Landowners are urged to think twice if oil and gas companies ask them to accept reduced lease payments
The failure earlier this month of another Alberta-based energy company was no surprise to many landowners from whom Houston Oil and Gas Ltd. has leased sites.
It is, however, an addition to the problem of gas and oil site abandonment and failure of energy companies to meet their obligations to Alberta’s farmers and ranchers.
Houston had more than 1,400 wells that could now be added to the list maintained by the Orphan Well Association, which as of Nov. 1 numbered 3,406 wells to be abandoned and another 3,023 for decommissioning and reclamation.
“They hadn’t been paying landowners,” said Daryl Bennett of My Landman Group, which represents landowners in disputes with energy companies. “We knew it was going to happen.”
He advises landowners to apply to the Surface Rights Board to obtain their lease payments from the insolvent company, but they should be prepared to wait because the board is dealing with a backlog of claims.
Bennett said another 20 companies, some larger and some smaller than Houston, are likely looking at a similar fate as gas prices in particular remain moribund. Many are failing to make lease payments or are asking landowners to accept reduced rates in light of energy market factors, taxes, high cost of operations and the cost of surface lease rentals.
Those requests led the Alberta Farmers Advocate to issue a special advisory about the SRB as recourse for non-payment and further noting that “cashing a cheque with a reduced lease payment does not necessarily imply acceptance of the reduced payment.”
That may be true, said lawyer Keith Wilson, who regularly represents clients in energy industry matters, but accepting a lesser amount from a company is a risk.
“My advice is tell them that the full amount is owing and if they don’t pay, then you get to claim against the government,” he said. “It’s a mistake to accept less, because the danger is, that’s all the Surface Rights Board will award you going forward.”
Bennett said some of his clients have encountered another tactic. Companies are arbitrarily reducing the size of their leases, in some cases from four acres down to two acres, and then reducing their rental payments by two-thirds.
“This is against the law,” said Bennett. “In the meantime a lot of landowners don’t know that they can refuse to accept this. I’ve got lots of landowners calling me and saying ‘hey, the payments are going down, the company just cut them, or I’m not getting paid at all. What should I be doing?’
“We’re telling all landowners, do not accept any rental reduction and just apply to the Surface Rights Board.”
Since getting elected in April, Alberta’s United Conservative Party has taken steps to support the energy industry. Earlier this month it lifted a curtailment cap on new conventional oil wells as a way to increase drilling activity.
Bennett said he fears that energy industry stimulation might come at the detriment of farmers and ranchers who have sites on their properties. He worries it could mean cuts to the SRB budget or reducing the orphan well levy charged to energy companies for reclamation of old wells and sites.
“We’re hearing from the UCP government that they’re going to do whatever’s necessary to stimulate the economy and help these companies out and they’ll probably be at the expense of property rights and the environment,” he said.
“And that’s from direct consultations with UCP MLAs. So I don’t anticipate the situation getting any better for landowners.”
If there is renewed interest in oil and gas activity, Wilson has more advice.
“I am urging all landowners going forward that if they are approached for a well site or a pipeline — and I know there won’t be a lot of them but there is some activity going on in different parts of the province … is to not sign a surface lease and not sign a right-of-entry agreement.”
Forcing companies to obtain a right-of-entry order through the SRB is an indication that the landowner is being forced to bear a burden for the benefit of the economy, said Wilson.
Should a situation end up in court, a right-of-entry order serves as a legal red flag, a sign that the agreement between company and landowner is not a simple commercial agreement between two parties.
“The right-of-entry order gives the landowner far more rights at law and recognition at law than does a voluntary surface lease or a voluntary right-of-way agreement,” said Wilson.
“The oil companies have increasingly been using that mistake that landowners make, in doing it co-operatively by an agreement as opposed to requiring an entry order, to the oil companies’ advantage and to the landowners detriment.”