Table of Contents
Document of Explanation
Authority
Oil and Gas Exploration and Production in Ontario
Oil and Gas Resources in Ontario
Landowners Own Minerals
Leasing of Mineral Rights
Well
Well Licence
Spacing Unit
Tracts
Correlative Rights
Protection of Correlative Rights
Modification of Spacing Units
Operator
Pooling
Voluntary Pooling
Compulsory Pooling
Working and Royalty Interests
Landowner as a Working Interest
Unitization
Background
Voluntary Unitization
Unitization Clause in a P & NG Lease
Unit Agreement
Unitization Agreements Modify Leases
Unit Participation
Compulsory Unitization
This guide is published by the Office of the Mining and Lands Commissioner and is intended to give general information only. The information that is conveyed in this guide does not constitute legal advice. For more detailed information or legal reference, please refer to the Oil, Gas and Salt Resources Act
This document is an explanation of respective applications, the legislation and the process which is followed concerning matters before the Mining and Lands Commissioner under specific legislation
NOTE: This explanation is not a legal document and does not attempt to explain to the affected parties the processes in connection with an application. This document is designed to be understood by those not normally involved in legal proceedings to provide them with a reasonable level of comfort and understanding in the subject matter.
As will be explained in greater detail below, one of the ways in which unitization may occur requires that all landowners be governed by both a lease and a unit operating agreement.
One item requires clarification at the outset. The term "pooling" means to join all of the various interests in a spacing unit. The term "unitize" means to join all of the various interests in a reservoir or pool. Please be aware of the seemingly contradictory definitions.
The Mining and Lands Commissioner is a quasi-judicial body. The Commissioner derives authority to make decisions regarding matters which are assigned through appointment by the Ontario Legislature under the Ministry of Natural Resources Act. Under the Mining Act, the Commissioner (often referred to as the "tribunal") has been given the power to call a hearing and require information to be provided. This proceeding resembles a trial. The outcome of the hearing is the issuance of an Order, which is legally binding, deciding the rights of those parties involved.
Under the Oil, Gas and Salt Resources Act, the Commissioner is empowered to make decisions after a hearing, including decisions regarding applications for pooling an unitization. Where the resulting Order allows pooling or unitization, it can be registered on the titles of the effected properties. If the application is disallowed, the resulting Order will not be registered on the title and the status of the parties will remain unchanged.
Oil and Gas Resources in Ontario
Oil and gas are found in sedimentary basins in rock formations that were formed
under ancient seas. There are four sedimentary basins in Ontario, the Appalachians,
Michigan, Hudson Bay and Moose River. Although all of these basins have the
potential for oil and gas occurrences, commercial production occurs only in
southern Ontario within the Appalachian and Michigan basins. There is no oil
or gas contained in the crystalline rocks of the Canadian Shield. Commercial
oil and gas mineral occurrences are found mainly in southern Ontario, south
and west of Toronto.
Landowners Own Minerals
In Ontario, landowners can own the minerals found under or in their property and these minerals include oil and gas. In southern Ontario mineral rights are usually held by the landowner (freehold mineral ownership). As owners of the minerals, landowners are free to enter into agreements, such as petroleum and natural gas leases, to allow for exploration and production of oil and gas.
Leasing of Mineral Rights
Individuals rarely drill on their own property due to the speculative nature,
high cost, and technical complexity of drilling for and producing oil or gas.
Resource companies carry out most exploration activities in the province. To
obtain the right to search for oil and gas or other minerals, companies usually
lease the mineral rights from the landowner. Most oil and gas companies in Ontario
use professional land leasing companies to act on their behalf to secure mineral
rights leases. Legal ownership of mineral rights may be determined by searching
the title at the local Land Registry Office. A Petroleum and Natural Gas Lease
allows for the exploration and production of oil and/or natural gas and provides
for the payment of rent to the landowner and production royalties should production
of oil or gas occur. Leases are legal agreements between the mineral right owner
and the oil and gas company. Landowners may wish to consult with legal counsel
that are familiar with oil and gas matters prior to signing a lease.
Well
The term "well" is defined in the Act as follows:
"well" means a hole drilled into a geological formation of Cambrian or more recent age for the purpose of.
Well Licence
Before conducting any activity on a well including drilling a well or producing oil and gas, a well licence must be obtained from the Ontario Ministry of Natural Resources (MNR).
Spacing Unit
Drilling for oil or gas must take place within the target area or a pooled spacing
unit. The following definitions taken from the Act and its
regulations refer to this requirement:
"spacing unit" means
a surface area and the subsurface beneath the surface area, established for
the purpose of drilling for or the producing of oil or gas;
"target areas" means
the areas within a spacing unit that is allocated for drilling a well;
"pooling spacing unit" means a spacing unit in which all the various oil and gas interest have been pooled;
"pooling" means the
joining or combining of all the various oil and gas interests within a spacing
unit for the purpose of drilling and subsequently producing a well.
