Lamarre
T
.C
J
.:
These
are
appeals
from
tax
assessments
made
by
the
Minister
of
National
Revenue
(“Minister”)
in
respect
of
the
appellants’
1988
taxation
year,
whereby
the
Minister
denied
deductions
on
account
of
the
Canadian
Exploration
Expenses
(“CEE”),
renounced
to
them
by
Benchmark-One
Hydrocarbons
Inc.
(“Benchmark”),
which
deductions
were
claimed
by
each
of
them
in
computing
his
income
pursuant
to
section
66.1
of
the
Income
Tax
Act
(“Act”).
The
appeals
were
heard
on
common
evidence.
Facts
The
facts
admitted
by
both
parties
are
as
follows.
Benchmark
was
incorporated
on
August
31,
1988
under
the
laws
of
the
Province
of
Ontario.
On
September
1,
1988,
Benchmark
entered
into
a
joint
venture
agreement
with
Canadian
Futurity
Oils
Ltd.
(“Futurity”)
pursuant
to
which:
(i)
Futurity
agreed
to
enter
into
agreements
relating
to
the
acquisition
of
oil
and
gas
properties
in
Western
Canada;
and
(ii)
Benchmark
agreed
to
incur
exploration
expenditures
in
order
to
acquire
interests
in
Futurity’s
and
third
parties’
oil
and
gas
properties.
Futurity
entered
into
a
participation
agreement
with
Trilogy
Resource
Corporation
(“Trilogy”)
pursuant
to
which
Futurity
and
Benchmark
were
to
earn
a
participating
interest
in
certain
oil
and
gas
properties
including
oil
well
10-24-43-12W5M
in
the
Brazeau
area
of
Alberta
(“well
10-24”),
in
exchange
for
sharing
the
costs
of
drilling
the
wells.
Under
this
agreement,
Trilogy
was
to
act
as
the
operator
for
well
10-24.
On
December
12,
1988,
Benchmark
filed
with
the
Minister
a
T100
form
together
with
an
offering
memorandum
relating
to
an
offering
of
common
shares
(“flow-through
shares”)
wherein
it
agreed
to
incur
expenditures
qualifying
as
CEE
equal
to
the
full
subscription
price
of
such
shares
and
to
renounce
the
said
CEE
to
the
subscribers.
Between
December
12,
1988
and
December
31,
1988,
20
individuals
subscribed
for
a
total
of
500,000
flow-through
shares
of
Benchmark
at
a
subscription
price
of
$1.00
per
share.
The
appellants
subscribed
for
111,000
of
those
shares.
By
February
28,
1989,
Benchmark
had
expended
$500,000
purportedly
qualifying
as
CEE,
of
which
amount
$100,000
related
to
expenses
incurred
in
drilling
well
10-24.
On
March
1,
1989,
Benchmark
filed
forms
with
the
Minister
purporting
to
renounce
$500,000
of
CEE
to
the
20
subscribers.
Of
that
amount,
$111,000
was
renounced
to
the
appellants.
According
to
the
respondent,
the
$100,000
of
expenditures
in
relation
to
well
10-24
did
not
constitute
CEE
on
the
basis
that
these
expenditures
did
not
result
in
the
discovery
of
a
natural
accumulation
of
petroleum
or
natural
gas
and
the
well
was
not
abandoned
in
1988
or
within
six
months
of
the
end
of
1988,
which
requirements
must
be
met
for
the
expenditures
to
qualify
as
CEE
under
subparagraph
66.1(6)(tz)(ii.l)
of
the
Act.
The
appellants
Wheeler
and
Hodge’s
portion
of
the
amount
of
$100,000
in
question
was
$20,000
each
whereas
the
appellant
Hepburn’s
portion
was
$60,000.
Issue
The
issue
is
whether
the
amounts
expended
by
Benchmark
in
respect
of
well
10-24
and
renounced
to
the
appellants
through
the
flow-through
share
provisions
qualify
as
CEE
as
described
in
clause
66.1(6)(a)(11.1)(A)
of
the
Act.
The
parties
agree
that
this
issue
will
be
resolved
by
determining
whether
well
10-24
resulted
in
the
discovery
of
a
natural
accumulation
of
petroleum
or
natural
gas.
Clause
66.1(6)(tf)(ii.l)(A)
states:
“Canadian
exploration
expense”.
—
Canadian
exploration
expense
of
a
taxpayer
means
any
expense
incurred
after
May
6,
1974
that
is...
