Omers Energy Inc. v. Alberta (Energy Resources Conservation Board)

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Page: 17[73] Cymbaluk argues that the Board erred in that decision because it misunderstood, or failedto distinguish, the difference between “commercial quantities” and “paying quantities” and thatmisunderstanding influenced its decision to reject the “paying quantity” definition. This argumentis based on the following statement from the Board:The Board notes that in paragraph 8 of the Cymbaluk lease, dealing with offsetwells, the lease does use the phrase “If commercial production is obtained.” TheBoard must use caution not to import that standard to another provision of thelease unless it is satisfied that the parties themselves intended the phrase to havethat meaning. (Board Decision 8) (Emphasis added)[74] Cymbaluk submits that commercial production is different from production in payingquantities in that commercial production provides a return to an investor on his original investment,whereas paying quantities is generally understood to mean any profit over costs of operation andmarketing. In the present lease, commercial production is defined and relates to output that wouldcommercially and economically justify the drilling of a well. She argues that the Board’s failure tounderstand this distinction impacted its decision.[75] In my view, the main point the Board was making is that where parties spell out a specificquantitative measurement in one term of an agreement, a tribunal should be slow to assume theparties intended a specific quantitative measurement in another term where none was included. Evenif the Board’s comment suggests a misunderstanding of the meaning of “in paying quantities”,which in my view is highly unlikely considering its experience, I am not satisfied that the commentmaterially affected its decision. It is necessary to look at the totality of the Board’s reasons forrejecting “paying quantities” terminology. The Board agreed with Omers and Montane that it shouldnot infer or imply that production in “commercial amounts” or “paying amounts” is needed to satisfythe requirement that the well be “capable of producing the leased substances”. But then the Boardwent on to say, “That is not the wording used by the parties, nor is it an interpretation that is so wellestablished in the industry or under Canadian law that the Board can reasonably infer it to be whatthe parties intended.” (Board Decision 8). I am satisfied that even if the Board made an error byequating the two quantitative measurements, it was not a material error and the decision would bethe same.[76] In any event, I arrive at the same conclusion. Words should not be read into a contract unlessthe court is satisfied that the parties intended to contract subject to those words. Other terms of thelease contain quantitative definitions. The parties did not choose to include “in paying quantities”in Clause 3 of the Cymbaluk Lease. I agree with the Board that the words “in paying quantities”should not be implied: see Freyberg v Fletcher Challenge Oil and Gas Inc, 2005 ABCA 46, 363 AR35.[77] By making this finding, however, I do not wish to be seen as rejecting the general rationaleupon which the term “paying quantities” is based. I agree with the American authorities, and theBoard, that the purpose and goal of parties entering into such a lease is to develop the resource forthe purpose of making a profit. That purpose provides the rationale for concluding that where
Page: 18production extends the primary term of a lease, the parties would have anticipated production atsomething more than trivial or minuscule production. Certainly they would not have anticipated thata lessee could hold a lease by shutting in a well that was not capable of producing a meaningfulamount, even if not every moment would have been in paying quantities. In my view, although theBoard was not prepared to read the words “in paying quantities” into the contract, it adopted therationale underlying the American cases and was proper in doing so.3. Did the Board chose the correct test?[78] What then is the proper interpretation of Clause 3 of the Cymbaluk Lease and did the Boarderr in its interpretation of “capable of producing the leased substances”? An interpretation whichdefeats the purpose of the parties in entering an agreement should be discarded in favour of aninterpretation which promotes that purpose and a sensible commercial result: Bearspaw PetroleumLtd v Encana Corporation, 2011 ABCA 7, 39 Alta LR (5th) 302; Mannai Investment Co Ltd v EagleStar Life Assurance Co Ltd, [1997] 3 All ER 352 (HL), cited in Nickel Developments Ltd v CanadaSafeway Ltd, 2001 MBCA 79, 156 Man R (2d) 170 at para 34.[79] The Board conducted a cogent analysis of the Suspended Wells Clause within the contextof the entire lease, and in particular in relation to the Habendum Clause. It found that the SuspendedWells Clause mirrors the Habendum Clause, and that for the Suspended Wells Clause to apply toextend the lease, there must be either a shut-in well on the lands that is capable of producing, or ifthe well is not capable of production, operations, as defined in 1(g), must commence with nocessation of more than 90 consecutive days between successive operations. As well, the Board notedthat to extend the lease under the Habendum and Suspended Wells Clauses the lessee mustundertake operations if a producing well is no longer producing the leased substances or if asuspended or shut-in well is no longer capable of producing the leased substances (Board Decision8).[80] When dealing with the interpretation of “capable of producing the leased substances”, theBoard correctly found two factors must be satisfied. First, the well had to be capable of producingand, second, it had to be capable of producing the resource in a meaningful quantity. The Boardfound that to satisfy the “capable” requirement, the well must have the ability to produce in itsexisting configuration and state of completion. Applying that concept to the present case, the Boardrejected Omers’ argument that because well head pressures showed the existence of gas in thewellbore, the well was capable of producing the leased substance and all that was needed was aroutine water clean out operation. The Board correctly found that a well could not be capable ofproducing the leased substances and at the same time in need of an operation to address the waterloading to do so. Rather, the lease calls upon the lessee to address the water loading situation if itis required to produce the leased substances in meaningful amounts. With respect to the 100/05-4Well, the Board looked at the history of the well and concluded that it was not capable of producingthe leased substances and at the same time be in need of an operation to address the water loadingsituation to do so.
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Page 5 and 6: Page: 4that a very low, or even non
Page 7 and 8: Page: 6[28] I am satisfied that the
Page 9 and 10: Page: 8[34] The search for the part
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Page 13 and 14: Page: 12whenever steps can be taken
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Page 23 and 24: Page: 222. If the lessee is conduct
Page 25: Page: 24Appearances:T.M. Bewsfor th

Omers Energy Inc. v. Alberta (Energy Resources Conservation Board)

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