J. Q.B. A.D. 1995 No. 211 J.C. IN THE QUEEN’S BENCH JUDICIAL CENTRE OF ESTEVAN BETWEEN: COACHLIGHT RESOURCES LTD. and DUCE OIL LTD. DEFENDANT Thomas Schuck and Lora Bansley for Plaintiff Cameron Muir for Defendant JUDGMENT PRITCHARD, J. March 12, 1999 [1] The plaintiff, Coachlight Resources Ltd. ("Coachlight") and the defendant, Duce Oil Ltd. ("Duce") are corporations engaged in the recovery of petroleum and natural gas substances. This action relates to horizontal well drilled by the parties on LSD of 33-6-9-W2 (the "Horizontal Well" or the "Well"). The Horizontal Well was drilled from an existing vertical well in which Coachlight held 65% interest and Duce held 35% interest. It was drilled under an operating agreement dated May 17, 1984 (the "Operating Agreement") which incorporates the Canadian Association of Petroleum Landmen Operating Procedures 1981 ("CAPL 1981"). The plaintiff invoiced the defendant for its share of expenditures for the Horizontal Well but the defendant refused to pay the whole amount. In this action, the plaintiff seeks an order requiring the defendant to pay the balance of its 35% share of the $681,955.58 costs associated with the Horizontal Well plus $49,701.61 representing its 35% share of the regular lifting and production costs of all joint interest wells under the Operating Agreement, including the Horizontal Well. The plaintiff also seeks a declaration that it holds a builders\' lien against the defendant\'s interest in the Well and other joint interest assets to the extent of the debts due. The defendant denies liability for any share in the costs of the Horizontal Well in excess of $447,535.00 being 110% of the Authorization For Expenditure ("AFE") executed with respect to the Well. The defendant also counterclaims on the basis that, among other things, the plaintiff conducted certain operations without authority, was negligent in conducting operations and overcharged or made improper charges in its accounting procedures. [2] Prior to the drilling of the Horizontal Well, the parties (or their predecessors in title) were joint-operators of vertical well on LSD of 33 and another vertical well approximately one-half mile away on LSD of 33. They agreed to attempt an enhancement of their oil recoveries from the south-half of section 33 by drilling horizontal re-entry Well from the existing vertical well at of 33. It was hoped that the Horizontal Well bore would traverse the oil producing formation lying between of 33 and of 33. Under the Operating Agreement, Coachlight would be the Operator and Duce the Joint-Operator. On August 31, 1993, Coachlight prepared an AFE for the project and submitted it to Duce for approval (the "Original AFE"). Total drilling and completion costs as provided for in the Original AFE were estimated at $406,850.00 comprising approximately $378,400.00 for drilling costs and approximately $28,450.00 for completion costs with 65% of the total costs or $264,452.50 to be paid by Coachlight and 35% or $142,397.50 to be paid by Duce. On September 24, 1993, Mr. Dallas Duce of Duce in Estevan, Saskatchewan and Mr. Kevin Maguire of Coachlight in Calgary, Alberta had 23 minute telephone discussion during which they discussed the plans for the re-entry Horizontal Well. Despite some concerns about what Mr. Duce perceived to be high estimated costs of the Well, the Original AFE was approved by Duce the same day and returned to Coachlight by fax. [3] The application to Saskatchewan Energy and Mines for approval of the Horizontal Well was made August 26, 1993. It shows the target producing zone as the Frobisher, spud date of September 15, 1993, completion date of September 28, 1993 and an anticipated on production date of October 1, 1993. [4] On September 25, 1993 preparations for drilling operations began, including the plugging back of the vertical well and removal of the existing well equipment at of 33. Drilling of the Horizontal Well began October 1, 1993. On that date, Mr. Duce and Mr. Maguire had further telephone discussion of approximately 10 minutes. [5] The drilling contractor was Becfield Drilling Services Ltd. ("Becfield"). The initial drilling by Becfield did not go well. lost time report prepared at the conclusion of the drilling by Bob Nephew, Coachlight's on-site representative, (the "Lost Time Report") describes seven incidents of lost time and resulting additional costs that occurred during the period from October to October 9, many of which involved equipment failures. One of the significant delays resulted from poor core sampling procedures followed by the Becfield crew. The poor sampling was accentuated by the crew's failure to run tracer to determine accurate log times. The sub-standard procedures resulted in sample mixing and difficulties in determining the depth and zone that drilling was at. In addition, after reaching the target Frobisher zone, technical difficulties resulted in the drill bit turning upward into the Marley waterbearing formation. When drilling horizontally, it is much more difficult to drill out of porous rock and although Becfield attempted to angle back downward to the oil zone, it was unsuccessful. As the Marley formation was not the target zone, drilling operations were halted. On the recommendation of Mr. John Milford, the geologist representing Coachlight, decision was made to log to obtain more exact reading of the Horizontal Well bore. [6] The logging was completed at about midnight on October 7, 1993. In the late afternoon of October 7, Mr. Duce and Mr. Maguire had 30 minute telephone conversation at which time the proposal to plug back and kickoff new leg was discussed. Although it was clear that Mr. Duce was not happy about how drilling had proceeded so far, he did not object to the proposed second leg or request time to consider whether Duce wanted to proceed in that manner. Following this lengthy telephone discussion, the plugging back of leg one commenced at approximately 4:30 a.m. on October 8. At approximately 6:00 p.m. on October 8, Coachlight sent Duce four faxes. Three of the faxes were of the computer logs that had finally been received by Coachlight. The other was rough sketch completed by Mr. Maguire which showed that the first leg of the horizontal well was approximately 230 metres in horizontal length and that at one point it had bottomed out in the target zone of the Frobisher limestone but only for length of approximately 20 metres. The fax cover page indicated that the first leg had been plugged back to 1400 metres and that drilling on leg