal liquefaction [.] [. . .] [ 52 ] To similar effect are the purposes of the Oil and Gas Conservation Act [14] , also administered by the Board, as set out in

section 4: Purposes of Act 4 The purposes of this Act are (

a) to effect the conservation of, and to prevent the waste of, the oil and gas resources of Alberta; (

b) to secure the observance of safe and efficient practices in the locating, spacing, drilling, equipping, constructing, completing, reworking, testing, operating, maintenance, repair, suspension and abandonment of wells and facilities and in operations for the production of oil and gas or the storage or disposal of substances; (

c) to provide for the economic, orderly and efficient development in the public interest of the oil and gas resources of Alberta; (

d) to afford each owner the opportunity of obtaining the owner’s share of the production of oil or gas from any pool; [. . .] [ 53 ] The types of concerns raised by the respondents about concurrent ownership of coal and coalbed methane (held under natural gas title) come within the jurisdiction of the Board, both under its general enabling statute and the statutes specifically dealing with coal and oil and gas.

VIII. Relief [ 54 ] The relief sought in the applications may be summarized as follows: (

a) Quicksilver seeks

summary dismissal of Encana’s claim; (

b) ARC seeks a

summary judgment declaring that the transfers of lands by the Railway Companies included transfer of the rights to coalbed methane, and that the leases of natural gas rights were effective to grant ARC the right to win, work and recover coalbed methane; (

c) Devon seeks

summary judgment declaring that the transfers of lands from the Railway Companies included transfer of the rights to coalbed methane, and dismissing Encana’s claims against Devon; and (

d) Direct Energy seeks

summary judgment declaring that the Railway Companies transferred the rights to coalbed methane to the land owners from whom Direct Energy has taken natural gas leases. [ 55 ] For reasons given above, I find that there is no genuine issue of material fact requiring a trial of the matters raised in the applications, and that the issues of law that are raised can fairly be decided on the record before the Court. Therefore, I grant the relief requested in each of the

summary judgment applications argued before me. [ 56 ] The parties have leave to speak to any matters that arise from these reasons for judgment, including the matter of costs, if they are unable to agree. Heard on the 11 th and 12 th day of April, 2013. Dated at the City of Calgary, Alberta this 18 th day of June, 2013. G.H. Poelman J.C.Q.B.A. Appearances: C. Popowich for Encana Corporation and Carbon K.L. Reiffenstein

for Encana Corporation and Carbon C. Harris for Encana Corporation and Carbon J.T.R. Flower for Encana Corporation and Carbon G.G. Baugh for Encana Corporation and Carbon K.A. Salmon for ConocoPhillips Canada L.A. Cusano for Devon Canada Corp. E.J. Dickinson for Devon Canada Corp. S.E.D. Fairhurst for Quicksilver Resources Canada Z. Thoms for Quicksilver Resources Canada P.T. Linder, Q.C. for Direct Energy Marketing J.P. Peacock, Q.C. for ARC Resources Ltd. and Direct Energy Marketing J.C. Price for ARC Resources Ltd. and Direct Energy Marketing [1]R.S.A. 2000, c. M-17. [2]Encana Corporation v.

ARC Resources Ltd., 2011 ABQB 431, 523 A.R. 431 (Kent J.), aff’d 2012 ABCA 271, 536 A.R. 199. [3]Tottrup v. Clearwater (Municipal District No. 99), 2006 ABCA 380, 401 A.R. 88, para. 10. [4]Tottrup, para. 10. [5]Guarantee Company of North America v. Gordon Capital Corporation, (SCC), [1999] 3 S.C.R. 423, para. 27 [6]Tottrup, para. 11. [7]Borys v. Canadian Pacific Railway, (UK JCPC), [1953] A.C. 217, [1953] 2 D.L.R. 65 (P.C.).

[8]Alberta Energy Company Ltd. v. Goodwell Petroleum Corporation Ltd., 2003 ABCA 277, 339 A.R. 201, paras. 53, 61 and 62. [9]Alberta Energy Company Ltd. v. Goodwell Petroleum Corporation Ltd., paras. 47 to 49. [10]Alberta Energy Company Ltd. v. Goodwell Petroleum Corporation Ltd., paras. 35 and 36, 46, 50 to 65, and 72 to 85; quoting andrelying on Borys; and Anderson v. Amoco Canada Oil and Gas (1998), 1998 ABQB 620 , 225 A.R. 277 (QB), varied 2002ABCA 162, 312 A.R 116, aff’d 2004 SCC 49, [2004] 3 S.C.R. 3. [11]Energy Resources Conservation Act, R.S.A. 2000, c. E-10, ss.16 and 20. [12]Ibid., s. 2(

c) and (e). [13]R.S.A. 2000, c. C-17. [14]R.S.A. 2000, c. O-6.