Issuance and Administration of Subsurface Contracts

Overview

Subsurface contracts (permits and subsurface leases) provide companies with the exclusive right to exploit the oil and gas in a contract area. (IOGC) assists First Nations to dispose of their oil and gas rights through the granting of subsurface contracts, including assisting with the negotiation of these contracts with companies and ensuring fair value for First Nations. IOGC drafts, issues and administers the contracts and collects bonuses, royalties and rents from companies on behalf of First Nations.

Both IOGC and the First Nation must approve the granting of a subsurface contract to a company.

All subsurface contracts are granted pursuant to the Indian Oil and Gas Regulations, (SOR/2019-196) and are subject to its terms and conditions.

Processes to Obtain a Subsurface Contract from IOGC

There are two processes used by (IOGC) to dispose of oil and gas rights on First Nation lands and for a company to obtain a subsurface contract (subsection 35(2) of the Regulations):

1. Public Tender (s. 39-42) - A company submits a bid in response to the issuance of a Notice of Tender by IOGC and a First Nation. The bonus price is the only competitive element. All other terms and conditions are fixed. The highest bonus is either accepted or all bids are rejected.
2. Negotiations (s. 44-46) - A company and a First Nation will complete preliminary negotiations and then the company may submit an Application for a Subsurface Contract to IOGC for approval. Items to be negotiated include: the type of subsurface contract, the lands to be included in the contract area, the amount of the bonus to be paid, the drilling commitments, the royalty to be paid, and in the case of a permit; the initial term and intermediate term and the earning provisions.

For the purpose of soliciting interest in First Nation lands, the Negotiations process may be preceded by a call for proposals in accordance with section 43 of the Regulations.

Types of Subsurface Contracts on First Nation Lands

There are two types of subsurface contracts granted on First Nation lands:

1. Permits - Permits give a company the exclusive right to exploit the oil and gas in the lands in the contract area, to treat that oil, to process that gas and to dispose of that oil and gas. Permits are usually large blocks of land and may include the entire Indian reserve. Some important aspects of permits are:
   1. The initial term is 2 to 5 years and the intermediate term is 3 years (sections 48 and 50 of the Regulations).
   2. The rent is $5.00 per hectare with a minimum of $100.00 (section 51 of the Regulations).
   3. A permit holder earns lands during the initial term if they have drilled a well in the permit area or re-entered an existing well. The permit holder may select these earned lands to hold for the intermediate term of the permit (sections 52 to 54 of the Regulations).
2. Subsurface Leases - Subsurface leases give companies the exclusive right to exploit the oil and gas in the lands in the contract area, to treat that oil, to process that gas and to dispose of that oil and gas. These leases are usually small blocks of land, though there are several large leases on First Nation lands. Some important aspects of subsurface leases are:
   1. The initial term is 3 years (sections 49 and 50).
   2. The rent is $5.00 per hectare with a minimum of $100.00 (section 51 of the Regulations).

Application Process to Obtain a Subsurface Contract from IOGC

To obtain a subsurface contract from (IOGC), a company must follow one of the two processes listed previously.

For the negotiation process, once the terms and conditions of a subsurface contract have been agreed to by the First Nation and the company, the company must submit an Application for a Subsurface Contract (along with the non-refundable $250 application fee) to IOGC for approval. If the application is approved, IOGC will prepare the subsurface contract and send a copy to the company and the First Nation for signing. If the application is not approved, IOGC will send a notice of refusal to the company and the First Nation which sets out the reason for the refusal.

IOGC invoices the company for the bonus and first year's rent and all moneys must be paid to the Receiver General for Canada (section 19 of the Regulations).

IOGC will grant the contract if within 90 days of the company and the First Nation receiving the contract, IOGC receives:

1. the signed original Band Council Resolutions (which form part of the subsurface contract) from the First Nation;
2. the bonus and first year's rent from the company; and
3. the signed originals of the contract from the company

If IOGC does not receive these items within the 90-day deadline, the contract will not be granted, the contract will be terminated and, if applicable, the bonus and first year's rent will be refunded to the company.

Once a subsurface contract has been granted, the company must apply for and be granted a surface contract prior to conducting any drilling operations. For further information on these matters, please refer to the Environmental Requirements and Issuance and Administration of Surface Agreements sections of the business cycle. Companies must also obtain from the relevant provincial authority any approval that is required to carry out drilling in the province and submit it to both IOGC and the First Nation before commencing operations.

Additionally, companies must obtain and maintain during the term of the contract, an insurance policy that is adequate to cover all risks resulting from the operations to be carried out under the contract (section 9 of the Regulations).

For further information on obtaining a subsurface contract, please contact IOGC's Manager, Negotiations, Subsurface Contracts and Research.

Payments Due under Subsurface Contracts

Bonuses, rents and royalties are payable to the Receiver General for Canada and are to be submitted to (IOGC) on behalf of the First Nation (section 19 of the Regulations). All fees and administrative monetary penalties set out in Schedule 1 and Schedule 6 of the Regulations are also payable to the Receiver General for Canada.

Companies must pay annual rents for permits and subsurface leases.

IOGC provides companies with a monthly Statement of Account for surface and subsurface contracts. Interest is charged on late payments and outstanding amounts under the authority of the Interest and Administrative Charges Regulations.

Selection of Lands for the Intermediate Term of a Permit

Before the end of the initial term of a permit, the permit holder may submit a Land Selection application to (IOGC) to select permit lands earned by drilling or re-entering wells in the permit area. If the application is approved, IOGC grants the oil and gas rights in the selected lands for the intermediate term of the permit and sends the permit holder and the First Nation a notice of the approval and an amended land description of the permit. If the application is not approved, IOGC sends the permit holder a notice of refusal that sets out the reasons for the refusal (sections 52 to 54 of the Regulations).

Term Extensions

The term of a subsurface contract may be amended to a maximum of 5 years (subsections 20(1) and 50(2) of the Regulations).

More information:

• Contract Assignment
• Corporate Name Change or Amalgamation
• Treaty Land Entitlement Replacement Contracts