two was expected to commence around am on October 9. The fax cover sheet ended with the statement: "The logs look good. We may be poorer but we're lot smarter". At that time, approximately $287,000.00 in costs had already been incurred but Becfield had acknowledged some adjustments would be necessary due to problems created by its crew. In accordance with standard oilfield practice, Coachlight and Becfield did not stop the drilling operations to negotiate exactly what concessions would be given. That issue was left to be settled after the Well was completed. Despite the high estimated costs to date, Maguire was still hopeful that the project would stay within budget. Clearly, the success in staying on budget would depend on the extent of costs assumed by Becfield and how drilling of the second leg went. [7] Drilling on the second leg did not commence until late on October 10, largely because of problems involved in plugging back the first leg. Drilling of the second leg was initially uneventful with the target zone being quickly located. Unfortunately, however, as the Becfield crew flattened out the drill bit to move horizontally, they drilled out of the oil producing formation. Attempts to turn downward were unsuccessful and upon pulling out of the hole they discovered that the steering tools had vibrated loose. The tools were repaired and after another attempt they were successful in turning downwards and were able to again pick up the Frobisher formation. As bad luck would have it, the Frobisher kept dropping structurally much more than had been anticipated. They found that although they continued to drill downward, they kept chasing the formation until it finally started turning up as leg two of the Horizontal Well bore moved closer towards the vertical well at of 33. [8] On October 12, the problems being encountered on the second leg were discussed in 10 minute telephone discussion between Mr. Duce and Mr. Maguire. On the same day, Mr. Maguire faxed Duce two computer generated schematic drawings. One drawing showed the actual drilling path of leg one through the Marley and the Frobisher formations as well as the drilling to date of leg two through the same formations. As at that date, drilling on leg two had extended out horizontally from vertical of 33 approximately 325 metres so actual geology was only known for that distance. The other drawing also showed the actual drilling paths of legs one and two through the two zones and then projected outward Coachlight's expectations of the geology approximately 475 metres further along the horizontal towards the of 33 vertical well. [9] Drilling on leg two stopped on October 13, 1993. On October 14, Mr. Duce and Mr. Maguire had 29 minute telephone discussion. During this discussion Mr. Maguire explained that leg two had missed the best part of the producing formation when the steering tool failed and that he wanted to go back to that area with sidetrack. He sought Mr. Duce's approval. Mr. Duce did not object to the plan. He indicated that he did not know whether or not it would work but if Coachlight thought it would, it could give it try. During the same conversation, Mr. Maguire advised Mr. Duce that based on full estimates, the Original AFE was already overspent and that even with anticipated Becfield credits, they would probably be over budget if they proceeded with third leg or sidetrack. Although the parties discussed that they would be over budget, neither party raised the issue of whether supplemental AFE was required. Some two hours after this telephone discussion, Mr. Maguire faxed another schematic to Duce. This drawing was similar to those faxed on October 12 but showed not only completed leg one but also completed leg two which now extended horizontally approximately 475 metres out from the of 33 surface location. The drawing showed that the horizontal well bore of leg two had entered the target Frobisher formation near the beginning of the leg for length of approximately 40 metres and again at the end for approximately 85 metres. The balance of the horizontal length of leg two was in the Marley water bearing formation. The drawing also showed proposed 150 metre openhole sidetrack off of leg two to be drilled entirely within the Frobisher target zone. This sidetrack was expected to penetrate that portion of the Frobisher zone that was essentially missed due to the steering tool failure. Notice of the proposed sidetrack was faxed to Saskatchewan Energy and Mines on October 15, 1993. [10] Consent to proceed with the sidetrack was received orally from Saskatchewan Energy and Mines on October 15, 1993. Preparations had already commenced in anticipation of receiving regulatory approval and were completed shortly after the consent was received although actual drilling of the sidetrack did not commence until October 16. The sidetrack was drilled in one day without incident. On October 17, bleach was spotted in the second leg and up into the main hole and liner was set in place. Since the drilling rig was hybrid rig, it was also used for completion of the Horizontal Well. pump was put in place in the early morning of October 18 and the rig was released at 8:00 a.m. on October 19. pump jack was set up, pumping commenced, and the new Horizontal Well was placed on production. Unfortunately, after all of these efforts, it produced primarily water. [11] It soon became clear that the Well had no pressure draw down and that water was flowing in as fast as the Well was being pumped. decision had to be made as to what steps could be taken to make it producing Well. Mr. Maguire determined that work-over program was required in order to isolate the lower part of the Well bore from the water. On October 25 he had 32 minute telephone discussion with Mr. Duce regarding his proposed work-over plan which included the installation of inflatable packers. Mr. Duce did not object to the proposal nor did he suggest any alternate means of attempting to deal with the excessive water flow. As the packers were not contemplated in the original AFE, Mr. Maguire asked Mr. Duce whether he required new AFE for this expenditure. It was agreed that as they still did not have producing Horizontal Well, the charges would simply be added to the original AFE. [12] Unfortunately, problems were encountered in placing the packers. Eventually one packer was installed at cost of $42,593.81. On November 8, 1993, the Well was placed back on production. On November 16, Mr. Maguire sent two structural maps to Duce by fax: one map was dated