In Bearspaw Petroleum Ltd v. Encana Corp., the Alberta Court of Queen’s Bench considered an action by a lessee seeking a declaration that it had subsisting rights under a petroleum and natural gas lease, in response to a termination of lease notice delivered by the lessor. The lease, executed in 1960 by the predecessors of both the lessor and lessee, granted the lessee an interest in the petroleum, natural gas, and other related hydrocarbons, in the mineral lands of the lessor. The term of the lease was 10 years “and so long thereafter as the leased substances or any of them are producible from the leased area.”
At the time the termination of lease notice was delivered in 2005, no leased substances had been produced or taken to market since September 2003. However, the lessor had two wells drilled which were considered viable but had not yet been tied into a pipeline. The lessor claimed the lease had terminated for lack of “producible” leased substances because the contents of the wells could not be immediately taken to market and sold. The lessee argued that “producible” meant capable of being produced in economic quantities and did not require actual production.
In finding in favour of the lessee, the Court considered the proper interpretation of “producible” within the meaning of the lease:
Producible does not mean that the product must be able to go to market without anything more to be done. A successful well remains producible in plain language even though the actual flow of gas to market awaits regulatory approval, well-head completion or contractual arrangements with carriers. When, after a well is drilled, leased substances are found in economic quantities, those substances are capable of being produced when other things are done - that is, they are “producible”.
The lease also contained a provision for the payment of yearly rent, in lieu of royalties, during periods in which no leased substances were being produced. This provision served as persuasive evidence for the Court that the continuation of the lease was contemplated in the absence of actual production. The lease continued by reason of leased substances being producible from the well in question and the annual rents being paid to the lessor.
An alternate argument of the lessor, that the lessee had breached an implied covenant to diligently produce and market any leased substances capable of production, was also dismissed. The Court found that there is no implied covenant where, as in the lease in question, production and marketing are expressly considered. The express covenant to develop the property so as to produce leased substances in paying quantities did not impose a timeline for such production. The lessee was entitled to postpone tying the wells to a pipeline until production was more economically viable. The Court also found it reasonable for the lessee to delay production while the legal status of the lease was in question.