Spacing units are required and established by regulations under the Act and by the Minster on the well licence and by the minister's order for an area as circumstances warrant. The size of a spacing unit and its target
area that is required for a well is related to the depth or age of the formation targeted by the drilling and the productive capability of the well and the pool. In general, the deeper the geological target the greater the productive capability
of the well and therefore, the larger the spacing unit.
Where the township lot and concession survey fabric of the land is regular, spacing units are comprised of tracts depending on the drilling depth.
Tracts
The word "tract" has two definitions in the regulation:
a) For the purpose of establishing spacing units, standard 2000 acre and 100 acre township lots are divided into rectangles of equal size known as tracts. Each tract
is 10.12 hectares (25 acres) in size more of less. Where the township survey is irregular MNR staff devise a similar system of tracts on a case by case basis.
b) For the purposes of applications made to the
Mining and Lands Commissioner to pool or unitize lands, tract refers to a particular
mineral interest within a spacing unit or proposed unit area (the area proposed
for unitization). For example, where landowners located in a spacing unit own
the minerals underlying their property the land of each landowner is referred
to as a tract.
Correlative Rights
Correlative rights mean the inherent right of an owner of oil or gas in a pool
to his share of the production and reservoir energy and his right to obtain
his just and equitable share of production and to be protected from wasteful
practises by others in the pool. where a mineral owner's lands make up part
of a spacing unit or unitized pool the mineral owner's royalty is based on the
proportion of the mineral owner's interest in a spacing unit or unit area to
be based on the proportion of his land area to the total area within the spacing
unit or unit boundary, however, other calculations are possible. The amount
of royalty received will depend on this proportion, the royalty rate stated
in the lease or unit agreement and the amount of oil or gas produced.
Protection of Correlative Rights
The primary means to protect correlative rights provided by the province under
the Oil, Gas and Salt Resources Act is the requirement places
on operators to drill and produce a well within the target area of a pooled
spacing unit.
Modification of Spacing Units
As stated above spacing units are established by regulation, on the well license
and by Minister's order. These methods can be viewed as a progression or evolution
for fine tuning spacing units to the specific geology of the oil or gas pool
as new information is acquired by geological and geophysical study and interpretation,
drilling, well tests and the well(s) production history. At the outset of oil
and gas exploration, the nature of any subsurface oil or gas resource is unknown.
However, correlative rights have to still be protected since drilling and producing
a well could have an immediate effect on them. Therefore, standard spacing unit
requirements are placed in the regulations. These standard spacing units are
somewhat arbitrary and may not reflect the actual production characteristics
of a well once it is drilled. Operators that discover new oil or gas pools are
therefore required to apply to the Minister to establish new spacing units to
be based on the information obtained at the time of discovery which in turn
will result in a more accurate protection of correlative rights. The application
to establish spacing units by Minister's order must be accompanied by all available
technical data on the pool, the well(s) and must include the probable area of
the pool. Once the MNR reviews this information then MNR establishes appropriately
sized spacing units over the probable area of the pool by Minister's order to
provide protection to the correlative rights within this area.
There is no right in the Act for a mineral owner to "opt
out" of the spacing units in which their interest is located since this
would put the land at risk of being drained without compensation. Spacing unit
requirements under the Act protect against uncompensated drainage
of oil r gas and prohibit individuals from preventing its neighbours within
the unit from enjoying the benefits of production from their own lands.
In addition, any person having oil and gas interests in a pool may apply to
the Minister to modify existing spacing units. The application process is the
same as applying for spacing units upon discovery of a new pool.
Operator
The act defines "operator" as follows:
"operator" means, in respect of a work,
This definition includes all persons, companies involved with wells and associated works governed by the Act and generally means all leased situations as it is generally understood as meaning the oil and gas companies responsible for oil and gas wells and works. However, the definition also encompasses landowners on whose land a well is located if no lease to an oil and gas company covers that land.
Voluntary Pooling
Before MNR will issue a license, all of the oil and gas interests in the spacing
unity must be pooled. When all of the oil and gas mineral interests have been
leased to the operator of the proposed well, the spacing unit is pooled and
drilling and/or production may commence. Leases that are issued today usually
contain clauses that allow the lessee to unilaterally pool his or her leased
interest with other leased interests up to one spacing unit. Older leases that
predate spacing legislation will require separate pooling agreement to be executed
by each mineral interest owner to accomplish the pooling requirement.
Compulsory Pooling
The Act provides for means to apply to the Mining and Lands
Commissioner for an Order that pools the oil and gas interests within a spacing
unit where voluntary efforts to pool have failed. This authority for this order
is found in clause 8(1)(a) of the Act and is referred to as
the compulsory pooling of a spacing unit.
There is no automatic right to a pooling order. A decision will be made after
hearing at which the applicant and the unpooled oil and gas interest owner(s)
will present their position(s). Where the unpooled interest owner fails to attend
the hearing and make their position and reasons known, the tribunal will proceed
with the hearing and make a determination without having their views taken into
consideration.
