Limiting Deemed Production: How Long Can A Shut-In Well Sustain A Valid Lease?

Introduction

In Canadian Natural Resources Limited v Rife Resources Ltd.1 (Canadian Natural), the Saskatchewan Court of Queens' Bench (the Court) set a new limit on how long a party can rely on deemed production to sustain a valid oil and natural gas lease. Shut-in well clauses typically permit a lease to continue by way of deemed production—where a well is capable of production, but is shut-in for reasons beyond the lessee's reasonable control. In Canadian Natural, the Court found that a party relying on such a provision must take steps to remedy the reason for the non-production, otherwise, a temporary shut-in would effectively become indefinite. It is contrary to the fundamental profit-making purpose of an oil and gas lease for deemed production to continue indefinitely, and when this occurs, the lease will terminate.

Background

In 1999, Canadian Natural Resources Limited (CNRL) entered into an oil and natural gas lease with Rife Resources Ltd. (Rife) and Canpar Holdings Ltd. (Canpar). The habendum clause provided a 10-year primary term, with the prospect of continuing the lease after the primary term, if there was continuous or deemed production. The shut-in clause outlined what constituted deemed production. A well "capable of production" but shut-in as a result of "any cause whatsoever beyond the Lessee's reasonable control" would be deemed to be producing leased substances.

The parties agreed to extend the lease's primary term from 2009 to 2011. At the end of the primary term, CNRL had two producing wells, though both were producing in excess of the provincial regulation's prescribed gas to oil ratio (GOR). Wells exceeding this GOR must be shut-in unless the lessee obtains approval for concurrent production of oil and gas from the Ministry.

In January 2012, CNRL applied to the Ministry for concurrent production approval. Waseca...