February 11, 1993 and showed their understanding of the structure before the Well was drilled; the other was dated November 7, 1993 showing the information learned from the drilling of the Well. At the same time, schematic drawing was faxed showing the placement of the inflatable packer. The following day, Mr. Maguire and Mr. Duce had 13 minute telephone discussion. This was the first time that Coachlight was notified that Duce did not intend to immediately pay Coachlight's October 4, 1993 request for payment of $142,397.50 being Duce's 35% of the Original AFE. On December 1, 1993, Coachlight received payment of $85,000.00. On January 12, 1994 Coachlight faxed to Duce supplementary AFE dated December 31, 1993 (the "Supplemental AFE") setting out the cost overruns as at December 31 totalling $214,650.00. The cost overruns were comprised of $155,100.00 for drilling costs and $59,550.00 in completion costs. Coachlight's 65% share of these additional costs was $139,522.50 with Duce's being $75,127.50. Included with the Supplemental AFE was copy of the Lost Time Report prepared for the purpose of securing rebates from Becfield. [13] On March 8, 1994 Duce paid to Coachlight the further sum of $57,397.50 representing payment in full of Duce's share of the Original AFE. However, Duce continued to refuse to pay any drilling or completion costs under the Supplemental AFE. The Well was nevertheless maintained on production from November to June of 1994. It continued to produce high water cut throughout the entire period. In June of 1994 the pump failed and given the high water cuts and payment refusals from Duce no steps were immediately taken to rectify the situation. On June 20, 1994 Coachlight corresponded with Duce advising that as at May 31, 1994 Duce owed it $65,427.52. The letter also gave notice that Coachlight, as Operator, was exercising its option under Article 5, Clause 502 of CAPL 1981 to charge interest. The referenced provision of the 1981 CAPL provides: 502 OPERATOR TO PAY AND RECOVER FROM PARTIES Subject to the provisions of Clause 503, the Operator in its operations for the joint account shall initially advance and pay all costs and expenses of operations conducted for the joint account. The Operator shall charge to each Joint-Operator its proportionate share of the said costs and expenses, and each respective Joint-Operator shall pay the same to the Operator within thirty (30) days after receipt of the Operator's statement thereof. Failing payment when due, the amount unpaid may, at the Operator's option, bear interest from the day such payment is due for the account of the Operator at rate two (2%) percentage points higher than the then prevailing prime bank interest rate charged by the chartered bank in Canada used by the Operator with respect to operations hereunder, until the amount is paid. [14] On July 15, 1994, Coachlight sent Duce default notice pursuant to Article V, Clause 505(b) of the CAPL 1981 (the "Default Notice"). Clause 505(b) of the CAPL 1981 states: 505 OPERATOR'S LIEN (b) If Joint-Operator fails to pay or advance any of the costs hereby agreed to be paid or advanced by it, and the default continues to thirty (30) days after the Operator has served notice upon the Joint-Operator specifying the default and requiring the same to be remedied, the Operator may, without limiting the Operator's other rights at law: (i) withhold from such Joint-Operator any further information and privileges with respect to operations; (ii) treat the default as an immediate and automatic assignment to the Operator of the proceeds of the sale of such Joint-Operator's share of the petroleum substances; and from and after the Operator making such election, the Operator may require the purchaser of such Joint-Operator's share of the petroleum substances to make payment therefor to the Operator while the default continues, and (iii) enforce the lien created by the default in payment by taking possession of all or any part of the interest of the defaulting Joint-Operator in the joint lands or in all or any part of the production therefrom and equipment theron; and the Operator may sell and dispose of any interest, production or equipment of which it has so taken possession either in whole or in part or in separate parcels at public auction or by private tender at time and on whatever terms it shall arrange, having first given notice to the defaulting Joint-Operator of the time and place of the sale. The proceeds of the sale shall be first applied by the Operator in payment of any costs to be paid by the defaulting Joint-Operator and not paid by it and any balance remaining shall be paid to the defaulting Joint-Operator after deducting reasonable costs of the sale. Any sale made as aforesaid shall be perpetual bar both at law and in equity against the defaulting Joint-Operator and its assigns and against all other persons claiming the property or any part or parcel thereof sold as aforesaid by, from, through or under the defaulting Joint-Operator or its assigns. [15] Under the Default Notice, Duce was given notice that it owed Coachlight $69,025.20 representing Duce's unpaid 35% of the drilling, completion and operating costs of the Well and operating costs of other joint interest wells up to June 30, 1994. Duce was required to remedy the default on or before August 18, 1994. By letter dated July 19, 1994 Coachlight offered to accept quit claim of Duce's interest in the Operating Agreement in full settlement of all amounts owing by Duce as set out in the Default Notice. However, by letter dated July 27, 1994, Duce advised Coachlight that it disputed that any funds were owing by it to Coachlight. In its letter, Duce outlined the following four reasons for its refusal to acknowledge an indebtedness: a) Duce was forced to agree to proceeding with leg two of the Well because leg one had already been cemented back before its approval had even been sought b) Duce did not give verbal or written approval to leg three; c) The cost overruns resulted from poor workmanship; d) Coachlight failed to use good oilfield practices in locating the proper placement of the inflatable packer. [16] By letter dated September 12, 1994, Coachlight gave Duce further notice that by virtue of Duce's continuing default Coachlight intended to exercise its rights as Operator pursuant to Article IV, Clause 505 of CAPL 1981. [17] In October of 1994, screw pump was installed on the Well. Although new AFE was prepared for the installation, it was never forwarded to Duce. Coachlight took