In the oil and gas industry, operating, processing or transportation agreements typically provide that the operator, processor or transporter, as applicable, is granted a first priority lien and charge over the subject matter of the agreement (i.e., the joint lands, the production and/or the joint equipment) (the Operator’s Lien). The Operator’s Lien is an effective tool to protect the operator’s interest against a joint owner or producer that has failed to pay in the ordinary course of business. However, the situation often becomes more complicated once that joint owner or producer files for creditor protection under the Companies’ Creditors Arrangement Act (CCAA). These further complications often arise because operators typically do not register or otherwise perfect their Operators’ Liens, and courts in Alberta have held that such liens, unless perfected, are subordinate to secured interests.
Generally, a lien is characterized in one of three ways: (a) consensual; (b) possessory; or (c) common law. As Operators’ Liens arise pursuant to contract they are widely considered to be consensual liens. While various types of liens that arise by operation of law, such as builders’ liens, will continue to have priority over other secured interests in CCAA proceedings, courts in Alberta have found that liens that arise by contract are not afforded the same super priority status granted pursuant to section 32 of Alberta’s Personal Property Security Act (the PPSA). As such, consensual liens are governed by section 35 of the PPSA and priority will be determined based upon the time of perfection of the security interest, by possession or registration.
Perfection by possession raises a number of practical implications. In particular, while tangible property is typically already in the operator’s possession, particularly for an operator of joint assets, possession of production can be far more cumbersome. In order to maintain possession of production the operator may be required to secure storage facilities for such production and, along with the cost of securing storage facilities, the availability of such facilities can be an issue. In addition, perfection by possession will not have much value if there is not sufficient production to seize to adequately satisfy a debt obligation.
In our view, due in part to the practical implications of perfection by possession, perfection by registration is the preferred option. Pursuant to section 10(1)(d) of the PPSA, a security interest is enforceable against a third party where there is a signed security agreement that contains a description of the collateral. The respective operating, processing or transportation agreement which sets forth the creation of the Operator’s Lien has been held to be an acceptable form of security agreement. In addition to the right to secure an interest against typical types of personal property, including tangibles such as equipment, a creditor may also register an interest against certain intangible property. In particular, the Alberta Court of Queen’s Bench in Kasten Energy Inc. v. Shamrock Oil & Gas Ltd. held that an oil and gas lease can be characterized as intangible collateral and, once extracted, production is capable of being the subject matter of a secured interest. It is important to note that certain interests related to oil and gas leases may not be covered by the scope of the PPSA, including overriding royalty or net profit interests which are properly characterized as interests in land and, thus, not registerable at the Personal Property Registry. However, a land charge may be registered at the Personal Property Registry because such land charges are not intended to secure a creditor’s interest in the land but rather to secure payment or performance of an obligation.
It is not practical or necessary for an operator to register security interests at the Personal Property Registry against all other joint owners or producers it has dealings with, particularly those joint owners or producers that are large, established companies with proven track records. However, a prudent operator should identify which of the parties it has dealings with that present a risk of default, particularly those companies with whom the operator has had payment issues. While the registration of the Operator’s Lien may be subordinate to prior registered interests, the registration of the Operator’s Lien will still have priority over any subsequent registrations and any unsecured interests.