JVViews: April 2012 Issue

Task Force Committee Update

YOU DON'T REALLY EXPECT ME TO PAY THIS?
The Problem of Stale Billing in the Energy Industry

PJVA April Pub Night

PJVA LinkedIn® Group

Alberta's Oil Sands Operations to Increase Workforce by Over 70 Per Cent

Task Force Committee Update

Back in June 2011, when Tim Reimer approached me to stand for Director, Task Forces, I wasn't sure what that actually meant and was a bit reluctant to take on the role. Fortunately, my fellow committee and board members' dedication and enthusiasm has made the experience not only enjoyable, but has meant we have made a lot of progress.

Below is an update on what your Task Forces committee has been focusing on.

The committee tasked to update the Emulsion Handling Agreement has now handed their draft agreement to the Agreement Monitoring Committee for their review and comment. The Emulsion Handling Agreement Task Force consists of Marcel Savoie, Deidra Garyk, Beth Swift-Hill and Tanis Kalynchuk, who aimed to have a new draft ready for review in January 2012. Thank you for all your effort and hard work to date.

The second committee is the Construction, Ownership and Operation Agreement Task Force. This task force has just begun and is run by Tim Reimer and a dedicated and capable team. They are in the process of gathering comments that were submitted by PJVA members and finalizing how they are going to go about making necessary changes and updates to the CO&O. This is a major initiative that is driven by many changes that have taken place in the industry during the last decade and by our members changing practices.

Joan Lee and her group of volunteers have completed the final Tie-in Agreement, which is ready for membership to purchase through the PJVA website. A special thank you to all the members of this task force for the dedication, effort and hard work to get this agreement completed. A job well done!

As well as the ad hoc committees, we have an Agreement Monitoring Committee that consists of Martine O'Connor, Jan McLean, Trevor Ross, Marilyn McAvoy, Richelle Lindsay and Karen Hall. The committee's objective is to address any inquiries or changes to the PJVA model agreements, so please contact any of us with your concerns or suggestions. If you see an error or have a comment that the industry membership should be aware of in one of the PJVA Agreements, please send your comment or suggestion to one of the members of this committee so that your comment or suggestion can get on the PJVA errata page for other members to view.

Martine O'Connor
PJVA Director, Task Forces

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YOU DON'T REALLY EXPECT ME TO PAY THIS?
The Problem of Stale Billing in the Energy Industry

The Scenario
How often have you run across one of these scenarios in your everyday operational issues:

1. An Operator of a property, through its own internal audit procedures, discovers quite some time down the road (we are talking years here, not months) that it was calculating something incorrectly or missed billing for something. The Operator then sends a bill out to the joint owners looking for substantial sums of money long after the fact;
2. A service provider sends a bill out to the Operator for work or services done years before. The Operator in turn passes the bill on to the other joint owners; or
3. An Operator, or the owner of a royalty, determines that an error was made in paying royalties over an extended period of time and now seeks to rectify the error resulting in substantial sums owing by a joint owner.

The frequency with which this is happening has caused the local energy industry to focus on not only the practical business issues raised, but also the question of whether such invoices are in fact even legally collectable. From the practical side, certain industry participants have taken the position that regardless of whether the billing is in their favour or in favour of others, if it extends beyond a certain period of time - as for instance, the end of the 24 month audit period allowed commonly in industry agreements for audits to be conducted in respect of a particular year, then they will neither bill for such matters, nor expect to pay for them.

The Legal Position
However, what is the legal situation? As is often the case, the answer is not particularly straight forward, and Alberta courts may take a different approach than courts in other jurisdictions. The failure to pay an invoice is viewed as a breach of a contract. Under the Limitations Act ("the Act"), if a creditor does not commence a lawsuit within 2 years of the date it knew, or ought to have known, that the debt was due but had not been paid, then the debtor may use the Act as a defence and claim immunity from payment.

For older agreements, this limitation period is often extended by industry standard agreements which delay running the 2 year clock until after the audit time periods in the agreement have expired, or if there is no such audit provision, then for a period of 4 years after non-payment. In any event, the Act make provision for an ultimate "outside date" so that if one is more than 10 years out from the date that the "injury" occurred (i.e. non¬payment), then nothing is collectible regardless of whether anyone had (or should have had) any knowledge of the claim or the non-payment.

The calculation of the applicable limitation period in alberta can be a tricky matter. One can not necessarily assume that an "old bill" is an "uncollectable bill".

