Litigating Shut-In for Lack of a Market: A Comment on Stewart Estate v. Taqa North Ltd

Abstract

Comment on Stewart Estate v. TAQA North Ltd, 2013 ABQB 691 - freehold oil & gas lease preserved through shut-in royalty clause, based on lack of market for natural gas.Typically an Alberta freehold petroleum and natural gas lease continues for a defined period (the primary term) and so long thereafter as leased substances are produced from the leased lands or the lessee satisfies specified lease conditions. In exchange for the lessee’s rights to explore for and produce leased substances, the lessor receives a royalty. This arrangement works satisfactorily (in the main) when leased substances are produced. Circumstances, though, may disincline the lessee to produce and incline the lessee to shut-in a well, particularly when the well is productive of natural gas. For example (especially if the well is in a new or little developed location), pipelines may have to be constructed, there may be no nearby pipeline system to connect to, or there may be no readily available processing plants; purchase contracts must be secured. Unlike oil, natural gas cannot simply be trucked to another location for disposition. The most convenient means for storing the natural gas pending changed circumstances is to leave it in the ground. To preserve both a lease and its finances, a lessee may seek to rely on lease provisions permitting a well to be shut-in and for the lease to be continued on the payment of shut-in royalties. A lessee would favour an expansive approach to shut-in provisions. In contrast, a lessor would understandably prefer to receive royalties on actual production (which presumably would be greater than shut-in royalties) or to have the lease terminate so that a lessee with a more aggressive or economical approach to production could be found. A lessor would favour a restrictive approach to shut-in provisions.