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OIL AND GAS - Lease or license for production - Working interest - Participation agreement - Overriding royalties

Thursday, July 13, 2017 @ 12:41 PM  

Lexis Advance® Quicklaw®
Appeal by the plaintiff, IFP Technologies (Canada) Inc., from the dismissal of its action against the defendants for damages for breach of contract. The parties were multinational companies who entered a contract in respect of a Canadian oil and gas partnership at an Alberta property known as Eyehill Creek. The defendants included PanCanadian Resources (PCR) and its corporate predecessors and successors. The plaintiff and PCR entered an agreement whereby PCR granted the plaintiff a 20 per cent working interest in Eyehill Creek in consideration of the plaintiff terminating other overriding royalties arising from other PCR-controlled leases. Following the collapse of oil and gas prices and the intended sale of certain PCR operations, litigation commenced over the scope of the working interest conveyed. The defendants' position that the plaintiff's interest was limited to an undivided 20 per cent interest in oil and gas produced only through thermal and other enhanced recovery methods was accepted by the trial judge. The plaintiff's position that the working interest encompassed all of the assets held by PCR at Eyehill Creek was rejected. At issue on appeal was the interpretation of the term "working interest" in the context of oil and gas leases, and what was conveyed by the transfer of a working interest in such leases.

HELD: Appeal allowed. The trial judge erred in failing to recognize the legal meaning ascribed to the legal term "working interest," and in disregarding clear, compelling textual wording of the substantive provisions in the parties' agreements. The judge's conclusion the plaintiff's interest was limited to oil and gas derived from thermal and other enhanced recovery methods was erroneous. Having regard to commercial reasonableness and the intent of the parties, the plaintiff did not contractually agree to forego a future stream of royalty income valued at $14.8 million in exchange for nothing more than the mere possibility of a thermal project at Eyehill Creek that was never guaranteed to proceed and that could be rendered economically impracticable through the defendants' unilateral actions. The trial judge further erred in concluding the plaintiff acted unreasonably in withholding consent to PCR's proposed disposition of its interests. The plaintiff owned and continued to own a 20 per cent working interest in all of the oil and gas leases and other assets held by PCR in Eyehill Creek. The plaintiff was entitled to an accounting for its proportionate share of the net proceeds from primary production at Eyehill Creek, with calculation of such proceeds to be remitted to the Court of Queen's Bench for determination.

IFP Technologies (Canada) Inc. v. EnCana Midstream and Marketing, [2017] A.J. No. 666, Alberta Court of Appeal, C.A. Fraser C.J.A., J. Watson and P.A. Rowbotham JJ.A., May 26, 2017. Digest No. TLD-July102017009