Habendum Conundrum – Is a Mandatory Well Shut-In By Conservation Laws A 'Cause Beyond A Lessee's Control' Sufficient To Extend A Lease Past Its Primary Term?

Introduction

In a recent decision from the Saskatchewan Court of Queen's Bench, Canadian Natural Resources Limited v Rife Resources Ltd., 2017 SKQB 307, the Court considered the interpretation of a common clause in a petroleum and natural gas lease that provides for lease termination after the expiry of the primary term when there is no production unless there is a well on the lands capable of production that is not producing as a result of "any cause whatsoever beyond the Lessee's reasonable control". The issue before the Court was whether a mandatory shut-in of wells pursuant to provincial conservation legislation constituted a "cause beyond the lessee's control" sufficient to continue the lease. The Court concluded that a proper interpretation of the habendum and shut-in provisions necessitated an implied requirement that any shut-in be temporary and not indefinite to trigger a lease extension. As the shut-in order did not have a discernible end date, the Court held that the lease had expired. The case is significant as the implication of such a term in an oil and gas lease is novel and because of the significant financial implications for a lessee faced with a possibe lease expiry arising from the effect of a governmental shut-in order.

Background

Rife Resources Ltd. ("Rife") and Canpar Holdings Ltd. ("Canpar") were lessors and Canadian Natural Resources Limited ("CNRL") was the lessee of lands located in Saskatchewan pursuant to a lease agreement (the "Lease").

The habendum clause of the Lease provided for a 10 year primary term, with the prospect of the Lease continuing in effect after expiry so long as there was continuous production, drilling or working on the lands. Article 11 of the Lease further provided the following with respect to production after the expiry of the primary term:

If at the end of the aforesaid ten (10) year term leased substances are not being produced from the said lands or lands pooled therewith, or if at any time after the expiration of the aforesaid ten (10) year term leased substances cease to be produced from the said lands or lands pooled therewith, but there is then situated on the said lands or lands pooled therewith, a well or wells capable of production of leased substances and such well or wells are shut-in, suspended or otherwise not producing as the result of a lack of or intermittent or uneconomic market, or any cause whatsoever beyond the Lessee's reasonable control, then, for the purposes of continuing the term of this Lease, each such well shall be deemed to be producing leased substances while shut-in, suspended or otherwise not producing as aforesaid.

The 10 year primary term expired in 2009 but the parties agreed to extend the primary term until 2011. On that date, two horizontal heavy oil wells were in production. CNRL continued with production from those wells after December 31, 2011, and so by operation of the habendum clause the Lease continued in force.

In 2011, CNRL learned that one of those horizontal heavy oil wells was producing natural...