the position that since it had received no response to the Default Notice, Duce was no longer entitled to information concerning the Well. The screw pump wore out in three months due to breakdown of the rubber compound. Another temporary pump was placed on the Well in February of 1995 and new screw pump and top drive assembly was installed in June of 1995. The total of all of these costs was $99,906.10. Duce was charged its proportionate share being $34,967.14. [18] By letter to Duce dated July 26, 1995 Coachlight once again demanded payment. The total amount owing as at June 30, 1995, including interest, was $160,826.32. The level of the indebtedness was continuing to rise because it included interest charges as well as outstanding operating costs of all joint interest wells and facilities covered by the Operating Agreement. At that time, the joint interest assets included three producing oil wells in addition to the Horizontal Well. Both of the parties also held interests in battery and water plant located at 13-33-6-9-W2. Although Duce held 35% working interest in the producing wells, it only held 7% interest in the battery and water plant with the remaining 93% interest being held by Coachlight. As producer, Duce therefore assumed considerably higher percentage of the battery costs and these costs rose significantly with the extremely high water volumes from the Horizontal Well. [19] As at September 30, 1993, before operations commenced on the Horizontal Well, Duce had an outstanding balance of $3,871.88 owing to Coachlight with respect to regular lifting and production costs of their joint interest wells. By June 30, 1995 these outstanding costs had risen to $49,701.61, including any expenditures under $25,000.00 for the wells for which CAPL 1981 did not require an AFE. [20] In its July 26, 1995 demand letter, Coachlight indicated that it was still prepared to accept surrender and quit claim in full satisfaction of the amount owing but gave notice that in default of payment in full or the granting of quit claim, it would proceed with steps to recover the indebtedness. The within action was commenced October 4, 1995. The counterclaim was filed November 20, 1995. [21] Based on the foregoing facts as found by the Court, the issues to be determined between the parties are as follows: 1. Is Duce liable to Coachlight for 35% of the costs referred to in the Supplemental AFE? 2. Is Duce liable to Coachlight for 35% of the screw pump costs incurred after the Default Notice? 3. Was Coachlight negligent in conducting the drilling operations or did it otherwise breach its obligations under CAPL 1981? 4. Is Duce liable for the full operating losses of the joint interest wells, including battery costs as charged by Coachlight? 1. Costs in excess of the Original AFE [22] The plaintiff claims that the defendant is liable for 35% of all drilling and completion costs under both the Original AFE and the Supplemental AFE. These costs total $582,049.48 with Duce's share being $203,717.31. The defendant argues that its maximum liability for drilling and completion costs is 35% of 110% of the Original AFE amount or $156,637.25. On this issue, the defendant relies primarily on the third paragraph of Clause 301 of Article III of CAPL 1981. Clause 301 provides: 301 CONTROL AND MANAGEMENT OF OPERATIONS The Operator is hereby delegated the control and management of the exploration, development and operation of the joint lands for the joint account, provided it shall consult with the Joint-Operators from time to time with respect to decisions to be made for the exploration, development and operation of the joint lands, and keep the Joint-Operators informed with respect to operations planned or conducted for the joint account. Subject to Clause 304, the Operator shall be entitled to make or commit to such operating expenditures for the joint account as it shall consider necessary and prudent in order to carry on good and workmanlike operation for the joint account, provided the Operator shall not make or commit to an expenditure for the joint account for any single operation, the total estimated cost of which is in excess of twenty-five thousand ($25,000) dollars without written Authority for Expenditure from Joint-Operators, unless the expenditure is considered by Operator to be necessary by reason of an event endangering life or property. Particulars of each such event shall be reported promptly to the Joint-Operators. Notwithstanding the foregoing, if the Operator while conducting any single operation for the joint account, which operation is covered by written Authority for Expenditure, incurs or expects to incur expenditures for the joint account in excess of the total amount authorized in writing by the Joint-Operators for that operation plus ten (10%) percent thereof, the Operator shall forthwith so advise the Joint-Operators and submit for their approval written supplementary authority for such excess expenditures. [23] Duce's primary position is that since legs two and three were not contemplated under the Original AFE, it is not responsible for any of these costs. In support of this position it relies on Passburg Petroleums San Antonio Explorations Ltd. and D.W. Axford Associates Ltd. 1987 CanLII 3238 (AB QB), [1988] W.W.R. 645, (1987), 57 Alta. L.R. (2d) 57 where the Court held that an operator could not recover the costs of directionally drilled well from the joint-operators where the signed AFE made no direct or indirect reference to the fact that the well would be anything other than standard vertical well. In Passburg, the Court found that the joint-operators had not agreed to directionally drilled well and that as the signed AFE did not refer to directional well, it could not be relied on by the operator as authority to incur costs for such well. [24] This case is clearly distinguishable from Passburg. Here, there is no question but that the Original AFE specified and that both parties agreed that the Well was to be horizontal well. By the Original AFE, the parties also agreed that the target producing zone was the Frobisher limestone. The evidence is undisputed that leg one did not result in the type of well described in the Original AFE. The horizontal length of leg one is approximately 230 metres. Not only were just approximately 20 metres of its horizontal length within the target zone, but the end of the well bore and the majority of its horizontal length were within the water bearing Marley formation. The Court therefore agrees with Coachlight's position