(11.1)
any
expense
incurred
by
him
after
May
6,
1987
and
in
a
taxation
year
of
the
taxpayer
in
drilling
or
completing
an
oil
or
gas
well
in
Canada
…
if
(A)
the
well
resulted
in
the
discovery
of
a
natural
accumulation
of
petroleum
or
natural
gas
and
the
discovery
occurred
at
any
time
before
six
months
after
the
end
of
the
year.
Counsel’s
Submissions
The
respondent
submits
that
well
10-24
cannot
meet
the
requirements
of
clause
66.1(6)(ü)(ii.l)(A)
because
it
did
not
result
in
the
discovery
of
a
natural
accumulation
of
petroleum
or
natural
gas.
To
support
her
position,
the
respondent
relies
on:
(i)
the
conclusion
reached
by
the
Alberta
Energy
and
Utilities
Board
(“EUB”)
(formerly
the
Energy
Resources
Conservation
Board
“ERCB”)
that
a
new
hydrocarbon
accumulation
had
not
been
discovered
and
the
EUB’s
refusal
to
assign
proven
reserves
to
the
well;
and
(ii)
an
independent
review
of
the
well
data
by
Mr.
James
A.
Davidson,
a
geologist
with
the
National
Energy
Board
(“NEB”),
which
confirmed
the
findings
of
the
EUB.
The
appellants
are
of
the
view
that
well
10-24
did
meet
the
requirements
of
clause
66.1(6)(a)(ii.l)(A).
They
submit
that
in
interpreting
the
meaning
of
the
phrase
“resulted
in
the
discovery
of
a
natural
accumulation
of
petroleum
or
natural
gas”
in
this
clause,
a
determination
must
be
made
as
to
whether
the
terms
“discovery”
and
“accumulation”
were
intended
to
have
their
ordinary
meaning
or
rather
to
be
given
certain
meanings
peculiar
to
the
“industry”
or
of
a
“technical”
nature.
They
take
the
position
that
based
on
principles
of
statutory
interpretation
the
terms
“discovery”
and
“accumulation”
should
be
given
their
plain
and
ordinary
dictionary
meanings
such
that,
at
most,
clause
66.1(6)(tf)(ii.l)(A)
would
add
a
requirement
that
the
well
have
the
ability
to
produce
petroleum
or
natural
gas.
The
appellants
submit
that
the
definition
used
by
the
respondent
and
the
EUB,
which
adds
an
economic
component
(the
appellants
would
have
to
prove
that
well
10-24
had
a
capability
for
the
economic
production
of
petroleum
or
natural
gas),
should
not
be
accepted.
Thus,
according
to
the
appellants,
a
discovery
would
be
the
finding
of
something
that
was
not
previously
known
to
exist
and,
at
most,
the
appellants
would
simply
have
to
prove
that
oil
or
gas
could
be
extracted
from
the
ground
and
that
the
well
was
capable
of
production
even
if
the
well
turned
out
not
to
be
economically
viable.
The
appellants
further
submit
that
Mr.
Davidson
is
not
qualified
as
an
expert
witness
to
testify
in
support
of
the
respondent’s
evidence,
but
if
he
is
so
qualified,
the
weight
to
be
attached
to
his
evidence
should
be
slight.
The
appellants
argue
that
Mr.
Davidson
has
little
or
no
experience
in
reviewing
certain
critical
factors
such
as
the
geological
well
samples,
the
core
reports,
the
open
well
logs
as
well
as
the
production
testing
and
well
completion
results.
Accordingly,
the
appellants
take
the
position
that
Mr.
Davidson
is
not
a
person
qualified
to
make
any
determination
as
to
whether
well
10-24
resulted
in
the
discovery
of
a
natural
accumulation
of
petroleum
or
natural
gas.
Analysis
Purpose
of
Legislation
The
Act
provides
taxpayers
with
deductions
for
pre-production
expenses
incurred
in
the
oil
and
gas
industry
which
otherwise
would
not
be
deductible.
These
expenses
are
classified
either
as
CEE
defined
in
paragraph
66.1(6)(æ)
of
the
Act,
which
are
100%
deductible
in
the
year,
or
as
Canadian
Development
Expenses
(“CDE”)
defined
in
paragraph
66.2(5)(a)
of
the
Act,
deductible
at
the
rate
of
30%
per
year
on
a
declining
basis.
