The Just Way
THE PLIGHT OF FREEHOLD OWNERS
THE FHOA LEASE
THE JFEC NICHE
THE PLIGHT OF FREEHOLD OWNERS
Fundamental to virtually all oil and gas exploration and development is a lease agreement between the owner of the resource and an energy company seeking to develop the resource. Conceptually a lease agreement is simple. The owner grants the energy company the right to explore for hydrocarbons within the owner’s lands for a certain period of years and to produce any hydrocarbons found until they are depleted in return for an upfront cash payment and a royalty share of the proceeds of production. In practice, a lease agreement is an exceedingly complicated document which addresses the many complexities of oil and gas exploration and development - what happens if hydrocarbons are found but not produced; what happens if production is established but then ceases; what happens if hydrocarbons are produced from an adjacent tract of land; what price applies to the oil and gas sold; what deductions are permitted in calculating the owner’s royalty; what recourse does the owner have if the energy company fails to fulfill its obligations; etc. Recourse is particularly important because oil and gas industry regulators take the position that they have no authority to become involved in situations where an energy company does not fulfill its obligations to a freehold owner. According to regulatory agencies, such situations belong in the courts. Very few freeholders have the financial resources or intestinal fortitude needed to challenge an energy company in the courts.
In Canada, most of the potentially productive petroleum and natural gas rights are owned by governments or the corporate successors to the Canadian Pacific Railway Company (the CPR) or the Hudson's Bay Company (the HBC). Not surprisingly, these entities have always prescribed the form of lease agreement under which their oil and gas rights may be leased by energy companies.
Would you rent your house to someone under a complex lease agreement you didn't understand which had been drafted by a team of lawyers acting for your prospective tenant? Not likely! The freehold oil and gas rights owned by individual freeholders are potentially far more valuable than their houses, yet Canadian freeholders have been leasing their valuable non-renewable resources under incomprehensible lease agreements prescribed by energy industry lawyers for more than a century.
As a result of the differences between freehold leases prescribed by energy industry lawyers and leases prescribed by owners such as governments and powerful corporations like Encana Corp. (the successor to the CPR), freeholders have historically received substantially lower financial returns from the development of their resources than have other owners of oil and gas rights in Canada.
Can you imagine the furor if a government in Canada decided to let the energy industry dictate the terms under which that government leased its citizens' oil and gas? Why then would freeholders continue to lease their mineral rights to energy companies under lease agreements drafted by teams of energy industry lawyers? It is simple. Individual freeholders have historically had no choice.
JFEC is providing freeholders with that choice by using a lease form developed by the Freehold Owners Association (FHOA) designed to fairly balance the rights of the freeholder with those of the energy company leasing the freeholder’s rights (the FHOA Lease).
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THE FHOA LEASE
In 1999, the Freehold Owners Association (www.fhoa.ca) was organized with the help of Alberta Energy. The purpose of this not-for-profit, volunteer organization is to provide information and education to freehold owners, to research issues of concern to freeholders and to act as their common voice. One of FHOA’s principle concerns was the widespread use of CAPL (Canadian Association of Petroleum Landmen) freehold leases. The association considered CAPL leases to be oppressive and it’s goal was to develop a fairer freehold lease form. However FHOA was reluctant to dedicate the resources necessary to develop such a 'freeholder-friendly' lease because it was aware of the fate which befell a similar initiative by the Office of the Farmers’ Advocate of Alberta in the mid-1980’s. The energy industry effectively refused to use the freehold lease form developed by the Farmers’ Advocate. A catalyst was needed.
Just Freehold Energy Corp., a company fostered by FHOA to lead the energy industry by example in adopting fair freehold leasing practices, provided the necessary catalyst by agreeing to use the FHOA Lease in all dealings with freehold owners.
As set forth in the comparison table below, the FHOA Lease differs significantly from CAPL leases. The FHOA Lease mirrors the Government of Alberta’s Crown lease in many respects – product prices are tied to weighted average Alberta prices; royalties are on a sliding scale tied to volumes of production; and rights below the deepest zone proven productive revert to the freeholder at the end of the primary term. Record Alberta energy industry profits attest to the fact that these aspects of the Crown lease do not inhibit energy company profitability. Similarly, an energy company such as JFEC that intends to treat freeholders fairly should have no concern with a mutual good faith obligation, providing understandable royalty statements with transparent deductions, providing reasonable protection from drainage, amending or removing caveats in a timely manner, only continuing the lease with production in paying quantities, seeking the freeholders consent to unitization, or providing freeholders with recourse to mediation or binding arbitration in the event of a dispute
The JFEC Niche
Under terms of the relationship agreement which Just Freehold has entered into with FHOA, JFEC has committed to using the FHOA Lease in all of its dealings with freehold owners and FHOA has committed to advising freeholders of the FHOA Lease and JFEC’s willingness to use it in situations that JFEC considers economically attractive. In consequence of the FHOA/JFEC relationship agreement, JFEC is constantly exposed to freehold leasing opportunities. JFEC does not engage in 'bidding wars' with competitors but, after a thorough technical review if JFEC recognizes an economically attractive drilling opportunity, it offers a competitive signing bonus and provides the freeholder with a 'freeholder-friendly' FHOA Lease.
By treating freeholders fairly and offering freehold owners an opportunity to participate as shareholders in developing their own and other freeholders' mineral rights in a just manner (see Investor Information), JFEC has positioned itself as the developer of choice for freehold owners. JFEC has already secured a number of drilling prospects on freehold lands. The quality of these prospects is attested to by the fact that other energy companies who do not have our preferential access to freehold mineral rights are prepared to participate in their development on financial terms favourable to JFEC (see Projects).
Over time, as word of the FHOA Lease and Just Freehold's willingness to use it spreads within the western Canadian freehold owner community, JFEC anticipates that the freehold leasing opportunities presented to our company will increase. JFEC intends to lead the western Canadian energy industry on adopting fairer freehold leasing practices for the benefit of all freehold owners. While doing so, Just Freehold expects to build a very successful energy company.
