Running to catch up.

The Western Sedimentary Basin is what the geologists call a wide swath of territory that extends from Alaska, diagonally down through northwest BC, including most of Alberta, and southern Saskatchewan and Manitoba. It is where the vast majority of Canada's oil and gas reserves and production are located. It is also home to over 100 First Nations.

The ownership, exploration for, extraction of and profits from the oil and gas resources located on and around First Nations' lands are significantly different from those on nonnative lands and are illustrative of some of the key principles of Canadian history and the development of Aboriginal law. The basic interests remain roughly similar; that is, ownership of the resource and access to it, who gets to develop the resource, how much tent or royalty they pay, and how the royalty streams are generated from the developments invested. But federal jurisdiction for Aboriginal matters combined with provincial jurisdiction for most business development has kept Aboriginal oil and gas development out of the main stream of the now well-developed regulatory and business framework that has evolved for the rest of the industry.

Back to some history. Millions of years ago, dinosaurs ruled the earth. They died and their bodies drifted to the bottom of the swamp where they decayed and turned into ... Well, maybe not that much history.

When the Western Territories were settled by the Europeans, the federal government entered into the "numbered treaties" where the Government of Canada obtained the signatures of Indian leaders to "cede" all of the territory of the First Nation in question in exchange for a defined Indian reserve that was to remain the territory of the particular band in perpetuity, plus other promises for agricultural, health, education and other social supports. The Indian reserves were to be and are still held by the federal government in trust for the First Nations, and the land includes both the right to control the surface access (as with just about any landholder or farmer in the basin), along with all of the subsurface rights. This control of the subsurface rights by the landowner is relatively uncommon. Most landowners own only the surface because before the provinces came into being, most of the subsurface rights were given to the CPR (which became Pancanadian Petroleum which then became Encana). After the creation of the provinces, most of the remaining subsurface mineral titles were split off for the provinces which now only lease the mineral rights to producers in exchange for a share of production (the royalty). Only a few homesteaders (and their descendants) who got their land at a very early date own both the surface and the subsurface rights together.

First Nations with oil and gas under their reserves are therefore in the position of provincial governments to be able to participate both in the surface developments and take a royalty for the oil and gas asset that they "own" beneath the reserve. This could be the foundation of a substantial revenue stream for local Indian government. But they are not allowed to develop it or invest any royalties themselves. Because the Indian reserve lands are held by the federal government in trust for the various First Nations, this oil and gas development is controlled by Indian Oil and Gas Canada (IOGC), a corporation created by the federal government, which upon request of individual First Nations, arranges for oil companies to explore for and develop oil and gas on a reserve in exchange for the payment of signing bonuses, production royalties, and surface disturbance payments.

This provides some convenient one stop shopping for oil and gas companies, and Indian Oil and Gas has been responsible for the development of millions of dollars of royalties on behalf of individual First Nations. But it is a government operation and one size fits all is never going to keep everyone happy. On the one hand, a lot of the First Nations in the basin are very small and could never have their own organization of geologists, land agents, and economists so having IOGC do all that for them works out. Other First Nations are large enough to have their own oil and gas departments and don't necessarily want the federal government telling them what to do with their resources. To this end, IOGC has initiated a project to train oil and gas administrators in some larger First Nations in order that they can administer their oil and gas right on the reserve.

Another one size fits all problem is that IOGC has its preferred deal structure that involves the payment of some standard signing bonuses and standard royalties. To be fair to IOGC, one valid reason to adhere to carefully thought out standards is to avoid accusations of breaching a duty of care down the road. So development of resources on a reserve will require an oil company with a bankroll to make the up-front payment required. But a sophisticated First Nation may legitimately want to develop its oil and gas reserves itself instead of allowing an oil company to develop the play and take the profits off reserve. Developing an oil and gas play can be rewarding in the long run, but it also can be very expensive and a First Nation may not be in a position to pay the usual bonuses required by IOGC, especially if all of the other oil and gas royalty money is going directly to Ottawa and can't be directly accessed by the band. What's that? All the royalty money went to Ottawa?

Well yes, and that has become another very significant aggravation. The royalty money is held in trust by the federal government for the First Nation, but the purse strings axe held pretty tight. It's not all that unusual for a public trustee of sorts to keep a pretty strict hand on trust funds as it doesn't want accusations of foolish spending to be made later. But it can be pretty aggravating for a First Nation to see all its royalty money going to Ottawa when it has to go hat in hand to get some of it back. And because the royalty money is tied up in trust, it pretty much obligates the bands to have their oil and gas plays developed by outside third parties.