The
expenses
for
drilling
or
completing
an
oil
or
gas
well
constitute
CDE
pursuant
to
clause
66.2(5)(a)(i)(B)
unless
they
meet
the
requirements
of
subparagraph
66.1(6)(a)(ii)
(for
expenses
incurred
before
April
1987)
or
subparagraph
66.1(6)(fl)(ii.l)
(for
expenses
incurred
after
March
1987),
in
which
case
they
can
be
deducted
as
CEE.
The
provisions
dealing
with
exploration
and
development
expenses
have
changed
frequently
in
recent
years.
The
definition
of
CEE
has
been
expanded
and
developed
as
a
means
of
encouraging
certain
activities
by
making
the
cost
of
those
activities
100%
deductible
on
a
current
basis.
According
to
one
author,
“[t]he
Government
and
the
oil
and
gas
industry
discussed
the
appropriate
cut-off
points
between
[CEE]
and
[CDE];
the
result
of
which
is
a
new
definition
of
[CEE]
effective
April
1,
1987.”
The
Department
of
Finance
Technical
Notes
to
the
Notice
of
Ways
and
Means
Motion,
dated
June
11,
1986
and
October
31,
1986
comment
as
follows:
Paragraph
66.1(6)(a)
of
the
Act
provides
the
definition
of
“Canadian
exploration
expense”
(CEE).
Subparagraphs
(1.1)
and
(11.2)
thereof
describe
the
oil
and
gas
drilling
expenses
incurred
after
1985
that
are
included
in
that
definition.
The
changes
to
this
definition
as
announced
by
the
Minister
of
Finance
on
December
31,
1985
and
March
27,
1986
are
intended
to
clarify
the
distinction
between
exploration
and
development
expenses.
History
and
statutory
context
of
clause
66.1(6)(a)(ii.l)(A)
Subparagraphs
66.l(6)(a)(ii)
and
66.1(6)(a)(ii.l)
read
as
follows
in
1988:
Paragraph
66.1(6)(«)
“Canadian
exploration
expense”
of
a
taxpayer
means
any
expense
incurred
after
May
6,
1974
that
is
(ii)
any
expense
incurred
before
April,
1987
in
drilling
or
completing
an
oil
or
gas
well
in
Canada
or
in
building
a
temporary
access
road
to,
or
preparing
a
site
in
respect
of,
any
such
well,
(A)
incurred
by
him
in
the
year,
or
|
(B)
|
incurred
by
him
in
any
previous
year
and
included
by
him
in
|
|
computing
his
Canadian
development
expense
for
a
previous
|
|
taxation
year,
|
|
if,
within
six
months
after
the
end
of
the
year,
the
drilling
of
the
well
is
|
|
completed
and
|
|
(C)
|
it
is
determined
that
the
well
is
the
first
well
capable
of
produc
|
|
tion
in
commercial
quantities
from
an
accumulation
of
petro
|
|
leum
or
natural
gas
(other
than
a
mineral
resource)
not
previ
|
|
ously
known
to
exist,
or
|
|
(D)
|
it
is
reasonable
to
expect
that
the
well
will
not
come
into
pro
|
|
duction
in
commercial
quantities
within
twelve
months
of
its
|
|
completion,
|
|
(ii.l)
|
any
expense
incurred
by
him
after
March,
1987
and
in
a
taxation
year
|
|
of
the
taxpayer
in
drilling
or
completing
an
oil
or
gas
well
in
Canada
or
|
|
in
building
a
temporary
access
road
to,
or
preparing
a
site
in
respect
of,
|
|
any
such
well
if
|
|
(A)
|
the
well
resulted
in
the
discovery
of
a
natural
accumulation
of
|
|
petroleum
or
natural
gas
and
the
discovery
occurred
at
any
time
|
|
before
six
months
after
the
end
of
the
year,
|
|
(B)
|
the
well
is
abandoned
in
the
year
or
within
six
months
after
the
|
|
end
of
the
year
without
ever
having
produced
otherwise
than
|
|
for
specified
purposes,
|
|
(C)
|
the
period
of
24-months
commencing
on
the
day
of
completion
|
|
of
the
drilling
of
the
well
ends
in
the
year,
the
expense
was
|
|
incurred
within
that
period
and
in
the
year
and
the
well
has
not
|
|
within
that
period
produced
otherwise
