Welcome to the first edition of “The Mineral Corner” where we take an opportunity to dig deep into freehold mineral right ownership in Canada, specifically related to petroleum and natural gas. We will be discussing current events, trends, ownership challenges and some management tips for the average freehold mineral right owner.
In Canada, mineral rights are owned by either government entities (referred to as Crown) or private individuals/corporations (referred to as freehold). Across all of Canada, approximately 89 per cent of land is Crown and the remaining 11 per cent is freehold.
Freehold mineral rights are an estate in real property and hold the right of the owner to exploit, mine, and/or produce any or all of the minerals lying below the surface of the property. Mineral rights include all organic and inorganic substances that form part of the soil with the exceptions of sand, gravel and subsurface water.
Exploring and developing oil and gas is technically complex, costly and thus a very risky endeavor for the average individual. Most owners of freehold mineral rights, including government, are not prepared to take the risk in developing their own resources. In the case of individual owners of freehold mineral rights, most are risk-adverse and very few have the technical training, experience and typically, the financial resources. In most cases, freehold mineral right owners rely on leasing (contractual obligation) their mineral rights to resource companies for the efficient and economic extraction of oil & gas.
Provincial government entities across Western Canada host scheduled crown mineral right auctions, designed to generate economic activity and maximum revenues while setting a standardized royalty regime for all resource companies that wish to develop petroleum & natural gas in Western Canada. Each provincial entity has the right to structure their royalty regime in a manner of which they prefer. In Saskatchewan, the crude oil royalty regime is dependent on the type of fluid being produced (heavy, southwest designated oil and non-heavy oil), monthly well production, oil price factors, production tax factor and a Saskatchewan resource credit – all of which are further explained at www.economy.gov.sk.ca. The Saskatchewan government implements royalty incentives (2.5 per cent royalty on a specific volume of oil production) to promote E&P companies and spur on economic activity. Royalty incentives are based on the type of well drilled (horizontal/vertical, developmental/exploratory, deep/non-deep) whereby the largest incentive of 16,000 cubic metres of production is for exploratory deep horizontal wells. A vertical developmental non-deep oil well does not receive an incentive volume.
Freehold mineral right owners typically lease their mineral rights to E&P companies by executing a CAPL (Canadian Association of Petroleum Landman) agreement. This agreement is a contractual obligation between the freehold mineral right owner and the resource company and define the terms of which each party wishes to work together. CAPL provides a base agreement of which the specific terms are then negotiated between the two parties. Bonus payments, royalty rates and term (length of lease) are the three major terms of the lease agreement; however, don’t pass over all of the additional terms that are defined in the agreement. The lease agreements is the most critical step to insuring that each party is comfortable working under the terms that are agreed to. If you’re unsure or uncomfortable with the lease agreement terms, please seek professional advice for support.
Watch for next month’s publication – Is my mineral lease offer fair?
Cameron Wyatt is the founder of Homestead Energy Ltd and MineralRights.ca with 15 years’ experience in the industry. He can be reached at email@example.com.