that leg one did not satisfy the Original AFE and that producing well like leg one was never contemplated by the Original AFE. The Court also finds that at the material time, Duce never suggested that the parties pause to consider stopping at leg one. [25] At trial, the defendant contended that the Marley formation could have been commercially produced and that by plugging back leg one as it did, the plaintiff destroyed perfectly good well capable of producing no less than 100 barrels of oil per day. The plaintiff disagreed. It contended that the Marley is known water bearing formation and that leg one was incapable of commercial production. Of course, the expert evidence of both parties is purely theoretical since leg one has been cemented in and neither contention can now be proven or disproven. However, from the Court's perspective, it is not necessary to decide the issue as the Court is satisfied that Duce approved of and consented to the plugging back of leg one and the drilling of leg two. [26] Duce went to considerable efforts to convince the Court that it was deprived of valuable asset through the plaintiff's unauthorized actions of plugging back leg one. The defendant's entire argument on this issue was predicated on its position that it did not voluntarily agree to proceed with leg two but was forced to do so because leg one had already been plugged back before it was consulted by Coachlight. As indicated, the Court does not accept Duce's position in this regard. The evidence establishes that Mr. Duce and Mr. Maguire had 30 minute telephone discussion on October and that the plugging back of leg one did not commence until approximately 4:30 a.m. on October 8. Although the schematic drawings were not faxed to Duce until after the plugging back, the Court accepts Mr. Maguire's evidence that the plan for leg two was discussed and agreed to during the one half-hour telephone discussion on the afternoon of October 7. The Court not only accepts Mr. Maguire's evidence on this issue but also finds that at the relevant time of October to October 8, Mr. Duce had not yet expressed, and perhaps had not yet even formed, the opinion that the Marley formation in which leg one was primarily drilled was capable of producing or that leg one should have immediately been placed on production. The Court is inexorably moved to this conclusion as the undisputed evidence is that the possibility of producing the Marley was never raised with Mr. Maguire during the October telephone discussion or in any subsequent telephone discussions throughout the period of drilling and completion of the Well. The possible lost opportunity to produce leg one was likewise not referred to in Duce's letter of July 27, 1994 in which, nearly one year later, Duce summarized its reasons for refusing to pay its share of the Supplemental AFE. [27] The Court also finds that Duce agreed to the drilling of leg three and to the installation of the inflatable packers. Consent to leg three and resulting increased costs was given during the 29 minute telephone discussion of October 14. Shortly after that conversation, Coachlight faxed to Duce schematic drawing of the sidetrack that they had discussed. Mr. Duce testified that after receipt of the faxed drawing he spent the evening of October 14 until 3:00 a.m. in the morning of the 15th reviewing his well file. At that time, Mr. Duce erroneously thought that Coachlight was drilling the sidetrack in northerly direction. He also erroneously thought that drilling of the sidetrack had commenced before his telephone discussion with Mr. Maguire on the 14th. He testified that if he had known on the morning of the 15th that drilling had not yet recommenced, he would have called Coachlight and argued against proceeding with the sidetrack, particularly if it was not being drilled to the north. Mr. Duce further testified that in such circumstances, he also would have told Mr. Maguire that it was wet where he intended to drill the sidetrack. Mr. Duce's misunderstanding about the commencement of drilling of the sidetrack arose from discussion he overheard on October 14 at the Estevan office of the Department of Energy and Mines. When he spoke to Mr. Maguire later on the same day he deliberately chose to omit telling Mr. Maguire that he had heard that drilling on the sidetrack had already commenced. Unfortunately, Mr. Duce's lack of candidness deprived Mr. Maguire of the opportunity to correct this error. Mr. Maguire did not know that Mr. Duce was operating under the misapprehension that Coachlight was not sincerely seeking Duce's input and consent to the proposed sidetrack or that Mr. Duce felt that he had no choice in the matter because Coachlight was just going to go ahead in any event. Mr. Maguire had no way of knowing that Duce thought the sidetrack was already in progress. As far as he knew, Duce was freely and willingly agreeing to the leg three sidetrack with full knowledge that by proceeding in that manner, the parties would be exceeding the Original AFE. [28] The Court finds that consent to the installation of the inflatable packers was given during the 32 minute telephone discussion of October 25. Not only does the Court accept Mr. Maguire's evidence on this issue, it also notes that in its letter of July 27, 1994 Duce only complained that the packer was improperly placed and makes no complaint that it was an unauthorized expenditure. Based on the October 25 discussion, Duce expected two packers to be installed but given the difficulties in installation, Coachlight terminated efforts after only one had been installed. The Court also finds that during the same telephone discussion, Duce specifically authorized the cost of the packers to be added to the Original AFE. Therefore, the Court finds that Duce is responsible for its 35% share of the cost of the installed packer notwithstanding that packers were not contemplated in the Original AFE. [29] Although the Court has found that Duce consented to the drilling of legs two and three, it also finds that there was no specific discussion between the parties regarding Supplemental AFE for such costs. Duce contends that it can only be liable for costs in excess of 110% of the Original AFE if it signs its approval to the Supplementary AFE. It has refused to do this. Coachlight has never disputed its obligation to issue the Supplemental AFE but argues that Duce's signature to the document is not required because its consent was given when the excess costs were being incurred at each stage of the drilling