Can landowners sell their leases with energy companies?

Farmers may be tempted to sell their energy leases to investment companies, but there could be tax implications and other issues

An investment company interested in buying energy company leases from landowners got the attention of Verna Phippen of Pigeon Lake, Alta.

She has several leases on her land and would like to be relieved of the dealings she said have become a headache. Trouble is, she isn’t sure about the long-term implications or even the legality of making such a deal.

“There’s a lot of hydrocarbons under my land so I get bombarded by the oil and gas industry on a constant basis,” said Phippen.

“I’m one of those landowners that, every time they file to get a licence, I file an objection with the regulator. I would love nothing more than to get rid of these guys and have someone else deal with them.”

Surface Capital is offering to buy energy leases from farmers to amass a portfolio for shareholder investment. As reported in the April 4 issue of The Western Producer, it estimates there are 700,000 oil leases in Saskatchewan and Alberta that could be worth $10 billion.

With the drastic reduction in oil prices in the past two years, some energy companies are in default of lease payments or have gone bankrupt and abandoned wells. Some of those wells can still be productive, while others will require reclamation.

Karen Johnson, Alberta’s Property Rights Advocate, said April 28 that her office is aware of Surface Capital’s general plan but has not seen a copy of any proposed agreement.

She said it is not the advocate’s role to comment on whether this or any agreement is legal, but rather to assess property rights situations “and then determine if there’s any recommended changes to property rights laws or processes that I can make to government.”

Phippen wonders how a third party such as Surface Capital could claim loss of use and adverse effect on her land. Such loss is the basis for lease payments by energy companies to land owners.

“They do not own land, nor do they occupy it. All they have is my former revenue stream, which the grantee may cut them off of because I had loss of use and adverse effect as the landowner, but the enterprise does not,” Phippen wrote in an email.

The Alberta Farmer’s Advocate Office (FAO) recently issued a warning to landowners about selling leases. It said the Surface Rights Board is a recourse for landowners in cases where an energy company becomes insolvent or refuses to pay lease fees.

“To imply that no recourse for unpaid rentals is available is a misleading approach that capitalizes on landowner fears,” the FAO said.

Value provided is also an issue.

“At this point, the FAO has not confirmed what payout is being offered to landowners in ex­change for their surface rights. Since a landowner has a right to be paid in full until the reclamation is complete, assigning the annual compensation to a third party in perpetuity may prevent a landowner from receiving full value in return for the impacts they experience during the lifetime of the development.”

There may also be tax implications and effects on the marketability of the property.

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