Executive Summary: Key Legal and Evidentiary Issues

• Central dispute involved whether Canadian Natural Resources Limited (CNRL) produced non-solution gas owned by Signalta Resources Limited, resulting in claims of trespass, conversion, and unjust enrichment.

• The trial judge accepted Signalta’s expert evidence, finding that CNRL produced 1,944,851 mcf of Signalta’s non-solution gas from January 1, 2001 to December 31, 2015, and was liable in trespass, conversion, and unjust enrichment.

• CNRL appealed on grounds including alleged errors in the admissibility and weight of expert evidence, the amendment of pleadings, the application of trespass law to split title lands, and the assessment of damages and costs.

• The Court of Appeal upheld the trial judge’s findings, confirming that CNRL did not comply with relevant regulatory requirements and that Signalta was entitled to damages.

• Damages were awarded using a restitutionary approach, specifically gross revenue less CNRL’s post-extraction expenses, reflecting the trial judge’s finding of careless but not egregious conduct by CNRL.

• Both CNRL’s appeal and Signalta’s cross-appeal were dismissed, with each party ordered to bear their own costs on appeal.

Facts of the case

Signalta Resources Limited and Canadian Natural Resources Limited (CNRL) each held interests in the Waseca Formation near Frog Lake, Alberta. CNRL was the bitumen lessee, holding an oil sands lease (OSL) under an agreement dated August 1, 1998, granting exclusive rights to oil sands in the Mannville Group. Signalta acquired petroleum and natural gas leases (P&NG Leases) under a purchase and sale agreement with Imperial Oil Resources dated February 17, 2009, effective January 1, 2009. Where the lands and zones covered by the P&NG Leases overlapped with the OSL, these were referred to as Split Title Lands.

CNRL, as the bitumen lessee, had the right to solution gas—hydrocarbon gas dissolved in crude oil or bitumen before reservoir perforation. Signalta, as the natural gas lessee, had the right to non-solution gas—hydrocarbon gas in a gaseous state before reservoir perforation. Signalta alleged that CNRL’s bitumen production from the Waseca Formation caused non-solution gas to migrate and be produced by CNRL, resulting in a claim for over $10 million in damages. CNRL denied producing non-solution gas, asserting that any gas produced was solution gas, and that an impermeable barrier in the Waseca Formation separated the bitumen from the non-solution gas pools.

Background and policy terms

The parties agreed that the relevant regulatory instrument was Alberta Energy Regulator Interim Directive 99-01: Gas/Bitumen Production in Oil Sands Areas – Application, Notification, and Drilling Requirements (ID-99), and that the Waseca zone is a geologic zone within the Mannville Group. The trial judge confirmed that the Waseca Formation at Frog Lake was regulated as a crude bitumen reservoir, and both parties agreed that ID-99 applied to the lands covered by CNRL’s OSL.

Trial findings and expert evidence

The trial judge accepted Signalta’s technical and expert evidence, finding that two gas caps (the Main Gas Cap and the NW Gas Cap) existed and contained non-solution gas, that there was no regionally extensive, impermeable barrier between the Upper and Lower Waseca, and that it was possible for CNRL to produce non-solution gas through well perforations and wormholes created by CHOPS (cold heavy oil production with sand). The trial judge determined that CNRL produced 1,944,851 mcf of non-solution gas from January 1, 2001 to December 31, 2015.

The trial judge found CNRL liable to Signalta in trespass, conversion, and unjust enrichment, and ordered CNRL to pay damages for “negligent trespass.” The damages were quantified based on the value of gross revenue for the non-solution gas, less CNRL’s expenses after extraction, including royalties and the costs of gathering, transporting, and compressing the gas. The trial judge declined to award “harsh damages” (gross disgorgement) because she was not satisfied that CNRL’s conduct was deliberately unlawful or done in bad faith.

Following trial, the judge awarded Signalta 45% of its “reasonable and proper costs,” with doubling of costs after the date Signalta served a formal offer on CNRL (April 12, 2019), and 100% of its disbursements in the amount of $1,461,448.08. The amount of reasonable and proper costs was to be determined by an assessment officer.

Appeal and outcome

CNRL appealed the trial judge’s findings on liability, damages, and costs, arguing errors in the handling of expert evidence, amendment of pleadings, application of trespass law to split title lands, and quantification of damages and costs. Signalta cross-appealed, seeking a higher damages award.

The Court of Appeal of Alberta (Justices Dawn Pentelechuk, Bernette Ho, and Joshua B Hawkes) upheld the trial judge’s decision in all respects. The appellate court found no reversible error in the trial judge’s treatment of expert and lay evidence, the amendment of pleadings, or the application of law to the facts. The court confirmed that CNRL’s right to produce non-solution gas was limited by regulatory requirements, which CNRL failed to observe, and that Signalta was entitled to compensation. On damages, the court clarified that the trial judge’s approach was consistent with the “harsh rule” in restitutionary damages, though not at the highest level, and that the award was just and equitable given CNRL’s conduct. The costs award was also upheld as a proper exercise of judicial discretion.

Ruling and overall outcome

The Court of Appeal dismissed both CNRL’s appeal and Signalta’s cross-appeal. The damages awarded to Signalta were based on the value of the non-solution gas produced, less CNRL’s post-extraction expenses, as determined by the trial judge. The exact amount was not specified in the appellate decision, but the methodology and relevant cost items were clearly set out. Each party was ordered to bear its own costs on appeal, and the trial judge’s findings and awards in favor of Signalta were affirmed.