The implementation of shallow rights reversion (SRR) in Alberta on January 1, 2009 means that, in addition to existing deeper rights reversion, PNG rights above the top of the shallowest productive zone will now also be severed from all PNG agreements at a specified point in time.

The foregoing is in furtherance of the Alberta government’s goals of maximizing the province’s resources, developing currently undeveloped resources, and creating increased royalty revenues for Albertans.

Impact of SRR on Various PNG Agreements

a) PNG Agreements Acquired After January 1, 2009

PNG agreements acquired after January 1, 2009 will be subject to SRR at continuation.

The application process for continuation will now require an agreement holder to prove both the shallowest and deepest rights under the agreement to gain continuation at the expiry of the appropriate term.

b) PNG Agreements Acquired Before, but not Continued Prior to, January 1, 2009

SRR will not apply to agreements acquired before January 1, 2009 until they have been continued once subject to deeper rights reversion only.

Once an agreement has been continued subject to deeper rights reversion, a SRR notice must be served before SRR can be applied to the agreement.

c) PNG Agreements Acquired and Continued Prior to January 1, 2009

All agreements that were acquired and continued prior to January 1, 2009 must be served with a SRR notice before SRR can be applied to the agreement.

SRR Notices

Existing PNG agreements will be served with a 3-year SRR notice based on the vintage of their term date, which will list the shallowest productive zone as determined by the Department.

The Department expects to begin issuing SRR notices throughout 2011 starting with the oldest PNG agreements. It expects to issue 1,000 notices in 2011, eventually increasing the number of notices issued to 5,000 per year.

In the event that an agreement holder disagrees with the shallowest productive zone as determined by the Department, an application can be made pursuant to s. 82.1(3)(d) of the Mines and Minerals Act at any point during the 3-year notice period.

If the Department disagrees with an agreement holder’s application, a review of the decision can be requested. The decision following this review will be final.

It should also be noted that the Mines and Minerals Act does not contain a provision to deal with late applications. Failure to make an application for a shallower zone prior to the expiration of the notice period will result in the agreement being severed as indicated in the SRR notice.

How Can Shallow Rights Be Proven?

Shallow rights can be retained to the extent the agreement holder can show one of the following:

  • Established production
  • Proven productivity with a good gas/oil test
  • Shallow rights are part of a unitized zone
  • Payment by the company of offset compensation
  • Proof of the shallowest productive zone through the use of geological mapping

Consolidation

One option for agreement holders to consider in light of the implementation of SRR in Alberta is the consolidation of their PNG agreements to retain more rights at the time of shallow rights severance.

In order for this to be effective, consolidation must occur prior to the occurrence of SRR and the agreements being consolidated must have the same term length (continued or primary), substances, designated representative, and interest holders.

SRR Looking Forward

While there is no immediate cause for concern as the implementation of SRR in Alberta will be a gradual process, industry members should begin to change their practices and processes to account for the future effects of SRR.

Industry members should also be alive to any changes to the Petroleum and Natural Gas Tenure Regulation that many anticipate will take place within the next year, as well as to any information or guidelines provided by the Department as future decisions are made regarding SRR.