Landowners losing on leases

Farmers should refuse to accept lower lease payments from oil companies, says advocacy group

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The Western ProducerAlberta’s Surface Rights Board is a recourse for landowners in cases where an energy company becomes insolvent or refuses to pay lease fees. | File photoAlberta’s Surface Rights Board is a recourse for landowners in cases where an energy company becomes insolvent or refuses to pay lease fees. | File photo

There was $1,200 missing from the lease fee cheque Verna Phippen received this year from the energy company that has leases on her land.

The Pigeon Lake, Alta., landowner filed a claim with the Alberta Surface Rights Board to obtain the balance of the fee owed according to her lease agreement, but she isn’t holding her breath for a quick payment.

“I know of people that have been waiting a couple years and have yet to get their cheque even though the Surface Rights Board has recommended to the minister (of finance) that they be paid out of general revenues,” said Phippen.

Her situation may become commonplace, as the beleaguered Alberta oil and gas industry seeks to cut costs amid a pricing slump that is affecting almost all sectors of the economy.

More than one energy company has asked farmers to accept reduced lease payments, which are designed to compensate them for adverse effect on their land and inconvenience resulting from the presence of wells and pipelines on their property.

They should refuse those requests, said Ronald Huvenaars, a farmer from Hays, Alta., who is chair of Action Surface Rights (ASR), an advocacy group formed to help landowners deal with energy companies.

“Don’t sign,” said Huvenaars.

“If you sign that for a reduced rate and this company happens to go bankrupt, in the next year or so, if you want to apply to the Surface Rights Board to get your lease payment, the lease payment will only be for the new re-negotiated price.

“Basically you’re committing yourself to a lower amount from that day on, until you can renegotiate a higher price again.”

Huvenaars said he has not been asked to accept a lower rate on his leases but knows of other landowners who have been approached to do so.

“They’re sending out letters saying ‘due to the problems in the industry, we feel we want you to cut your lease rates.’ A lot of them are saying in half.

“It’s to share the pain, I guess, is how their letters go. Everybody’s just trying to find a place to save some funds. Some of the companies are finding all kinds of interesting federal legislation to try to get out of leases.”

However, Huvenaars points out energy companies didn’t offer to increase lease payments when oil prices were high. Rates are written in contracts.

Daryl Bennett, an ASR director and vice-president with My Landman Group, said he has been helping farmers deal with requests for reduced lease payments, some of them seeking a 50 or 60 percent reduction.

“In those cases we just send them a letter saying we are applying to the Surface Rights Board and they have 30 days to pay the remainder of the amount or we’ll apply to the board and then they can have the privilege of paying for representation costs for the landowner,” said Bennett.

“Usually the company will back off because they’ll have to pay far more than that in legal costs to go before the board.”

In some cases, energy companies have offered to pay farmers a lump sum for wells they say are close to reclamation. However, if that reclamation doesn’t take place, the landowner will have forfeited the lease payments.

“That’s a common tactic, for companies to promise reclamation, but they don’t have the money to reclaim a lot of these wells. They’re just trying to get rid of their obligation to pay the rental,” said Bennett.

“We’re simply telling landowners that if you have a producing well on your land, and the company is just telling you they’re reducing the rents, don’t stand for it.”

Energy company bankruptcy is already a fact of life in the sector. In 2015, 20 Canadian oil and gas exploration companies went into receivership, according to Sayer Energy Advisors, a company involved in energy industry acquisitions and mergers. It said in its winter 2016 newsletter that it expected more to fold in 2016.

Bennett said the ASR group is waiting for a response to its submission to the finance department, asking if it will cover landowners’ legal costs to recoup full lease payments and whether the government is in turn calling energy companies to account.

“We do not think the minister of finance is trying to recoup money from existing operators who refuse to pay and to us, that’s a dereliction of duty. They should be doing that,” Bennett said.

Huvenaars wonders if the situation will worsen as energy companies pull out the stops to save money and survive until oil prices improve.

“One of my fears is that it becomes a bit of a vicious circle when a few companies start trying to do some of these things. We have companies that respect their commitments. But everybody is competitive … and when your competitors are starting to try to walk away from things … it almost forces other companies to start working at doing the same thing.”

Alberta’s Farmers Advocate Office (FAO) issued an advisory about energy companies’ efforts to reduce their payments.

“The amount provided for annual rental is based on a landowner’s Adverse Effect and Loss of Use, not the state of the industry,” the FAO said.

“A company cannot unilaterally decide to reduce the amount of compensation provided to a landowner. Section 27 (6) of the Surface Rights Act entitles landowners to the opportunity to negotiate with industry in good faith.

“A landowner is under no obligation to accommodate the changing financial circumstances of a company.”

The FAO further stated that landowners can seek compensation for unpaid or reduced rents through the SRB, and cashing a cheque from an energy company does not necessarily imply acceptance of the amount.