In an application to the tribunal by an operator, those unleased mineral owners
will be identified and made parties to the proceeding. In most circumstances,
the operator seeks to have a P & NG lease deemed to apply to those unleased
parties by Order of the tribunal. The tribunal at a compulsory pooling hearing
will determine whether to apply the lease to the unleased parties then the terms
of the lease will also be examined. Compulsory pooling orders are not automatic
and unleased or unpooled mineral owners are encouraged to be frank in explaining
their position to the tribunal.
Working and Royalty Interests
In the oil and gas business, the petroleum and natural gas interest is usually
composed of a Working Interest and a Royalty Interest. A landowner that leases
his oil and gas mineral rights voluntarily or a landowner whose oil and gas
mineral rights are pooled by the imposition of a P & NG lease by Order of
the tribunal are referred to as a Royalty Interest. This terminology comes from
the fact that the landowner retains a royalty interest in exchange for granting
the mineral interest to the lessee. The lessee or operator earns the working
interest by spending money to explore, discover and develop the resource and
by assuming all of the risk of the venture with respect to its success or failure.
Landowner as a Working Interest
Non-leased landowners may wish to participate as a working interest for the
purposes of drilling a well in a spacing unit. Where such a case is brought
to the tribunal the landowner would be put in the position of an operator with
respect to sharing in the working interest but would also share in the operating
costs and risks. If so ordered, the landowner would be required to contribute
their proportionate share of the costs of drilling and operating the well(s).
Background
Over time an oil and gas company may obtain sufficient information about the
pool it has discovered to accurately define its limits and physical characteristics.
This information is usually obtained from the wells it has drilled, well testing,
the production history of wells, and geological interpretation of the pool.
When sufficient information is obtained, the operator may wish to unitize the
pool. Essentially this means that they wish to combine all the oil and gas interests
in the known pool into a single operation. The mineral interests in a pool are
usually more accurately defined in a unitization agreement than the area proportions
determined within spacing units.
The benefits of unitization to the operator include streamlined operations, centralized facilities, and a lower economic production limit due to lower operating costs and additional recovery of oil or gas. The benefits of unitization to landowners
include a longer production life of the pool (more royalties), less surface production equipment and a guarantee of a share in production regardless of whether a well is located
on their land or spacing unit. The latter benefit occurs since all production from a unitized pool is deemed to have come from all interest owners.
Voluntary Unitization
Where voluntary or compulsory unitization is implemented one of the operators
is chosen to be the initial unit operator. The initial unit operator is usually
the operator having the greatest working interest in the pool. A unit operating
agreement will govern the manner in which the unit will be managed and the division
or royalty and working interests.
At the time of unitization, landowners will fall into different categories depending on how they have handled their mineral rights. There will be those who have signed P & NG leases, those who have not signed a p & NG lease and those that oppose the unitization.
Unitization Clause in a P & NG Lease
Modern leases usually contain a clause that authorizes the lessee to unilaterally
unitize the lessor's lands with other interests within an oil or gas pool. Where
no such clause exists in a lease a separate unit agreement must be obtained
from the landowner to unitize the oil and gas interest.
Unit Agreement
To obtain a fully unitized pool the operator must combine all of the oil and
gas interests whether by exercising unitization clauses in the leases or by
separate unit agreements. Until such time as unitization is completed, the oil
and gas interests in the pool are governed by existing spacing and pooling rules.
Unitization Agreements Modify Leases
Unit agreements modify the terms of existing leases to allow for the unitization of the pool or field including the establishment of the unit area and the unit's expansion or contraction as development continues.
Unitization eliminates the need to drill a well on each spacing unit and allows
production royalties to be distributed to all interest owners participating
in the unit. There may be different proposals regarding the manner by which
royalty shares are determined. There may be based on a landowner's land area
relative to the entire unit area or they may be based on a three-dimensional
volume calculation of the reservoir. Both may be modified by various tract factors
assigned to individual tracts.
Unit Participation
Of the leased lands to be included in a unitized area, those that actually cover
the underlying pool are characterized as "participating" while those that are
outside the pool are termed "non-participating". Where such a distinction has
been made in the unit agreement the production royalties will be paid only to
those "participating" interests in the manner described in the unit agreement.
In other words, only those parties that actually own the oil or gas interests
will be compensated for its production.
Compulsory Unitization
Where the various interests cannot agree to unitize or where an interest wishes
to otherwise accomplish the unitization of an oil or gas pool, the proponent
of a unitization may apply to the tribunal for an Order requiring the joining
of the various oil and gas interests in a pool. When the tribunal issues an
order to unitize a pool, unleased interests will be deemed to be either a royalty
interest or a working interest. Royalty interests will have a P & NG lease
applied to them and working interests will be subject to the working interest
provisions of the unit operating agreement attached to the order. In addition,
the order will direct that all working and royalty interest owners be subject
to the unit agreement. The terms of the proposed unit agreement will be examined
in detail during the course of the hearing.