Recent Trends in Alberta Surface Compensation - Bill Marriott
May 2001

The Canadian oil and gas industry has recently reaped the benefits of unprecedented prices for both crude oil and natural gas. Oil company profits have reached all time highs and the industry is poised to drill a record number of wells in 2001. What, if any, are the effects of this prosperity on surface compensation? The purpose of this article is to review Alberta surface land compensation over the last several years with particular emphasis on the year 2000. Specifically, the article will analyse the impact of the recent higher oil and gas prices on surface compensation in Alberta.

The acquisition of surface rights tends to be the ugly sibling in the otherwise exotic drilling business. The cost of obtaining a surface lease pales beside drilling costs even in shallow gas areas. However, in aggregate, surface compensation costs are significant for the industry. For example, the approximately 60 thousand freehold well sites in Alberta pay around $400 million per year in surface costs. If half of the forecast 12,000 Alberta wells drilled this year are on freehold lands, the industry can expect to pay approximately $45 million for drilling access alone. These amounts become even more meaningful when married to the perception that surface compensation can tend in only one direction - up!

Surface compensation has long been perceived by the industry to be in an irrevocable upward spiral. The Surface Rights Act and the threat of a Surface Rights Board hearing have been viewed as unfairly tilting the negotiating playing field in favour of the landowner. That anomalous 'wildcard' deal made by the uninformed or undisciplined land agent becomes the new precedent for negotiating in an area. Surface Rights Board decisions contend that ongoing rent reviews must correspond to the escalating 'pattern of dealings' in the area. Finally, these forces are even worse during periods of industry prosperity when there is a perception that the industry can afford to pay more and when some companies seem to need instantaneous access to lands. The question remains as to whether there is any substance to these perceptions. The analysis undertaken for this article provides some hard evidence as to what is actually happening in the field.

The data source for this analysis is the Surface Land Compensation Database, which contains information on nearly 10,000 Alberta surface leases. Over 3,800 pipelines and over 4,000 well sites were included in the analysis spanning the years 1995-2000. The data included only new takings while excluding rent reviews, amendments, Surface Rights Board orders and consent of occupant on Crown lands. The four standard categories of surface compensation: land value, general disturbance, loss of use, and adverse effect were analysed. The data for land value and loss of use are expressed in $ per acre while adverse effect and general disturbance are lump sums that apply to the sites as a whole. The analysis of land value was done separately for well sites and pipelines. In addition, the province was broken into five areas: (1) Southeast comprised of Township 1-27, Range 1-30, W4M; (2) East Central, Township 28-47, Range 1-18, W4M; (3) Central, Township 28-47, Range 19-30, W4M and Township 28-47, Range 1-7, W5M; (4) Northeast, Township 48-67, Range 1-28, W4M, and Township 48-67, Range 1-9, W5M; (5) Northwest, Township 68-90, Range 13-26, W5M, and Township 68-90, Range 1-13, W6M. The data in each category was averaged for the year and then the rate of change calculated from year to year.

Great care was taken to ensure that no erroneous conclusions were drawn from the analysis. For example, it would be a mistake to conclude that surface rates are increasing if the overall sample merely reflects a migration of industry activity from low cost areas to high cost areas. Similarly, it would be a mistake to conclude that first year costs were increasing if the average lease size was increasing. Analysis of the five areas showed no migration towards the high cost areas. Similarly, the average well site remained virtually constant at just over 4 acres.

Table 1 - 1995 - 2000 % Change by Area

All SE E. Central Central NE NW
Land Value - Pipelines 18.23 18.21 11.14 40.37 30.69 22.07
Land Value - Wells 19.35 20.07 2.37 31.9 17.42 5.69
Loss of Use 9.61 10.84 -5.06 19.31 12.33 -0.65
General Disturbance 5.18 -7.74 -3.68 18.5 6.43 -0.65
Adverse Effect 8.18 7.63 2.14 6.04 13.42 11.23

Table 2 - Yearly % Change all Leases

Land Value Land Value Loss of General Adverse
Pipelines Well Sites Use Disturbance Effect
1996 4.23 0.30 0.12 1.04 0.14
1997 1.12 -0.15 2.97 -1.66 2.70
1998 10.08 4.32 -0.73 0.04 -1.88
1999 -0.40 7.17 -0.69 0.96 3.32
2000 3.20 7.71 7.94 4.80 3.90
Total 18.23 19.35 9.61 5.18 8.18

Table 1 shows that for the entire sample considered over the five-year period ending in 2000, all categories of surface compensation have increased. The largest increase is in the Land Value category where the overall experience of well sites and pipelines is closely correlated with an 18-19% increase. Table 2 shows that for well sites, the majority of this increase occurred in 1999 and 2000. For pipelines the largest increase took place in 1998. A somewhat surprising result is the significantly higher rates of increase for pipelines versus well sites in every area except the SE. One would expect that the rate of increase for all pipelines would be higher than for all well sites. However, this is explained by a heavier weighting of well sites in the SE. Finally, although not shown in these tables, the average land value paid for pipelines is about $100/acre higher than the average land value paid for well sites in all of the areas. This means that the pipelines have both the highest prices and the highest rates of increase. No doubt this can be explained by the global approach to handling pipeline compensation versus the individual nature of well site negotiations. The global approach of offering the same land value along the entire length of the line is more likely to err on the side of higher values, a sort of  "highest common denominator" approach.

Loss of use, general disturbance and adverse effect all increased less (5-10%) than land values but, significantly, the major proportion of the five-year increase took place in 2000. General disturbance increased the least and would not have changed at all except for 2000. This is what would be expected since nuisance, inconvenience and noise are more or less constant and not subject to market factors, as are land values. Adverse effect also saw hardly any change except in 1999 and 2000. This is also what would be expected since the costs of changing farming patterns etc. shouldn't vary much over time. The lower increase in loss of use compared to land values is somewhat surprising since there should be a high correlation between land values and loss of use. Again, if it were not for 2000 there would be virtually no change in loss of use.

In conclusion, surface compensation levels except for pipelines changed very little in the 1995 -1998 time frame. This indicates that any perception of a permanent negotiating disadvantage to industry does not bear up to the scrutiny of analysis. However, the numbers clearly confirm the suspicion that surface compensation prices rise during periods of industry prosperity.

Detailed data can be found in the following tables.

Overall Summary

Summary of Well sites

Summary of Pipelines