But that's not the worst of it. When royalty money goes to Ottawa, it doesn't go into a big closet and sit around in cash, and it doesn't even go into a special trust account, it goes into general revenue. That means that the federal government can spend the money right away and carry the debt to the First Nations on its books along with a modest interest adjustment. That can be especially galling to a First Nation. It is obligated to loan its money to the government for the lowest possible interest rate, have to come hat in hand with plans and justifications if it wants any of the money back, but in the meantime the government can spend it on any thing it wants (maybe gun registries and advertising contracts). This enforced low cost loan to the federal government is part of a HUGE lawsuit between the Samson Band in central Alberta and the federal government. It involves the royalties from the Pigeon Lake gas field which at one time was the largest gas field anywhere. The royalty discrepancies alleged could amount to billions.

Over the decades that Indian royalty money has been flowing into the federal government, the difference between the interest the feds gave and bank or stock market interest is huge. This sort of lawsuit made a lot more sense when the stock market was hot and Nortel was worth hundreds of dollars. Now that the dot corns are in the dumpster, government guaranteed interest might seem like a better deal. But on the other hand, forcing some of the poorest Canadians to loan all their oil and gas royalties to the feds for the lowest possible interest rates seems just a bit of a convenient deal for the feds, and does raise legitimate questions of the proper duty of a trustee. Even if the feds were sitting on the money for purposes of protection of capital, could they have tried a bit harder to get a better deal on the interest rate? And would they have tried harder if they weren't just putting the money into general revenue and spending it on their own priorities?

Another emerging area of concern is the development of oil and gas in what the First Nations call their "traditional lands". There are some rather extreme arguments that when the First Nations made their treaties with the Europeans, they offered to share the bulk of the land with the immigrants in exchange for their defined reserves and collateral benefits. Share didn't include a complete release of valuable mineral rights under the lands, which were never fully in the contemplation of either the Europeans or the First Nations. Therefore a complete accounting for all of the oil and gas taken out of the ground is necessary. This may be something that could never be negotiated at this late stage. If the First Nations own (and have owned since the start) all of the mineral rights to the country, and have to be paid back, then we may just have to give the keys back instead.

But there is another argument about access to drilling rights on "traditional lands" that actually more closely resembles the surface rights that non-natives exercise over their farms and other property. Most of the treaties contained a provision that although the First Nations had pretty much exclusive right to the limited territory within their reserves, they still had the right to hunt and trap on unoccupied Crown land. Legally speaking, this right has been upheld many times in hunting cases involving First Nations members shooting game animals perhaps out of season, and perhaps on various kinds of provincial lands, parks, or forest reserves. Although a particular First Nations member may live on a reserve, the family may have continued to hunt or trap on unoccupied Crown land outside the reserve. This hunting right may still be subject to some provincial game laws, but it is nevertheless a real right of surface occupation, recognized by the treaties themselves and enumerated in the Constitution. Oil and gas development on these hunting and trapping lands off reserve will adversely effect the surface rights of the traditional hunters and trappers just as much as oil and gas development will damage the crops of a farmer who owns the surface of the lands but not the subsurface fights.

In most non-native oil and gas development, there exists a very defined procedure for the owner (or an oil company holding a provincial lease of subsurface oil and gas) of oil and gas rights to get access to the surface of the lands for drilling and production operations. If the farmer and the company can't make a surface lease deal, then there is a Surface Rights Board that will arbitrate a deal based on usual rates and crop damage. But no similar procedure has arisen to compensate traditional hunters or trappers for the exploration damage to the unoccupied Crown lands that they don't own but have a constitutionally protected right to hunt on. Provincial governments are just now beginning to work out the procedures to balance the rights of the owners or lessees of the subsurface mineral rights with the traditional hunting rights of the First Nations. There will be compromises to be made. What is the dollar value versus the spiritual value of shooting a few moose a year or running a trap-line with your grandfather? Does the closest band control the surface right or the person who really worked the land? Or just because a few young hot heads throw up a road block and pretend that they control this traditional land, do they really?

Sensible mechanisms to address the surface rights issues on traditional lands will evolve over time, but like many areas of Aboriginal law, a late start to the process will mean that some of our Aboriginal citizens will be left a bit behind due to the absence of the regulatory and development framework that the rest of us take for granted.

Not every First Nation is the same, and each will have its own preferred way to develop the resources under its control. Inevitably, the relative speed that a particular First Nation will want to proceed at will be locally determined, as will the balance between industrial development and ecological preservation. But the ability to make and manage those decisions will be controlled by the development of up-to-date infrastructure to access, pay for, and invest the royalties generated by the resource. Real progress is being made, but like many things Aboriginal, from voting rights to agricultural infrastructure, coming from behind hasn't helped matters.

Fred R. Fenwick is a lawyer with the firm of Drummond Phillips Sevalrud LLP in Calgary, Alberta.