Ontario courts say that 2 things have to happen to start the clock for the running of the limitation period. First is the expiration of a reasonable period of time for the invoice to be delivered (to prevent the service provider from simply sitting on the invoice), while the second is the expiration of a reasonable time for the recipient of the invoice to actually pay the amount owing. The perhaps surprising result is that the time limitation does not begin to run on either the date on which the services were provided or the date on which the invoice itself was provided. Piling two "reasonable periods of time" on top of each other (as in the Ontario test), certainly does not create any sort of "bright line" test of certainty. This Ontario approach looks to the practice between the parties as a guideline to determine these reasonable time frames. The Alberta courts have not addressed the issue directly but, in comments in judgments on related issues, clearly have not adopted the Ontario approach as a general rule for all situations.

Where the Issues Can Lead
An Alberta royalty case illustrates some of the possibilities. Through the fault of neither party, both the royalty holder and the royalty payor were unaware that, starting in 1988, royalties had become payable in respect of certain wells. The royalty payor first notified the royalty owner in May of 2002 that the wells were on production and royalties were payable. The royalty owner sued for royalty payments back to 1988. The Court took the position that each missed royalty payment gave rise to a separate claim with its own limitation period. Since neither party had been aware of the true facts, the Court allowed the action for all royalties other than those that were more than 10 years prior to the royalty owner commencing its claim in 2002. Had the royalty owner delayed commencing its action until June of 2006, it would also not likely have been able to collect for missed royalties from May, 2002 to approximately July or August of 2004.

Concluding Thoughts
The calculation of the applicable limitation period in Alberta can be a tricky matter. One can not necessarily assume that an "old bill" is an "uncollectable bill". The key to a more definitive answer is assembling the information relevant to answering the questions posed below and then consulting with legal counsel to confirm the result and whether the time to pay has passed.

Practical Guidance
So, what can we offer by way of guidance in Alberta for some of the situations outlined above? The following thoughts provide a starting point in examining such a limitation issue:

1. Look first to any written agreement between the parties. Does it address when invoices must be sent and when they become due? For instance, must invoices be provided within a certain time frame after the work is done?
   
   Does the agreement contain language whereby the parties agree to extend the 2 year limitation period? The Limitations Act allows parties to lengthen (but not shorten) the time period.
   
   Does the agreement contain a "24 month audit provision"? If it does, but the agreement does not extend the limitation period, then it is entirely possible that the limitation period for suing could expire before that audit process is even complete!
   
   
2. Determine whether there is an established practise between the parties in terms of how frequently invoicing occurs, and how quickly invoices are paid.
   
   
3. If a party receives a seemingly late billing, determine whether there are reasonable grounds for suggesting that the sender of the invoice has been "sitting on the bill" or whether there are unexplained delays in invoicing that are outside of the ordinary course of dealings with that party. If so, the limitation period may be a defence to payment of the invoice.
   
   
4. Determine whether the party providing the invoice can supply information as to the timing and circumstances of its own delivery of the invoice, or its determination of a prior royalty calculation error, so as to ascertain whether there have been inordinate delays.
   
   
5. Determine whether the agreement is one which is covered by the "Industry Standard Agreement" which extends limitation periods for agreements effective prior to February 15, 2001. If so, that would extend the limitation period to 2 years after the internal audit process provided by the agreement has been completed, or in any other case to 4 years from the non-payment.
   
   
6. Determine how many invoices were issued and when were they issued. Each invoice is its own claim and each could have its own limitation period.
   
   
7. Determine whether a partial payment has been made on the invoice or whether the debtor has acknowledged that the amount in the invoice is owing. If the partial payment or acknowledgement is made within the limitations period, it may restart the clock.
   

Romeo Rojas and Julie Inch
(Published in BD&P's March 2012 On Record; Used by Permission)

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PJVA April Pub Night

The next PJVA "Unofficial Social Networking non-event" is slated for April 19 at the Barley Mill in Eau Claire.

The Barley Mill (Eau Claire)
April 25, 2012
4:30 pm
Pay-as-you-go or run your own tab.

Please click here to RSVP so we have an idea of numbers.

SEE YOU ALL THERE!!

For any questions or suggestions on locations, please contact Social Director, Marcel Savoie at Marcel.Savoie@Cenovus.com.

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PJVA LinkedIn® Group

PJVA is now on LinkedIn®, the world's largest professional network. It's a great way to stay connected and exchange ideas with other PJVA members and industry professionals.

Click here to join the discussion!

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Alberta's Oil Sands Operations to Increase Workforce by Over 70 Per Cent

(Published by Council eNews, March 2012, Petroleum Human Resources Council of Canada)

Alberta's oil sands, which employed just over 20,000 workers in 2011, is projected to grow its workforce by a staggering 73 per cent by 2021, according to a new report released today by the Petroleum Human Resources Council of Canada. More >>

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PJVA was incorporated in 1985 to represent individuals and organizations involved in petroleum joint ventures. JVViews is published to keep members informed about upcoming PJVA and industry events, courses and seminars offered and/or sponsored by PJVA and current projects being facilitated by the Association.