than
for
specified
pur
|
|
poses,
or
|
|
(D)
|
a
certificate
in
prescribed
form
in
respect
of
the
well
has
been
|
|
filed
with
the
Minister
on
or
before
the
day
that
is
60
days
after
|
|
the
end
of
the
calendar
year
in
which
the
drilling
of
the
well
has
|
|
commenced,
|
|
(I)
|
the
aggregate
of
expenses
incurred
and
to
be
incurred
|
|
in
drilling
and
completing
the
well,
in
building
a
tem
|
|
porary
access
road
to
the
well
and
in
preparing
the
site
|
|
in
respect
of
the
well
will
exceed
$5,000,000,
and
|
|
(II)
|
the
well
will
not
produce,
otherwise
than
for
a
specified
|
|
purpose,
within
the
period
of
24
months
commencing
|
|
on
the
day
on
which
the
drilling
of
the
well
is
com
|
|
pleted,
[emphasis
mine]
|
a)
«frais
d’exploration
au
Canada»
d’un
contribuable
s’entend
des
dépenses
suivantes
engagées
après
le
6
mai
1974:
|
(ii)
|
une
dépense
d’une
part
engagée
avant
avril
1987
pour
le
forage
ou
|
|
l’achèvement
d’un
puits
de
pétrole
ou
de
gaz
au
Canada,
la
construction
|
|
d’une
route
d’accès
temporaire
au
puits
ou
la
préparation
d’un
emplace
|
|
ment
pour
un
tel
puits,
et
d’autre
part
engagée
par
le
contribuable
|
|
(A)
|
soit
dans
l’année,
|
|
(B)
|
soit
dans
une
année
antérieure
si
elle
est
incluse
par
le
contribu
|
|
able
dans
le
calcul
de
ses
frais
d’aménagement
au
Canada
pour
|
|
une
année
d’imposition
antérieure,
|
|
si,
dans
les
six
mois
suivant
la
fin
de
l’année,
le
forage
du
puits
est
|
|
achevé
et
|
|
(C)
|
qu’il
soit
établi
que
le
puits
est
le
premier
susceptible
d’une
|
|
production
en
quantités
commerciales
à
partir
d’un
gisement
de
|
|
pétrole
ou
de
gaz
naturel
(à
l’exception
d’une
ressource
minér
|
|
ale)
jusque-là
inconnu,
ou
|
|
(D)
|
qu’il
soit
raisonnable
de
s’attendre
à
ce
que
le
puits
ne
produise
|
|
pas
de
quantités
commerciales
dans
les
douze
mois
de
son
|
|
achèvement,
|
|
(11.1)
|
une
dépense
engagée
par
le
contribuable
après
mars
1987
et
dans
une
|
|
année
d’imposition
du
contribuable,
pour
le
forage
ou
l’achèvement
|
|
d’un
puits
de
pétrole
ou
de
gaz
au
Canada,
la
construction
d’une
route
|
|
d’accès
temporaire
au
puits
ou
la
préparation
d’un
emplacement
pour
un
|
|
tel
puits,
à
condition,
selon
le
cas,
|
|
(A)
|
que
le
puits
soit
la
cause
de
la
découverte,
à
une
date
antérieure
|
|
à
la
période
de
six
mois
suivant
la
fin
de
l’année,
d’un
gisement
|
|
naturel
de
pétrole
ou
de
gaz
naturel,
|
|
(B)
|
que
le
puits
soit
abandonné
dans
l’année
ou
dans
les
six
mois
|
|
suivant
la
fin
de
l’année
sans
avoir
jamais
produit
de
pétrole
ou
|
|
de
gaz
sinon
à
une
fin
admise,
|
|
(C)
|
que
le
terme
de
la
période
de
24
mois
commençant
le
jour
|
|
d’achèvement
du
forage
du
puits
tombe
dans
l’année,
que
la
|
|
dépense
soit
engagée
durant
cette
période
et
dans
l’année
et
que
|
|
le
puits
n’ait
pas
produit
de
pétrole
ou
de
gaz
durant
cette
péri
|
|
ode
sinon
à
une
fin
admise,
|
|
(D)
|
que
soit
produite
au
ministre,
au
plus
tard
six
mois
après
la
fin
|
|
de
l’année
d’imposition
du
contribuable
dans
laquelle
le
forage
|
|
du
puits
a
commencé,
une
attestation
délivrée
par
le
ministre
de
|
|
l’Énergie,
des
Mines
et
des
Ressources
portant
que,
compte
|
tenu
des
éléments
de
preuve
qui
lui
ont
été
présentées,
il
est
convaincu:
(I)
d’une
part,
que
le
total
des
dépenses
engagées
et
à
engager
pour
le
forage
ou
l’achèvement
du
puits,
la
construction
d’une
route
d’accès
temporaire
au
puits
et
la
préparation
d’un
emplacement
pour
le
