In a recent decision of the Alberta Court of Queen’s Bench, Kasten Energy Inc. v. Shamrock Oil & Gas Ltd.1, an oil and gas lease was characterized as a form of personal property subject to the Alberta PPSA.2 The case appears to broaden the scope of assets that are characterized as personal property, and therefore may be secured by a typical general security agreement (“GSA”).
The Alberta Court of Queen’s Bench (the “Court”) considered an application by Kasten Energy Inc. (“Kasten”) to appoint a receiver and manager pursuant to the Judicature Act3 over all of the assets of Shamrock Oil & Gas Ltd. (“Shamrock”). Shamrock held a Crown petroleum and natural gas lease (the “Lease”) for the development of an oil well in Alberta. Shamrock executed a GSA in favour of Kasten’s predecessor which granted a security interest in all of Shamrock’s present and after acquired personal property. The GSA was subsequently assigned to Kasten.
In considering Kasten’s application for the appointment of a receiver and manager, the Court summarized the applicable test for the appointment of a receiver, namely, whether the appointment is “just or convenient”4. The Court concluded that the appointment of a receiver was just, convenient and appropriate in the circumstances.
What is remarkable about this case is the Court’s consideration of the question of whether the Lease was covered by Kasten’s GSA. Shamrock contended that the Lease is a profit à prendre (ie. the right to enter someone else’s land and work and remove a valuable resource), which is an interest in land excluded from “personal property” pursuant to the Alberta PPSA. Kasten acknowledged that the GSA is not enforceable against the oil and gas in the ground, but argued that once the oil and gas is extracted from the ground by Shamrock, it becomes intangible personal property subject to the GSA. The Court relied on the reasoning of the Supreme Court of Canada in Saulnier5, where the term “property” was considered in the context of a commercial fishing licence under the Bankruptcy and Insolvency Act6 and the Nova Scotia PPSA.7 In that case, the Supreme Court found that the subject matter of the licence (ie. the right to participate in a fishery that is exclusive to licence holders) coupled with a proprietary interest in the fish caught “bears a reasonable analogy to rights traditionally considered at common law to be proprietary in nature”.8 Therefore, the Court in KastenEnergy held that an oil and gas lease is analogical to a commercial fishing licence, since the leaseholder has a beneficial interest in the earnings generated by its oil and gas lease during the leasehold term. The Court concluded that, “within the purposive contemplation of Alberta’s [PPSA]” the Lease is an intangible form of personal property subject to both the GSA and the PPSA and fell within the power and authority of a court-appointed Receiver.
Some commentators have suggested that the Court found it necessary to shoehorn the Lease, Shamrock’s principal asset, into the category of personal property in order to reach the conclusion that it had the authority to appoint the receiver, although there is no such requirement under the Judicature Act.
The Court’s judgment in Kasten Energy appears to be contrary to previous authority indicating that a Crown oil and gas lease is not a form of personal property.9 Prior to this decision, it was generally understood that an oil and gas lease is an interest in land, and security interests in an individual oil and gas lease were perfected by registration either at the Alberta Land Titles Office (for freehold leases) or at Alberta Energy (for Crown leases). This case may cause confusion for lenders, as it suggests a security interest in an oil and gas lease can also be perfected at the Personal Property Registry (“PPR”). Kasten Energy may also lead to uncertain priority disputes between parties who have registered in the PPR and those who have registered at the Land Titles Office or Alberta Energy. Further, transferees of such leases may need to obtain “no interest” letters from creditors with registered GSAs to ensure the lease, as intangible personal property, is not encumbered.
It remains to be seen whether Kasten Energy will be followed, distinguished or ignored.