and completion of the Well. [30] In support of its position, Duce relies on Morrison Petroleums Ltd. Phoenix Canada Oil Co. et al (1997), 198 A.R. 81. In Morrison, the signed AFE, issued pursuant to CAPL 1981, estimated drilling costs at $1.1 million while actual costs were $3.2 million. The operator knew prior to spudding that there would be cost overruns but it failed to advise its joint-operators. The joint-operators refused to pay the excess amount because their approval had not been obtained before the additional costs were incurred. In the circumstances, and in reliance on Clause 301 of CAPL 1981, the Court limited the operator's recovery to 110% of the original AFE amount. In so doing, the Court held that an operator under CAPL 1981 is required to obtain authorization from the joint-operators prior to incurring expenditures in excess of the AFE and is also required to issue an AFE for the excess expenditures. [31] This Court entirely agrees entirely with the interpretation of Clause 301 of CAPL 1981 as found in Morrison. However, the facts in this case are significantly different from those in Morrison. Here, the Operator did not have prior knowledge that the Well was going to be overexpended. This is also not case where the operator casually advised the joint-operators of its intention to issue supplemental AFE after the cost overruns had already been incurred with an attempt thereafter to treat their silence as tacit approval of the excess expenditures. Here, the Operator consulted with its Joint-Operator on each and every occasion that significant decision had to be made that could result in cost overruns. And here, the consultations all occurred before the excess expenditures were made. Given the credits that still had to be negotiated with Becfield, it was impossible for Coachlight to precisely know at what point the Original AFE was or would be overspent, but it complied, as best it could in the circumstances, with its Operator's responsibility to advise its Joint-Operator when to expect that they would be incurring overexpenditures. [32] Although Coachlight did not submit the Supplemental AFE to Duce until December 31, 1993, the Court in Morrison found that an operator's obligation under Clause 301 to advise of cost overruns and its obligation to issue supplementary AFE need not be satisfied simultaneously. In paragraphs 52 and 52 of Morrison, the Court states: [52] Clause 301 of CAPL 1981, in its third paragraph, requires that an operator "forthwith" submit to its joint operators for their approval Supplementary AFE for cost overruns in excess of 10%. Counsel for the defendants contend that the language of the third said paragraph is mandatory and not merely permissive and that Morrison had an obligation to advise the defendants as soon as it expected such cost overruns and also to submit to the defendants Supplementary AFE. The Oxford English Dictionary defines "forthwith" as "immediately, at once, without delay or interval." The definition of this word has been expanded by the courts to include "as soon as practicable", "as soon as possible in the circumstances", "without unreasonable delay" and "as soon as reasonably can be". See: R. v. Seo (1986), 1986 CanLII 109 (ON CA), 13 O.A.C. 359; 54 O.R.(2d) 293 (C.A.), at pp. 317-318; R. v. Precourt (1976), 1976 CanLII 692 (ON CA), 39 C.C.C.(2d) 311 (Ont. C.A.), at p. 322; R. v. Parrot (1980), 1979 CanLII 1658 (ON CA), 27 O.R.(2d) 333 (C.A.), at pp. 339-340; Chuman v. Canada (1983), Admin. L.R. 1(F.C.T.D.), at pp. 6-7. [53] Counsel for the plaintiff argues that the amount of the cost overrun could not be determined until the drilling operation was finalized and that therefore the Supplemental AFE need not be issued sooner. However, it seems to me that inclusion of the word "expects" in paragraph three of Clause 301 contemplates, firstly, advice being given to the joint venture partners in situation where the operator has come to realization that there will be cost overruns, and secondly, the issuance of Supplemental AFE as soon as practicable. Clearly the two events need not be coincidental in point of time. [33] Installation of the packer was completed by early November, 1993 and the Supplemental AFE was issued on December 31, 1993. In the circumstances of this case, it might be said that the Supplemental AFE was actually issued prematurely because by December 31, Coachlight had not completed its negotiations for credits from Becfield. Although the original Becfield billing was just under $18,000.00 less than its actual time in the field, further credits on the account were successfully secured by Coachlight but not until some months after December, 1993. The Court is therefore satisfied that the Supplemental AFE was issued as soon as practicable. [34] Based on all of the foregoing, the Court finds that Duce had an obligation to approve the Supplemental AFE once it was submitted by Coachlight or at least to approve it subject to what further credits Coachlight could obtain through negotiations or otherwise, with Becfield. The Court has already found that Duce approved all of the work covered by the Supplemental AFE before the expenditures for the work had been incurred. Thus, although CAPL 1981 requires an operator to issue supplemental AFE for joint-operator approval, if the joint-operators have pre-approved the extra work with knowledge that it would or might result in cost overruns, they are clearly contractually obliged to approve the supplementary AFE unless it contains other expenditures for work that was not authorized by them. joint-operator who has approved of expenditures during the operations that will result in or likely result in the original AFE being exceeded cannot thereafter refuse to approve the supplemental AFE for such costs in an attempt to shield itself from such expenses. The Court therefore finds that Duce is responsible for 35% of all costs incurred under the Original AFE as well as 35% of all costs incurred under the Supplemental AFE. 2. liability for the screw pump costs [35] The screw pump was installed after the August 18, 1994 time limit given to Duce to respond to the Default Notice had expired. Under Clause 505(b)(i) of CAPL 1981, an operator is entitled under such circumstances to withhold from the defaulting joint-operator any further information and privileges with respect to the operations. The Court is therefore satisfied that Coachlight was entitled to install the screw pump without consulting with its defaulting Joint-Operator who was also not entitled to approve the AFE for the screw pump operation. Duce is therefore liable for 35% of the screw pump costs. 