Perennial pipeline puzzle: The question of surface rights compensation for buried lines goes to court

4/20/2009

Published in Alberta Oil Magazine April-May 2009
By Dean Watt, Staff Counsel, Environmental Law Centre

For years, pipeline operators in Alberta and other provinces have had to address recurrent arguments made by landowners seeking annual compensation for surface rights, citing ongoing impacts of buried pipelines. Operators have argued against these awards on grounds that the losses suffered by landowners are only temporary.

While the Alberta Surface Rights Board previously acknowledged that the law did not prohibit the granting of annual compensation for pipelines, the agency repeatedly decided not to give it. But recent board decisions awarding annual compensation to landowners suggest that it is becoming more open to the idea that such compensation may be appropriate in pipeline cases. Pipeline operators have filed appeals of these board decisions in the law courts.

Under Alberta law, a company with a pipeline license has a statutory right to acquire an interest in the lands under which the line is to be located. The operator can acquire this interest by entering into an agreement with the landowner or by obtaining an order from the Alberta Surface Rights Board. Accordingly, compensation amounts are set either in the agreement or by board order.

Operators have traditionally compensated landowners for construction disturbance in the right of way and associated temporary work areas by paying them a lump sum prior to the pipeline’s installation. Pipeline surface rights agreements have not traditionally included annual compensation for landowners, though agreements entered into with respect to the Nova pipeline provided an exception. Further, the board has not traditionally awarded annual compensation. More recently, some landowners have attempted to negotiate agreements including a term that would require annual compensation if and when Alberta law directs annual payments be made. Operators have been reluctant to agree.

In contrast, landowners are entitled to up-front and annual compensation for wells and other surface facilities located on their lands. The basis for this distinction has been that, while the presence of surface facilities creates an ongoing loss of land use, underground pipelines result in only temporary loss of use. Farmers are still able to grow crops over the pipeline and the land productivity has been thought to return a few years after the pipeline is buried. However, landowners have continually asserted that they suffer ongoing losses attributable to the existence of underground pipelines. These losses relate to a range of impacts including reduced crop productivity above the pipeline, inability to grow trees or deep-seed crops and ongoing inconvenience and potential hazards presented by the use of machinery or vehicles in the vicinity of the pipeline.

Where the operator and landowner do not agree on compensation, the board determines amounts in accordance with the Surface Rights Act. This act establishes a list of factors that may be considered by the board when determining compensation amounts, but does not bind the board to only these factors. The board will consider evidence regarding the compensation paid to other landowners in the area in similar circumstances. These comparable compensation amounts may establish a “pattern of dealings” in the area that can be used by the board when setting the compensation amount. Pipeline companies have disputed landowners’ suggestions that a pattern of dealings has been created by the Nova pipeline agreements that require annual compensation.

Recent board decisions granting annual compensation were based on facts similar to those upon which previous rulings refused annual compensation. The legal arguments for annual compensation, though successful, were not wholly novel. The board, not bound by its prior decisions, found that landowners do suffer ongoing losses for which annual compensation is appropriate.

If the courts uphold the recent board decisions, there are a number of new issues for pipeline companies to consider in future cases. The board gave notice that it will require evidence and argument on a number of new topics, including the magnitude of the ongoing loss and how best to compensate for ongoing or recurring losses. This means that pipeline companies will need to develop new compensation formulae to provide this evidence.

Pipeline companies will also need to consider new obligations relating to the periodic review of compensation amounts. The Surface Rights Act requires periodic reviews in cases where surface leases or compensation orders provide for annual or periodic compensation. Such a review might result in increased annual compensation amounts being paid to the landowner. However, the current language of the act would not require existing leases or orders that do not provide for annual payment to be reviewed. The act’s language creates inconsistent treatment amongst landowners depending on when a pipeline was constructed. This difference in treatment may attract pressure from landowners for legislative change to allow annual compensation in respect of existing pipelines.

In addition, under current Alberta law, annual payments under a surface rights agreement or compensation order are to be paid until the agreement is cancelled or the order terminated, both of which require that a reclamation certificate in respect of the land be issued by Alberta Environment.

Currently, while pipeline operators and landowners can agree to the removal of the pipeline as a term of an agreement, in the absence of such a term a pipeline operator is allowed to abandon the pipeline in place and conduct all the reclamation work required to receive a certificate. This creates a curious situation. During the term of the agreement or compensation order, annual compensation would be payable to the landowner for ongoing loss of land use and inconvenience created by the buried pipe.

But once the agreement was surrendered or the order terminated, the operator’s obligation to pay annual compensation would cease, even though the pipe remains buried and many of the previously compensable inconveniences remain. A change to the law that grants annual compensation may provide incentive to pipeline operators to conduct reclamation activities sooner, but unless the law is changed to require pipeline removal as a precondition to the receipt of a reclamation certificate, the nuisance will remain. Landowners may be motivated to seek such a change.