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Xenotime Energy Inc. Application for Pooling Order, 2023 ABAER 003

Link to Decision Summarized

Oil – Unit to Produce Oil

Application

Xenotime Energy Inc. (“Xenotime”) applied for a compulsory pooling order prescribing that all tracts within the drilling spacing unit in the northwest quarter of Section 15, Township 50, Range 4, West of the 4th Meridian (“NW15”), be operated as a unit to produce oil from all formations from the surface to the base of the Mannville Group through a well to be drilled in Legal Subdivision 13.

Xenotime requested standard AER pooling clauses, including specifying that costs and share of production under the pooling order be allocated on a tract-area basis. It further requested to be named as the operator of the proposed well, and to apply the maximum penalty allowed under the Oil and Gas Conservation Act (“OGCA”) if a tract owner fails to pay their tract’s share of costs by the time specified in the pooling order.

Decision

The AER approved the application for a pooling order, subject to conditions.

Pertinent Issues

PrairieSky Royalty Ltd. (“PrairieSky”), as the fee simple title owner of all mines and minerals, except coal, within, upon, or under the lands within a portion of the northwest quarter section of NW15, submitted a statement of concern regarding the application. PrairieSky’s principal argument was that section 80 of the OGCA applies only to a working interest owner of a tract within a drilling spacing unit that is unable to come to an agreement with other working interest owners to negotiate a satisfactory pooling arrangement. PrairieSky argued that, because it was not engaged in oil and gas operations and did not hold an operator’s licence, section 80 of the OGCA did not apply, and a compulsory pooling order cannot be issued against it. PrairieSky, however, decided not to participate in the hearing before the AER.

AER Jurisdiction

In light of PrairieSky’s arguments, and despite lacking a formal motion, the AER first considered the jurisdiction to grant compulsory pooling orders pursuant to Part 12 of the OGCA (which includes sections 78–90) and whether it had the authority to issue a compulsory pooling order that includes fee simple mineral title owners, including PrairieSky. The AER concluded that, because a fee simple mineral title owner satisfies the definition of an “owner” of a “tract” for the purposes of sections 78–90 of the OGCA, it had the required authority.

Need for a Compulsory Pooling Order

In accordance with section 4.010(3)(a) of the Oil and Gas Conservation Rules, the surface area for a drilling spacing unit for an oil well is one quarter section, unless otherwise prescribed by the AER. Xenotime’s Crown production rights will expire on December 21, 2023, and in the absence of a pooling order, it appears unlikely that oil production from the Mannville Group in the drilling spacing unit could be achieved prior to expiry of the Crown lease. As a result, the AER found that there is a need for a pooling order to allow drilling for and production of oil from the drilling spacing unit and that Xenotime should be afforded an opportunity of obtaining its share of the production of oil from its Crown production rights.

Xenotime Efforts to Negotiate a Voluntary Pooling Arrangement

Section 80(2) of the OGCA and sections 1.5.3(4) and 1.5.3(5) of Directive 065 require an applicant to make substantial efforts to negotiate a voluntary pooling arrangement. A compulsory pooling application should be a last resort in case the mineral owners are unable to voluntarily negotiate a pooling agreement.

The AER found that Xenotime made several attempts to obtain production rights for the entire quarter section. Xenotime also unsuccessfully attempted to obtain a voluntary pooling agreement for the Manville Group in the drilling spacing unit. According to the AER, there was no evidence on the record of the proceeding that suggested a voluntary pooling arrangement was likely to occur.

Based on the evidence on the record, the AER found that Xenotime tried to enter into a voluntary pooling arrangement with PrairieSky. However, PrairieSky did not consider a pooling arrangement as an option as part of its business practice, as a result of which the efforts to achieve a voluntary pooling arrangement failed quickly. Therefore, the AER was satisfied with the efforts made by Xenotime.

Appropriate Terms for the Pooling Order

The AER approved the requested terms as part of the pooling order, which included standard provisions for a compulsory pooling order, based on the OGCA and previous pooling decisions. The AER did not include in the order the applied-for terms that relate to royalty payments and taxes since the AER does not have jurisdiction in relation to those issues.

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