puits
dépassera
5
000
000
$,
(II)
d’autre
part,
que
le
puits
ne
produira
pas
de
pétrole
ou
de
gaz
sinon
à
une
fin
admise
dans
la
période
de
24
mois
commençant
à
la
date
où
le
forage
du
puits
est
terminé,
Prior
to
its
amendment
in
1986,
subparagraph
66.1(6)(a)(ii.l)
read:
66.7(6)(tz)(/Z.7)
any
expense
incurred
after
1985
in
drilling
or
completing
an
oil
or
gas
well
in
Canada
or
in
building
a
temporary
access
road
to,
or
preparing
a
site
in
respect
of,
any
such
well,
(A)
incurred
by
him
in
the
year,
or
(B)
incurred
by
him
in
any
previous
year
and
included
by
him
in
computing
his
Canadian
development
expense
for
a
previous
taxation
year,
if
drilling
of
the
well
is
completed
within
six
months
after
the
end
of
the
year
and
the
well
is
abandoned
within
six
months
after
the
end
of
the
year
and
within
twelve
months
after
the
drilling
of
the
well
is
completed,
66.1(6)(a)(ti.1)
une
dépense
supportée
après
1985
pour
le
forage
ou
l’achèvement
d’un
puits
de
pétrole
ou
de
gaz
au
Canada,
la
construction
d’une
route
d’accès
temporaire
au
puits
ou
la
préparation
d’un
emplacement
à
l’égard
d’un
tel
puits,
(A)
supportée
par
lui
dans
l’année,
ou
(B)
supportée
par
lui
dans
toute
année
précédente
et
incluse
par
lui
lors
du
calcul
de
ses
frais
d’aménagement
au
Canada
pour
une
année
d’imposition
antérieure,
si
le
forage
du
puits
est
terminé
dans
les
six
mois
suivant
la
fin
de
l’année
et
si
le
puits
est
abandonné
dans
les
six
mois
suivant
la
fin
de
l’année
et
dans
les
douze
mois
de
son
achèvement,
The
pre-1986
version
of
subparagraph
66.1(6)(tz)(ii.l)
merely
required
that
the
drilling
be
completed
and
the
well
abandoned
within
six
months
after
the
end
of
the
year.
The
amended
version
provides
another
alternative:
now,
CEE
may
be
claimed
in
a
year
if,
within
six
months
of
the
end
of
the
year,
either
the
well
results
in
a
discovery
of
a
natural
accumulation
of
oil
or
gas
or
the
well
is
abandoned.
This
amendment
has
added
the
terms
“dis-
1997-06-05
covery”
and
“natural
accumulation”
which
replace
a
more
general
drilling
requirement;
obviously,
it
is
intended
that
something
more
than
mere
drilling
be
present.
Counsel
for
the
appellants
submits
that
“discovery”
should
be
taken
to
mean
capable
of
production
in
any
quantity,
regardless
of
how
minimal,
given
that
subparagraph
66.1(6)(a)(11.1)
refers
to
a
discovery,
rather
than
a
discovery
capable
of
production
in
commercial
quantities,
a
qualification
which
specifically
appears
elsewhere
in
the
CEE
provisions.
According
to
counsel,
the
word
“discovery”
appears
more
likely
to
have
been
specifically
intended
to
be
substituted
for
the
phrase
“not
previously
known
to
exist”
in
clause
66.1(6)(«)(ii)(C).
Counsel
for
the
respondent
takes
it
as
having
been
settled
that
the
terms
used
in
the
Act
must
be
interpreted
in
accordance
with
their
specialized
meanings
in
the
industry.
She
submits
that
the
use
of
the
word
“discovery”
within
the
industry
presumes
a
capability
of
commercial
production,
particularly
when
linked
to
the
word
“accumulation”.
Although
the
meaning
within
the
industry
is
helpful
in
interpreting
a
provision
of
the
Act,
such
meaning
must
be
determined
to
be
correct
in
the
context
of
the
provisions
of
the
Act?.
In
Nova,
an
Alberta
Corporation
v.
The
Queen,
the
Federal
Court
of
Appeal
had
to
determine
the
meaning,
for
capital
cost
allowance
purposes,
of
the
word
“pipeline”
as
used
in
the
Income
Tax
Regulations.