3. Operator's negligence and breach of CAPL 1981 obligations [36] The defendant alleges that contrary to Clause 304 of CAPL 1981 Coachlight failed to carry on operations relating to the Horizontal Well in diligent and good and workmanlike manner in accordance with good oilfield practice and in accordance with the regulations. Although Mr. Duce testified that Coachlight failed to obtain the approval of Saskatchewan Energy and Mines for legs two and three, the Court is satisfied that all necessary regulatory approvals were properly acquired. [37] Coachlight conceded that the drilling contractor that it hired on behalf of the parties encountered number of problems during the drilling of the Well. It was because of these problems that Coachlight had its on-site supervisor prepare the Lost Time Report. Becfield acknowledged its contributions to the problems as set forth in the Lost Time Report by granting substantial reductions in its billings. Based on time in the field, Becfield's bill would have been approximately $160,000. In the end, after all credits, its final bill was $81,148. Duce led no evidence to suggest that Becfield's final bill was still too high or that for the most part, the equipment failures that Becfield experienced were due to negligence or defective tools as opposed to simple bad luck. On the evidence, the Court has no basis to conclude that Duce suffered any losses as result of the drilling contractor selected by Coachlight. [38] Duce also contends that Coachlight was negligent by continuing to drill after it discovered the unexpected geological low in leg one. The sketch prepared by Mr. Maguire on October shows that, based on the information learned from the drilling of leg one, the bottom of the Marley formation dipped 1.97 degrees in space of only 119.8 metres. Mr. Maguire testified that he had expected the Marley to dip but not to that extent. The sketch also showed that at the lowest point in leg one, the Marley was lower than it was at the of 33 vertical well bore but not as low as at the of 33 vertical well bore. Mr. Maguire testified that he was therefore hopeful that the Marley would flatten out as they continued drilling horizontally towards the of 33 well. Of course, at that time, he did not have the benefit of the two other horizontal well bores. Given the information available at the time, the Court is far from satisfied that the decision to continue drilling towards the of 33 vertical well was an imprudent, reckless or negligent one. [39] Duce further contends that Coachlight failed to forthwith provide it with daily drilling reports as required under Clause 702 of CAPL 1981. The Court agrees but finds that no losses can be attributed to this omission. Mr. Maguire testified that if daily drilling reports were not faxed to Duce, as had become the standard practice in the industry, it was because Mr. Duce indicated he did not want to be inundated with paper. Mr. Maguire testified, and the Court accepts, that during every significant telephone discussion that he had with Mr. Duce in which major decision had to be made, he specifically asked Mr. Duce if he had all the information that he needed. If Mr. Duce had wanted the daily drilling reports, they would have been faxed to him. 4. joint interest operating losses [40] Coachlight claims operating losses up to June 30, 1995 owed by Duce Oil in the amount of $49,701.61. These expenses relate to the Horizontal Well and to all other joint interest wells drilled under the Operating Agreement. Each of the partners also holds an interest in the battery and water plant located at 13 of 33-6-9-W2. Coachlight is the Operator of the battery. [41] Coachlight and Duce, in their capacity as owners of the battery, have been charging battery costs to Coachlight and Duce, as working interest owners, based on total emulsions from the Horizontal Well and their joint interest vertical wells located at 11 of 32-6-9-W2, of 33-6-9-W2, and 13 of 33-6-9-W2. Because Duce holds 35% interest in the four producing wells but only 7% interest in the battery, in the end, it bears significantly higher proportion of the costs of dealing with the high water volumes from the wells, and in particular, from the extremely high water volumes from the Horizontal Well. Given Coachlight's 93% interest in the battery site, it can continue to produce the Horizontal Well at loss in its capacity as working interest owner since that loss is more than off-set by the profit it realizes on its interest in the battery. Of course, significant portion of the battery profit that Coachlight earns is at the expense of Duce who is responsible for 35% of the battery's income but receives only 7% of its profits. Duce raises two concerns regarding these battery costs. Firstly, it argues that the battery owners are only entitled to charge fees based on oil volumes rather than on total emulsion volumes. In the alternative, it argues that Coachlight is in breach of its fiduciary duty to Duce by continuing to produce the Horizontal Well and charging Duce its share of the water costs to the ultimate benefit of Coachlight. [42] As to the first issue, neither party could produce an agreement that details an agreed to method of charging for the use of battery facilities. Mr. Maguire testified that the battery charges were set by Duce's and Coachlight's predecessors and that other than for few months in 1993 and 1994, the battery charges for the last ten years have always been based on total emulsions. The change to charging based only on oil volumes was made shortly after Coachlight acquired its interest in the battery and was done as temporary measure until ownership of the battery could be realigned to be similar to ownership of the working interests in the wells using the facility. To effect this realignment and thereby increase Duce's ownership in the battery, Duce had to pay corresponding share of the value of the increased interest in the battery being acquired. When it became clear that no agreement could be reached on the value of the battery and that the ownership interests would not change, Coachlight reverted to the longstanding method of billing. [43] As there is no evidence that the method of calculating battery charges that was in effect over the preceding 10 years was not in accordance with the arrangement between Duce's and Coachlight's predecessors in title, the Court is not prepared to interfere with that method of