Enerplus Corporation v Harvest Operations Corp, 2021 ABQB 634

Court of Queen’s Bench of Alberta Citation: Enerplus Corporation v Harvest Operations Corp, 2021 ABQB 634 Date: 20210811 Docket: 2001 07798 Registry: Calgary Between: Enerplus Corporation Plaintiff - and - Harvest Operations Corp., Orlen Upstream Canada Ltd., and Petrus Resources Corp. Defendants _______________________________________________________ Reasons for Decision of J.T. Prowse , Master in Chambers _______________________________________________________ [ 1 ] The plaintiff Enerplus sues for unpaid royalties. One of the defendants, Harvest, applies for

summary dismissal of the claim against it. [ 2 ] For the reasons which follow I summarily dismiss Enerplus’ claim against Harvest. Background

[ 3 ] Under a 1998 joint operating agreement, Kaiser Energy Ltd. held a 70% working interest in petroleum and natural gas rights in the subject lands.

Petro-Canada held the other 30% working interest. [ 4 ] Petro-Canada’s 30% working interest was transferred from time to time so that now the defendant Petrus holds 15% and the defendant Orlen holds 15%. [ 5 ] Kaiser’s 70% working interest is now held by Harvest. [ 6 ] Prior to Harvest acquiring that 70% working interest (via its predecessor Krang), Enerplus held it. [ 7 ] Enerplus transferred its 70% working interest to Harvest’s predecessor under a 2005 Farmout agreement. Enerplus retained a royalty. It is that royalty which Enerplus says is unpaid.

Independent Operations Notice [ 8 ] Under the relevant operating procedure, when a working interest owner gives an “Independent Operations Notice” (ION) proposing to drill a new well, the other working interest owners have the option of participating, by committing its capital to pay for its share of the new well. If it choses not to participate, it does not share in the royalties under the new well until a defined volume of production from the new well has been achieved.

This is referred to as a ‘penalty period’ for the non-participating owner. [ 9 ] The reverse side of the coin is that any owner participating in the new well is allowed a reward for risking its capital. If the new well is successful the participating owners get all the production revenue from the new well until a certain production threshold is met. Thereafter the production revenue reverts to the previous 70/30 split. [ 10 ] In this case an ION was issued by Orlen. Harvest chose not to participate.

Three ION wells were successfully completed. [ 11 ] Notwithstanding that all the capital for the new wells was put up by Orlen, Enerplus seeks its royalty (payable out of the 70% working interest) on the new wells – in other words, Enerplus seeks to avoid having the penalty period apply to its royalty. [ 12 ] It is clear from the language used in the 2005 farmout agreement (between Enerplus and Harvest’s predecessor) that Enerplus is only entitled to a royalty from production funds actually received by Harvest.

If Harvest misses out on production revenue from a new well because it chose not to participate in an ION well, Enerplus is likewise not entitled to its royalty during the penalty period. [ 13 ] This flows from the language which obliges Harvest to pay a royalty to Enerplus, as follows.

I have inserted the parties’ names rather than defined terms: If [Harvest] receives funds on account of or as the proceeds of sale of the production of Petroleum Substances comprising the Overriding Royalty, [Harvest] will receive [Enerplus’] share of those funds as trustee for [Enerplus]. [Harvest] must remit to [Enerplus] all funds accruing to [Enerplus] on account of the Overriding Royalty on or before the 25 th day of the month next following ... [emphasis added] [ 14 ] Harvest did not receive, and was not entitled to receive, funds from the new wells during the penalty period, and is not obliged to pay any royalties to Enerplus on funds not received. [ 15 ] The above is the same outcome determined by the Alberta Court of Appeal 27 years ago in Mesa Operating Ltd.

Partnership v.

Amoco Canada Resources Ltd. , 1994 ABCA 94 , 1994 CarswellAlta 89. [ 16 ] Enerplus attempts to distinguish Mesa on the basis that the law is now clear that the royalty reserved to Enerplus is an interest in land, whereas that was not a factor in the Mesa decision. [ 17 ] With respect, this is an irrelevant distinction. [ 18 ] The finding that a royalty is an interest in land does not change the terms of the royalty (in this case a royalty payable only on funds received); it only changes who is bound to pay the royalty. [ 19 ] In this case Harvest stepped into the shoes of its predecessor Krang and acknowledged that it is contractually bound to Enerplus, so Harvest must pay the royalty which was promised i.e. a royalty on funds received. [ 20 ] If Harvest had conveyed its 70% working interest to ‘Newco’ and if Newco refused to acknowledge a contractual obligation to pay the royalty to Enerplus, then it would become relevant to establish that the royalty was an interest in land, in order to bind Newco to pay it.

If so bound, Newco would likewise only be required to pay royalties on funds received , because that is the nature of Enerplus’ royalty. [ 21 ] Enerplus’ argument with respect to Orlen seems to be that, since Enerplus’ royalty interest is an interest in land, it binds the revenues which Orlen is receiving from the three ION wells during the penalty period. The implication of this argument is that Orlen is obliged to make royalty payments which Harvest is not bound to make. I disagree. [ 22 ] Enerplus as owner was always subject to the cessation of revenue if it chose not to participate in ION wells.