In
confirming
that
the
trial
judge
was
correct
in
considering
the
meaning
ascribed
to
the
term
by
those
involved
in
the
oil
and
gas
industry,
Urie
J.
said
at
p.
6391:
Dictionary
meanings
are,
of
course,
relevant,
as
other
aids
to
construction
just
as
the
evidence
of
those
conversant
with
the
industry
provides
assistance
to
the
ultimate
arbiter,
the
Court…
...the
dictionary
meanings
to
which
both
he
(the
trial
judge)
and
this
Court
were
referred
varied
sufficiently
that
they
could
fairly
be
described
as
inconclusive.
He
was,
therefore,
entitled
to
accord
those
meanings
little
weight
and
to
accept
evidence
of
the
Respondent’s
experts
as
persons
familiar
with
the
subject,
....
In
the
present
case,
I
must
determine
whether
there
was
a
discovery
of
a
natural
accumulation
of
petroleum
or
natural
gas
within
the
meaning
of
clause
66.1(6)(a)(ii.1)(A)
of
the
Act.
I
agree
with
counsel
for
the
appellants
that
these
words
are
to
be
construed
in
the
context
of
the
statute
as
a
whole,
and,
in
the
words
of
E.
A.
Driedger
in
Construction
of
Statutes:
...the
words
of
an
Act
are
to
be
read
in
their
entire
context
and
in
their
grammatical
and
ordinary
sense
harmoniously
with
the
scheme
of
the
Act,
the
object
of
the
Act,
and
the
intention
of
Parliament...
However,
I
also
agree
with
MacKay
J.
in
Ora
Del
Norte,
S.A.
v.
The
Queen
J
when
he
says
that
“the
use
of
terminology
used
in
the
industry
may
be
significant
where
the
Income
Tax
Act
does
not
itself
define
words
that
it
uses”.
In
the
present
instance,
neither
the
expression
“the
discovery
of
a
natural
accumulation
of
petroleum
or
natural
gas”
as
a
whole
nor
the
words
“discovery”
or
“accumulation”
taken
individually
are
defined
in
the
Act.
Evidence
of
usage
within
the
industry
will
therefore
be
of
assistance
in
interpreting
those
words
as
used
in
the
statute.
This
kind
of
evidence
may
be
presented
by
experts.
In
R.
v.
Mohan,
Sopinka
J.
expressed
himself
as
follows:
This
pre-condition
[the
necessity
of
an
expert
witness
to
assist
the
trier
of
fact]
is
often
expressed
in
terms
as
to
whether
the
evidence
would
be
helpful
to
the
trier
of
fact.
The
word
“helpful”
is
not
quite
appropriate
and
sets
too
low
a
standard.
However,
I
would
not
judge
necessity
by
too
strict
a
standard.
What
is
required
is
that
the
opinion
be
necessary
in
the
sense
that
it
provide
information
“which
is
likely
to
be
outside
the
experience
and
knowledge
of
a
judge
or
jury”:
as
quoted
by
Dickson
J.
in
R.
v.
Abbey,
supra.
As
stated
by
Dickson
J.,
the
evidence
must
be
necessary
to
enable
the
trier
of
fact
to
appreciate
the
matters
in
issue
due
to
their
technical
nature.
In
Kelliher
(Village
of)
v.
Smith,
(1931)
S.C.R.
672,
at
p.
684,
this
Court,
quoting
from
Beven
on
Negligence
(4th
ed.
1928),
at
p.
141,
stated
that
in
order
for
expert
evidence
to
be
admissible,
“the
subject-matter
of
the
inquiry
must
be
such
that
ordinary
people
are
unlikely
to
form
a
correct
judgment
about
it,
if
unassisted
by
persons
with
special
knowledge”.
This
being
said,
I
have
now
to
resolve
the
question
raised
by
the
appellants
as
to
the
qualification
of
the
respondent’s
expert,
Mr.
Davidson.
Qualification
of
Mr.
Davidson
as
an
expert
witness
The
expert’s
usefulness
in
stating
his
opinion
and
conclusions
on
a
scientific
and
technical
issue
is
circumscribed
by
the
limits
of
his
own
knowledge.
The
test
of
expertness
is
described
as
follows
in
The
Law
of
Evidence
in
Canada:
®.
The
test
of
expertness
so
far
as
the
law
of
evidence
is
concerned
is
skill
in
the
field
in
which
the
witness’
opinion
is
sought.
The
admissibility
of
such
evidence
does
not
depend
upon
the
means
by
which
the
skill
was
acquired.
