|Date Closed:||July 30, 2014|
|Client Name:||Encana Midstream|
The decision clarifies the previously undecided issue relating to the right of a party to the standard form CAPL oil and gas operating agreement to withhold consent to a disposition of the operator’s interest.
The Plaintiff was the Canadian subsidiary of the Institute Francais Du Petrole (“IFP”). IFP purchased an unusual working interest in a heavy-oil field from Encana’s corporate predecessor. The field was then being developed with conventional production, but might well have been a candidate for enhanced production by Steam Assisted Gravity Drainage (SAGD), or other enhanced recovery methods. The Encana Defendants were technology leaders in the area, and IFP hoped to capitalize on that experience as a working interest owner. The agreements between the parties provided that IFP would have a stake in enhanced recovery, but would not be entitled to or liable for the benefits and risks of conventional production, or associated abandonment liabilities. SAGD projects are sensitive to scale and the price of natural gas relative to oil prices.
In the early 2000s, oil prices tanked and gas prices spiked. The Encana Defendants also decided to pursue larger scale SAGD projects elsewhere, and chose not to develop the field by enhanced recovery. Encana’s working interest was put up for sale, and the purchaser agreed to accept abandonment liabilities, but proposed to continue development of the field on primary production. IFP waived its right of first refusal for the deal, but refused to consent to the disposition on the basis that its interest would be adversely affected because the proposed purchaser did not have the technology to purse enhanced recovery. The purchaser and its successors proceeded with primary production, and, over the years, oil prices rose and gas prices fell. IFP claimed that the primary production had ruined the prospect for thermal development, and that its losses were between $45 million and $70 million.
The CAPL standard operating procedure permits working interest holders to withhold their consent to a proposed disposition by the operator, if they do not do so unreasonably.
Expert landmen were called to give evidence on that provision. Each confirmed that neither had ever seen the provision tested before, and there was no reported case authority on the subject. Ultimately, the Chief Justice confirmed that it was up to the Court to construe the agreement, and determine its effect. Unassisted by prior oil and gas jurisprudence, the Court adopted several principles from the landlord and tenant context.
The Court also decided that a refusing party need not detail all of the reasons for its decision at the time that the refusal is given, but those reasons must have influenced the mind of the refuser at the relevant time.
The Court further found that withholding consent will be unreasonable when the withholding party stands to compel as much under the proposed disposition as it would have been entitled to receive under the original agreement.
Here, the Chief Justice found that IFP acted unreasonably because it stood to receive as much under the disposition as it was entitled to receive under the original agreement because the Encana Defendants had never committed to undertake thermal operations, and that IFP could not have forced those operations, and did not propose independent operations itself.
Paul Edwards of Gowling Lafleur Henderson LLP and Rinus de Waal of De Waal Law, represented the Plaintiff.
Grant Stapon, QC, Laurie Goldbach, and Lawrence Ator of Bennett Jones LLP represented the Encana Defendants.