How can Enerplus convert itself to a royalty holder by means of a farmout agreement, to which Orlen is not a party, such that Enerplus is no longer subject to the same cessation of revenue (penalty period) in favour of Orlen? Clauses 801, 802 and 1007 of the Operating Procedure [ 23 ] Notwithstanding that the express wording of the royalty only compels Harvest to pay a royalty on funds received, Enerplus argues (in essence) that the express wording is overruled by implication under clauses 801, 802 and 1007(

b) of the relevant Operating

Procedure. I disagree. [ 24 ] Those clauses only apply to joint royalty obligations of all of the working interest owners (Harvest, Orlen and Petrus) and not to a royalty obligation of Harvest alone. [ 25 ] The Enerplus royalty, payable by Harvest when it receives production, is not an obligation reflected in the wording of clauses 801, 802 or 1007(b).

It is not a royalty payable to “to the grantor of the title documents” (the Alberta Crown), or a charge “to be borne for the joint account” or an obligation “created pursuant to provisions of the Agreement” (joint operating agreement dated November 1, 1998) or “specifically acknowledged therein” (again, in the joint operating agreement dated Nov 1, 1998).

The Enerplus royalty was not even in existence on November 1, 1998. [ 26 ] As Enerplus acknowledged in its written argument: Despite assertions by Harvest, there is no evidence before this Court that shows Orlen, Petrus or its predecessors in interest have agreed to include the Enerplus Royalty in the 1998 Joint Operating Agreement, or otherwise assume liability for the royalty while Harvest remains in penalty position with respect to the [three ION wells]. [ 27 ] Orlen is not a party to the Enerplus royalty agreement (the 2005 farmout agreement) and it is not obligated to make royalty payments to Enerplus during the penalty period.

Harvest is a party to the royalty agreement (via its predecessor) but it has only promised to make royalty payments on revenue received. Is this issue suitable for

summary determination? [ 28 ] Enerplus submits that this issue should not be decided summarily as there needs to be further evidence adduced regarding whether or not the Enerplus royalty was in fact acknowledged by Harvest, Orlen and Petrus. But Enerplus is the holder of the royalty. If no acknowledgement has been sent to Enerplus, how could it be that the Enerplus royalty was ‘acknowledged’? [ 29 ] Enerplus points to a letter from letter send from Harvest to Orlen, from which I will quote below. [ 30 ] I think it is a fair

summary of the letter to say that Harvest is saying to Orlen “I don’t have to pay the Enerplus royalty but you [Orlen] have to pay it”. I do not think this qualifies as an ‘acknowledgement’ by Orlen. Enerplus does not say that Orlen agreed to that suggestion. Orlen clearly did not agree because Enerplus found it necessary to sue Orlen in these proceedings. [ 31 ] The relevant portion of the Harvest to Orlen letter is as follows: The rationale behind this commonly accepted 'industry practice' is to allow farmout royalties to be administered in a more efficient and practical manner.

We have consulted on the issue at hand with several industry professionals who have dealt with land/royalty issues for over 25 years and they have all agreed that Harvest's expectations [that Orlen will pay the Enerplus royalty] are reasonable and fall within the 'normal practice' . In fact, the provisions of Clause 1007(

b) of the operating procedure were specifically included in the procedure to keep the participating party whole and in fact, provide extra compensation to such party for facilitating a potential outstanding farmout royalty. In this scenario, ORLEN would get to collect a 150% interest on the royalty and would only have to payout 100% of the royalty interest to Enerplus. This would work to the benefit of ORLEN and result in a 'free 50% royalty interest' collectible by ORLEN until such time as Harvest ceases to be in a penalty position.

At such time, Harvest would again assume responsibility for payment of the royalty. [emphasis added] [ 32 ] Enerplus refers to the underlined portion of this letter as raising the potential for expert evidence of an industry practice relevant to the issue at hand. Enerplus suggests that they need to obtain more document disclosure from Harvest to pursue this expert evidence.

I fail to understand why more document production is necessary. [ 33 ] The alleged ‘industry practice’ is outlined with sufficient particularity in Harvest’s letter such that there was nothing stopping Enerplus from seeking out that expert evidence and, if available, placing it before the Court on this

summary judgment application. Enerplus did not do so. Conclusion [ 34 ] If Enerplus refused to participate in an ION well, when it held the 70% working interest, it would undergo a penalty period. When Harvest held the 70% working interest it declined to participate in the ION wells, and it underwent a penalty period. [ 35 ] Enerplus argues that even though neither it nor Harvest put up the capital for the three ION wells, the Enerplus royalty continues to be payable and is not subject to the penalty period. For the reasons set out above I disagree. [ 36 ] Accordingly I dismiss Enerplus’ claim against Harvest. [ 37 ] If the parties cannot agree on a costs outcome of this ruling, they may

schedule a hearing to make submissions in that regard. Heard on the 05 th day of August, 2021. Dated at the City of Calgary, Alberta this 11 th day of August, 2021.

J.T. Prowse M.C.C.Q.B.A. Appearances: Curtis Fawcett / Karen A. Salmon Borden Ladner Gervais LLP for the plaintiff Michael P. Theroux / Dylan Gibbs Bennett Jones LLP for the defendant Harvest