As
long
as
the
court
is
satisfied
that
the
witness
is
sufficiently
experienced
in
the
subject-matter
at
issue,
the
court
will
not
be
concerned
with
whether
his
or
her
skill
was
derived
from
specific
studies
or
by
practical
training,
although
that
may
affect
the
weight
to
be
given
to
the
evidence.
Therefore,
and
as
was
mentioned
by
McLachlin
J.
in
the
decision
of
the
Supreme
Court
of
Canada
in
R.
v.
Marquard:
The
only
requirement
for
the
admission
of
expert
opinion
is
that
the
“expert
witness
possesses
special
knowledge
and
experience
going
beyond
that
of
the
trier
of
fact”:
R.
v.
Béland,
(1987)
2
S.C.R.
398,
at
p.
415.
Deficiencies
in
the
expertise
go
to
weight,
not
admissibility.
Here,
Mr.
Davidson
was
asked
to
comment
on
the
statement
of
the
appellants’
expert
witness
regarding
well
10-24
and
to
give
his
opinion
on
whether
well
10-24
represents
“the
discovery
of
a
natural
accumulation
of
petroleum
or
natural
gas”.
According
to
his
biographical
résumé,
Mr.
Davidson
graduated
from
the
University
of
Manitoba
with
an
honours
Bachelor
of
Science
degree
in
Geology
in
1977.
He
began
his
career
in
the
petroleum
industry
doing
work
consisting
in
calculating
reserves
available
in
oil
and
gas
pools,
primarily
in
eastern
Alberta.
He
joined
Esso
Resources
in
the
fall
of
1978
where
he
stayed
for
three
years
and
worked
in
that
company’s
Reservoir
Geology
Division
in
Alberta.
He
worked
as
a
geologist
with
the
Newfoundland
government
for
two
years
and
then
with
the
Canadian
Oil
and
Gas
Lands
Administration
(COGLA)
in
Ottawa
where
he
performed
pool
studies
to
determine
reserves
on
the
mainland
of
the
Yukon
Territory.
In
1985,
he
joined
the
NEB
in
Calgary,
where
he
worked
in
the
area
of
reserves
existing
in
pools
in
western
Canada.
In
December
1994,
he
was
loaned
to
the
EUB
to
do
geological
analysis
on
new
wells
as
part
of
the
EUB-NEB
joint
database
project.
The
appellants
challenge
the
expertise
of
Mr.
Davidson
on
the
basis
that
he
lacks
experience
as
a
well-site
geologist
(in
his
testimony,
Mr.
Davidson
admitted
that
inhis
career
he
only
visited
two
well
sites)
and
therefore
would
not
be
qualified
to
analyze
the
well-site
geologist’s
report
(the
core
and
log
data
reports)
or
the
production
testing
and
well
completion
results.
Furthermore,
counsel
argues
that
Mr.
Davidson
is
neither
a
petrophysicist,
(a
recognized
expert
in
log
analysis
and
interpretation)
nor
a
professional
geologist
in
Alberta
so
designated
by
the
Association
of
Professional
Engineers,
Geologists
and
Geophysicists
of
Alberta.
On
this
latter
point,
Mr.
Davidson
testified
that
he
used
to
be
a
member
of
this
Association
and
was
granted
professional
geologist’s
status,
but
he
stopped
paying
the
annual
dues
when
he
first
moved
to
Newfoundland
as
membership
in
the
Association
was
no
longer
relevant.
When
he
went
back
to
Alberta,
he
started
to
work
for
the
government
and
it
was
not
a
requirement
that
he
belong
to
the
Association.
Mr.
Davidson
mentioned
that
he
was
however
qualified
to
work
in
the
industry
and
only
needed
to
pay
the
required
dues
to
regain
his
membership.
I
find
that
non-membership
in
the
Association
is
not
a
good
argument
for
disqualifying
Mr.
Davidson
as
an
expert
as
long
as
he
can
demonstrate
that
he
has
expertise
in
the
field.
Based
on
the
evidence,
I
am
of
the
opinion
that
Mr.
Davidson
is
certainly
qualified
to
give
an
expert
opinion
in
the
present
case.
His
background
in
geology
is
no
less
relevant
than
that
of
the
appellants’
expert.
Even
though
Mr.