billing. [44] As to the second issue, Duce argues that the Horizontal Well is not commercially economic Well. It contends that Coachlight continues to produce the Well solely for the battery revenues that it generates to Coachlight's benefit as Operator but to the financial determent of its Joint-Operator. Coachlight counters that it must continue to produce the Well or the parties will risk losing the petroleum and natural gas lease of the lands upon which the Well is drilled. Mr. Maguire testified that Coachlight believes that there is more value in the SW-33-6-9-W2. He provided the Court with two possible scenarios for future recovery under the lease but indicated that neither of these options could be pursued while the parties were engaged in dispute over the Horizontal Well. [45] By continuing to produce the Horizontal Well, Coachlight is preserving the underlying lease for the benefit of both parties. For the time being, the Court accepts Coachlight's position that the Well must be produced to protect further value in the underlying lease. Once the parties have complied with the terms of this Judgment they will be in position to determine their future plans for these lands. If, at some time in the future, no steps have been taken to exploit this further value in the lease, Duce is at liberty to ask the Court to consider whether, at that time, Coachlight is in breach of its fiduciary relationship to Duce by continuing to produce the Horizontal Well in circumstances that earn it significant profit at the battery site at the expense of Duce. [46] After June 30, 1995, Coachlight voluntarily gave up charging any fees at the battery site because, in Mr. Maguire's words, "it was too expensive to determine how much Duce Oil wasn't going to pay that month". The Court has determined that it would be inequitable to permit Coachlight to now charge Duce Oil for amounts that Coachlight had in effect abandoned for each month that it failed to render monthly bill to Duce. Accordingly, Coachlight shall be prohibited from hereafter charging Duce for unbilled battery fees for the period June 30, 1995 to and including March 31, 1999. CONCLUSION [47] The defendant attempted throughout the trial to establish that the plaintiff was a highhanded, arrogant Operator who simply forgot that it had a minority partner. The totality of the evidence simply does not bear this out. The Court finds that Duce is liable to Coachlight for: 1. The sum of $96,286.95 representing 35% of the unpaid costs of the Original AFE, the Supplemental AFE and the costs of the screw pump. 2. The sum of $49,701.61 representing regular lifting and production costs for the Horizontal Well and the other joint interest wells plus any expenditures on such wells under $25,000 which did not require an AFE. [48] On June 20, 1994 Coachlight gave Duce written notice that it was exercising its option under Clause 502 of CAPL 1981 to charge interest. In its letter of January 10, 1994, Coachlight had indicated that it would charge Duce interest if its late payments resulted in the parties' suppliers charging them interest. The Court therefore finds that Coachlight is only entitled to the CAPL 1981 interest from its notice of June 20, 1994. Based on the interest calculation provided by Coachlight, Duce is liable for interest of $10,424.65 for the period June 30, 1994 to June 30, 1995. Duce is also liable for interest on the sum of $145,988.56 at the Canadian Western Bank's prime rate plus 2% from June 30, 1995 to March 12, 1999. [49] In default of payment of the amounts provided for hereunder within 90 days of the date of Judgment the plaintiff shall be entitled to a builders\' lien on the entire estate or interest of the defendant in the following lands:All petroleum, natural gas and other hydrocarbons except coal and valuable stone within, upon or under:Firstly: Section 33Township 6Range 9West of the Second MeridianSecondly: Legal Subdivision 11 & 12 ofSection 32Township 6Range 9West of the Second Meridiantogether with all estates or interests of the defendant in the petroleum and natural gas when recovered from the said lands and the proceeds therefrom and the interest of the defendant in the fixtures, machinery, tools, appliances and other property in or on any oil or gas well on the said lands or the surface thereof and the appurtenances thereto. [50] The plaintiff shall be entitled to its taxable costs. PRITCHARD, J. DATE: March 12, 1999 CENTRE: Yorkton INITIALS: pw
Coachlight sought an order requiring the defendant to pay the balance of its 35% share of $681,955.58 as costs for drilling a petroleum/natural gas well plus $49,701.61 representing its 35% share of the lifting and production costs under the Operating Agreement. The plaintiff also sought a declaration that it holds builders' liens against the defendant's interest in the Well and other joint interest assets to the extent of the debts due. Duce Oil denies liability for any costs of the horizontal well in excess of $447,535 being 110% of the authorization for expenditure executed with respect to the Well. The defendant counterclaimed on the basis the plaintiff conducted certain operations without authority, was negligent in conducting operations and overcharged or made improper charges in its accounting procedures. HELD: 1)Duce was liable for $96,286.95 representing 35% of the unpaid costs of the original and supplemental authorization for expenditures (AFE) and the costs of the screw pump. 2)Duce was responsible for $49,701.61 representing regular lifting and production costs and other joint interest wells plus expenditures under $25,000 which did not require an AFE. 3)Coachlight was only entitled to interest from the time of its written notice on June 20/94 that it was exercising its option under the CAPL 1981 to charge interest. 4)In default of payment within 90 days of Judgment the plaintiff would be entitled to a builders' lien in the entire estate or interest of the defendant in all petroleum, natural gas and other hydrocarbons except coal and valuable stone, upon or under the lands as specified together with all proceeds from the defendant's interests in petroleum and natural gas and its interest in fixtures, machinery, tools, appliances and other property in any of the defendant's oil or gas wells on those lands. 5)The totality of the evidence did not support the portrayal by the defendant of the plaintiff as a high handed, arrogant operator who simply forgot it had a minority partner.  6)The plaintiff was entitled to its taxable costs.