Surface rights issues from an expert

Focus on law in the oilpatch

North Battleford – North Battleford lawyer Richard Gibbons spent many years as the head of the Saskatchewan Surface Rights Board of Arbitration. Now he specializes in representing landowners before the board.

Gibbons was appointed to the board in 1995, and left it in November 2009. The government had changed, and Gibbons felt they wanted some new faces for the non-political board. “I was on the board for 14 years, so it was probably time for some refreshing.”

“I was okay with that. There was a lot of travel. You go all the way from Estevan to Pierceland,” Gibbons said by phone on May 4.

When he was on the board, he was the board chair and authored most of the decisions. Three board members would take part in a particular hearing. He talked about how one had to understand the technical part of oil and gas, reduce that to a written form that would make sense, be consistent with previous decisions, and be fair to the oil and gas industry as well as the agricultural industry.

The rules are that you cannot appear before the board for one year after you’ve left it. Since that time has passed, Gibbons has been appearing before the board instead of sitting on it. “After that year went by, I had people who remembered me being on the board, and (they) concluded I still might have some interest and expertise in the area, and things went from there. If you look at the decisions of the last five years, you’ll see I was involved in a number of hearings,” he said.

“I have surface rights as specialty. I appear for landowners only. I do not represent petroleum or natural gas corporations. I review oil and gas leases, mines and minerals leases, surface rights agreements and leases, and appear before the Surface Rights Board on applications for surface rights and applications for setting compensation for surface rights.”

About 30 to 40 per cent of his practice is this sort of work. The rest is general litigation, business and corporate work.

Gibbons has clients from south of Kindersley to the Alberta border and north to Pierceland. Further than that, travel becomes an issue. The oilpatch is slowly creeping towards North Battleford, and is now at Prince, 20 kilometres north of the Battlefords. He knows of test holes further east and south.

“Heavy oil was stagnated for years until they developed the technique, I think Husky developed it, of pumping sand with the oil. That revolutionized the production of cold oil. Now, Husky, who is the main player in this area, is looking for thermal injection and SAGD-types of arrangements.”

As that sort of work gets closer to North Battleford, he expects services to locate there.

The 65-year-old has no intention of retiring anytime soon, and will continue on as long as his health is good and he enjoys it.

Typical client

“When it comes to oil and gas and surface rights, the typical client is a farmer who owns farmland on which there are oil and gas installations, typically oil wells. Gas wells typically don’t have a very big footprint on his land and don’t raise very many issues, and they aren’t serviced heavily with traffic on and off the site, whereas oil wells are,” Gibbons said.

“So they are coming to me typically one of two ways. One is the oil and gas company wants to drill on their land, and they haven’t done that before, or secondly, they’re looking at the compensation being reviewed. If there’s a new well and a surface lease entered into, and if not, there’s a hearing before the Surface Rights Board, and they want some help before the Surface Rights Board: what evidence to call, what’s relevant, what’s the board interested in, what are the considerations. What can be done, if anything, to settle before a hearing, and if not, run the hearing and see what the results of that will be. If there’s a right of entry granted so they can drill a well, they engage me to negotiate surface rights compensation.

“And if we can’t we reach an agreement on compensation, we run a hearing before the board and the board will set compensation.”

Different forms of compensation

Asked what a range of a farm owner could expect in northwest Saskatchewan, with a CHOPS (cold heavy oil with sand) installation, Gibbons responded, “That’s a tougher question than you think. The oil and gas companies will typically try to get a number of land owners to sign surface rights rentals. They’re typically done at the low end of the range, because people aren’t informed of what their rights are under the surface rights compensation.

“They then use some of these lower end rental payments to form a ‘pattern of dealing,’ and use that pattern of dealing to force all owners to receive the low end of those rentals. Some of those rentals, are, in my view, extremely poor.”

He used the example of a three-acre site – two acres at the wellhead and one acre for the road. “They’re typically looking at the value of that farmland to be $1,000 an acre. Well, current farmland sales around the Battlefords are closer to $3,000 an acre.

“But there’s more to that. That $1,000 an acre is increased by 150 per cent in accordance to what’s called the Blackstock formula, which says no landowner would part with three acres of land going into the middle of his field voluntarily. So this is, in effect, a type of expropriation, so the value of the land should be increased to reflect the small-taking factor. If the current fair market of the land is $3,000 an acre, then the award should be $4,500 per acre, having the Blackstock formula implemented.

He then referenced the loss of use, which takes into effect the crop on that land. “The typical returns on canola grown will be 50 bushels per acre, at $12 per bushel. That’s $600,” he said. “They’re typically offering $300, which is half of what that farmer is going to lose, by having oil and gas on that location.”

Severance

“Then you go onto what’s called severance, adverse effect and nuisance,” Gibbons continued. “Severing is the imposition of this oil installation, sometimes in the middle of your field, which severs one part of the field from the other. Depending on the field pattern you have, there could be sloughs, ravines, or other obstacles, you can have severance of your land with this oil and gas installation.

