Focus On Energy - May 2009

Article by Mike Hurst, Miles Pittman, George

Antonopoulos and Jenelle Matsalla

Extension of Oil & Gas Operators' Trust

Obligations

Where an operator commingles the monies of a joint-operator

with its own funds and the account is depleted, a constructive

trust may be imposed on the assets (and sale proceeds thereof) of

the operator for the benefit of the joint-operator.

Under clause 507 of the 1990 CAPL Operating Procedure, an

operator is expressly authorized to commingle its own funds with

those of a joint-operator, but it is provided that the joint

operator's funds are considered trust monies. In Brookfield

Bridge Lending Fund Inc. v. Vanquish Oil & Gas Corporation and

King Energy Inc., 2008 ABQB 444, the Alberta Court of

Queen's Bench held that, where an operator empties its bank

account to pay creditors, a constructive trust may be extended over

the other assets of the operator, and the joint-operator will be

granted priority over all of the operator's creditors.

Karl Oil and Gas Ltd. ("Karl") and

Choice Resources Corporation ("Choice")

were 55% and 45% working interest owners, respectively, of a well

referred to as the "Simonette property". Karl was

originally the operator until it sold its interest to Vanquish Oil

& Gas Corporation ("Vanquish"), and

Vanquish assumed the role of operator. The well came into

production when Vanquish was operator.

The Simonette property was operated subject to the terms of the

1990 CAPL Operating Procedure. Clause 507 specifically allowed the

operator to commingle the monies received from or on account of a

joint-operator with its own funds, and these monies were deemed

trust monies held by the operator as the joint-operator's

trustee.

A related dispute not addressed in this specific action was

whether Karl or Choice was the owner of the 45% working interest in

the Simonette property, which was not previously owned by Vanquish.

For the purposes of this case, it was clear that whomever was the

owner of that 45% interest was entitled to have been paid by the

operator a percentage of the net production revenues. Vanquish, as

operator, kept a main operating account where all expenses were

paid from and all production revenues were deposited. However,

Vanquish did not pay the pro rata net production revenues,

estimated to be in the amount of $320,539.00, to the owner of this

remaining 45% interest.

Three years after Vanquish became operator, a receiver was

appointed on application by Brookfield Bridge Lending Fund Inc.

("Brookfield"), a secured lender of Vanquish. The

receiver applied for the sale of Vanquish's assets. From the

proceeds of the assets sale, Karl and Choice advanced a claim to

obtain the $320,539.00 which should have been remitted to the 45%

interest owner for net production revenues.

The issue to be determined then was whether the joint-operator

working interest owner...