Coalbed methane developers are worried their fast-growing industry could soon be stalled by a dispute over who owns the gas beneath millions of acres of private land in Alberta.
On private land, companies wanting to produce the natural gas in coal seams must negotiate with firms that own the coal beneath the property and claim ownership of the coalbed methane (CBM).
But in some cases, individual landowners who own the mines and minerals beneath their property - but not the coal - also claim ownership of the CBM.
"Fundamentally, when there is a dispute over who owns the gas in the coal on a piece of land, then there's a problem," says Mike Gatens, chair of the Canadian Society for Unconventional Gas, which represents the CBM industry.
A CBM developer could reach agreement with a landowner who owns the mines and minerals beneath his land to develop the coalbed methane, for example. But a company that owns the coal on the same piece of property could legally challenge the agreement and demand compensation.
"It's not an insignificant problem. But it's not going to stop development," says Gatens, who's also chairman and CEO of MGV Energy Inc., a Calgary-based CBM developer.
However, so-called individual freeholders who own the mines and minerals beneath their land - but not the coal - should prepare themselves for repercussions if they lease the CBM rights beneath their property, says the Freehold Owners Association's website.
Freehold owners who don't hold title to the coal but who receive royalties from CBM production should keep a separate account for these royalties "until the ownership issue respecting their mineral rights is resolved through litigation or negotiation," the association advises.
Alberta Energy says it doesn't intend to clarify the matter by enacting new legislation - as the B.C. government did.
B.C.'s Coalbed Gas Act, which the B.C. government enacted in 2003, stipulates that natural gas is a mineral and that the owner of the natural gas - not the owner of the coal - owns the coalbed methane entrapped within the coal.
In Alberta, however, "the Department of Energy has no plans for legislation that would affect the private property rights of freehold mineral owners," says Mike Ekelund, an Alberta Energy assistant deputy minister and chair of a multi-stakeholder advisory committee examining how best to develop CBM in the province.
"The courts determine questions of interpreting existing contracts between private parties," Ekelund said.
The Canadian Society for Unconventional Gas (CSUG) has formed a special committee to study and try to resolve the freehold issue.
"The (Alberta) government is clearly waiting for the industry to come up with a solution," says Patricia Steele, a lawyer with Gowling Lafleur Henderson LLP in Calgary.
Steele, who is on the CSUG committee that's looking at the freehold issue, said the committee is gathering information from CBM developers and other CSUG members to determine the extent of the issue and whether some companies have been able to resolve it on their own.
"I get the sense it is a serious issue. What we're trying to do right now is to quantify how serious," Steele told Business Edge at CSUG's Unconventional Gas Conference held recently in Calgary.
One reason the freehold issue looms as a potential threat to the industry in Alberta is because of where companies are exploring for, and producing, coalbed methane.
The industry is focused on the Horseshoe Canyon geological formation, because its relatively "dry" coals don't produce the huge amounts of contaminated water that has caused environmental problems in Wyoming's Powder River Basin.
The Horseshoe Canyon's buried coal deposits, which run in a wide swath just east of Highway 2 from Edmonton to south of Calgary, are currently producing Alberta's only commercial-scale CBM.
However, the area also contains a significant amount of freehold property where ownership of the CBM on private land is uncertain, says Jon Baker, president and CEO of Trident Exploration Corp., a Calgary-based CBM developer.
The freehold issue will have to be resolved if coalbed methane in the Horseshoe Canyon is to be developed to its fullest extent, Baker said during the recent Ziff Energy North American Natural Gas Strategies Conference held in Calgary.
There is enough CBM in the coal formation - an estimated 11 to 22 trillion cubic feet of potentially recoverable gas - to support the drilling of 3,000 wells per year between 2005 and 2014, he said.
Alberta's Horseshoe Canyon alone could produce up to 11 per cent of Canada's natural gas within 10 years, he noted.
But to achieve that kind of production, the freehold issue must be settled so companies can amass the large blocks of contiguous land needed for multiple-well CBM drilling and production, Baker said.
MGV Energy's Gatens said he believes a lot of companies, including his own, have been successfully negotiating with freeholders.
"There is the opportunity for the private parties that are disputing who owns what to resolve their differences and go forward." The freehold issue has its origins in the early 1900s, when the Canadian Pacific Railway sold some of its land, which included subsurface minerals, to Western Canadian homesteaders to raise money to build the railway and encourage traffic on its rail line.
Some settlers acquired title to all subsurface mines and minerals, including coal, CBM, petroleum and natural gas, the Freehold Owners Association says.
Other settlers acquired title to all mines and minerals except the coal. And still others acquired title to all mines and minerals except the coal and petroleum reserved by the CPR.
"Individual freeholders now currently hold title to subsurface minerals beneath approximately six million acres in Alberta," the association says.
However, the group notes that EnCana Corp. and Fording Inc., the successor operations to the CPR, "have publicly claimed that their ownership of coal in split-title situations includes CBM." Some CBM developers are making deals with individual freehold owners to develop CBM on land where EnCana or Fording holds title to the coal.
This could lead to legal challenges, the freeholders' association warns.
Lawyer Steele said the CSUG committee that's gathering information on the freehold issue plans to report to its members at a forum scheduled for January.
(Mark Lowey can be reached at mark@businessedge.ca)