“The second thing is the adverse effect, which is the impact of putting this on your farming operations. The biggest thing nowadays is there’s so many GPS devices used on farm equipment, it enables the farmer have the tractor guided and directed by GPS so you have incredibly straight farming lines. The oil site and roadway in the middle of your field destroys the ability to use your GPS. You now have to farm around these obstructions.

“Then you get into the nuisance effect. You’re looking at 100, 120-foot sprayers. When you look at the operation of any farm equipment around a wellsite and roadway, the equivalent of a mushroom with square corners, you have to turn tight to go perpendicular of the direction of travel, to go along the roadway. You’re going to have inside corners going up to the mushroom. You’re going to have outside corners.

“On the inside corners, you’re going to have underspray and overspray, because the outside boom goes faster, the inside boom goes slower. You have the opposite going around the mushroom, around the box. Plus you have headlands, area you can’t spray. So you lose production around the wellsite and the roadway due to underspray and overspray.

“It’s extremely difficult to farm around these obstructions with the size of farm equipment now,” Gibson said.

When there are multiple sites on a quarter, there’s then a cumulative effect, which also needs to be compensated for. “If you have one installation on your quarter section of land, that’s one thing. But if you have as many as four, or more, farming around these becomes almost impossible, or extremely difficult, with modern farming equipment. When you add to that a naturally occurring slough or ravine, you run into huge issues with farming your land at all. But there’s no compensation other than for the wellsite and the roadway, and there should be.”

And this is a major frustration for Gibbons. “I think it needs to be addressed by Surface Rights Board, because they have the ability to make that award. But if you do an examination of the Surface Rights Board’s decisions, I would take the position the board has been inadequately compensating the landowner.”

Lack of understanding

“In my view, the oil companies do not understand farming. And if they understand it, they’re determined, on a cost-cutting measure, (they) aren’t interested in over-compensating farmers. They’re interested in undercompensating them,” Gibbons said.

Often wellsites are sculpted into a teardrop-shaped berm. The oil companies will often make an agreement with the farmer to farm up to the teardrop, which controls the weeds on the wellsite. But then the oil companies are asking to then reduce the compensate in relation to the smaller area, such as a now-one-acre wellsite instead of the original two-acres. “But the oil company has every right to go on that land any time they want. So if the farmer goes up to the teardrop shape, but the oil company wants to bring a service rig on there, to service the well, they drive around in the farmer’s field, because that field is still on the surveyed wellsite and roadway,” Gibbons said.

He said oil companies still want to be able to use that land as needed, but they don’t want to pay for it because they are not using it all the time. “And that’s fundamentally wrong,” he said.

The second and third years of a three-year lease do not include the value of the farmland. There are payments for loss of use and severance, adverse effect and nuisance. “Typically you’re receiving less than $3,000 in subsequent years, depending on the size of the site,” he said. Battery sites are larger, with five or six acres. A satellite might be three or four acres, and a well might be located in the middle of the field, with a two or three-acre roadway.

Larger sites, which can eventually be developed as pad sites, up to five acres in size, can result in free occupation if that is developed and the lease compensation is not reviewed until the review window comes up, once every three years on the anniversary date. Reviews can be requested three months before or after the anniversary date. Those reviews are typically requested by the landowner.

Weed control

“The Act requires the petroleum company to control the weeds and prevent them from going to seed. The reality of noxious weeds is they start forming seeds almost immediately after they germinate. So the requirement is they be prevented from germinating into seed. So you need to be there immediately in the spring, and as many applications of herbicide or mechanical eradication as is necessary to prevent them from going to seed,” Gibbons said.

“I have applications before the Surface Rights Board where they don’t do that. Of course, those weed seeds are now spread along the farmers’ fields, and the cost of chemical herbicides is, of course, dramatic. The farmers are bearing the results of the oil company paying a half-attention to controlling the weeds.”

Depending on the site, he said they should be sprayed as many as five or six times, as much as a farmer does now – a pre-seeding burndown, one after seeding, one in the middle of the summer, another before harvest and another in the fall.

Work done in the winter, breaking frost with rippers, can lead to issues with the separation of topsoil and various horizons of subsoil as well. “Winter construction is hard on soil horizons,” he said.

This comes into play on flowline construction, as the landowner is only compensated for the first three years on a diminishing basis each year. Yet after those three years, the landowner can’t build on that land, and there’s often settling. “That’s grossly unfair.”

Government held off changes

Several years ago the Saskatchewan government, under then-Premier Brad Wall, had made moves to make changes to Surface Rights Act. But when the downturn hit, the provincial government backed off, not wishing to add another burden onto an already beleaguered industry.

Gibbons had submitted a large 20-page brief to amend the act, but he noted the new act has not passed or been proclaimed.

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