Davidson
only
went
to
well
sites
twice
and
is
not
qualified
as
a
petrophysicist,
I
am
satisfied
that
with
his
knowledge
as
a
geologist
he
has
more
than
enough
experience
to
interpret
log
data,
which
is
crucial
in
determining
if
there
was
a
discovery
of
a
natural
accumulation
of
petroleum
or
natural
gas
in
the
well.
His
ability
to
analyze
the
production
testing,
the
well
completion
results
and
the
core
reports
goes
only
to
the
weight
I
will
give
to
his
opinion
and
does
not
negate
his
competence
to
give
an
expert
opinion.
As
was
stated
by
McLachlin
J.
in
R.
v.
Marquardt
Important
as
the
initial
qualification
of
an
expert
witness
may
be,
it
would
be
overly
technical
to
reject
expert
evidence
simply
because
the
witness
ventures
an
opinion
beyond
the
area
of
expertise
in
which
he
or
she
has
been
qualified.
Meaning
of
“discovery
of
a
natural
accumulation
of
petroleum
or
natural
gas"
From
the
submissions
of
the
respondent’s
counsel
and
Mr.
Davidson’s
testimony
and
documents
filed,
it
is
clear
that
their
interpretation
of
what
constitutes
a
discovery
is
an
accumulation
of
petroleum
or
natural
gas
that
is
based
on
the
definition
given
in
the
industry
of
what
they
call
“established
reserves”,
which
term
is
defined
as
follows:
Established
Reserves:
Those
reserves
recoverable
under
current
technology
and
present
and
anticipated
economic
conditions,
specifically
proved
by
drilling,
testing,
or
production;
plus
that
judgement
portion
of
contiguous
recoverable
reserves
that
are
interpreted
from
geological,
geophysical,
or
similar
information,
with
reasonable
certainty
to
exist.
The
terms
“reserve”,
“reserves”,
“reservoir”
and
“pool”
are
defined
as
follows
in
the
industry:
Manual
of
Oil
&
Gas
Terms
reserve:
That
portion
of
the
identified
resource
from
which
a
usable
energy
commodity
can
be
economically
and
legally
extracted
at
the
time
of
determination.
reserves'.
The
unproduced
but
recoverable
oil
and/or
gas
in
place
in
a
formation
which
has
been
proved
by
production.
reservoir:
A
porous,
permeable
sedimentary
rock
containing
commercial
quantities
of
oil
or
gas.
Three
types
of
reservoirs
are
encountered:
(a)
Structural
Trap;
(b)
Stratigraphic
Trap,
and
(c)
Combination
Trap.
The
reservoir
is
formed
when
escape
of
the
oil
or
gas
is
prevented
by
surrounding
layers
of
impervious
rock.
pool:
An
underground
reservoir
containing
or
appearing
to
contain
a
common
accumulation
of
oil
and
natural
gas.
A
zone
of
a
structure
which
is
completely
separated
from
any
other
zone
in
the
same
structure
is
a
pool.
Dictionary
of
Geological
Terms
reserve:
Petroleum
or
natural
gas
discovered,
developed,
and
producible,
but
not
yet
produced.
reservoir:
A
natural
underground
container
of
liquids,
such
as
oil
or
water,
and
gases.
In
general,
such
reservoirs
were
formed
by
local
deformation
of
strata,
by
changes
of
porosity,
and
by
intrusions.
These,
however,
are
classifications
in
the
broadest
sense.
oil
pool:
An
accumulation
of
oil
in
sedimentary
rock
that
yields
petroleum
on
drilling.
The
oil
occurs
in
the
pores
of
the
rock
and
is
not
a
pool
or
pond
in
the
ordinary
sense
of
these
words.
AGI
Glossary
reserves:
Identified
resources
of
fuel-bearing
rock
from
which
the
fuel
can
be
extracted
profitably
with
existing
technology
and
under
present
economic
conditions.
reservoir
(petroleum):
(a)
A
subsurface
volume
of
rock
that
has
sufficient
porosity
and
permeability
to
permit
the
accumulation
of
crude
oil
or
natural
gas
under
adequate
trap
conditions,
(b)
A
pool
of
gas
or
oil.
oil
pool:
A
subsurface
accumulation
of
petroleum
that
will
yield
crude
oil
in
economic
quantities.
Under
these
definitions,
there
is
clearly
a
requirement
that
the
drilling,
testing
or
production
tests
show
that
the
well
in
question
can
be
economically
viable.
As
regards
this
test
(and
counsel
for
the
appellants
seemed
to
agree
on
this
as
he
did
not
even
try
to
argue
that
well
10-24
could
ever
satisfy
the
“anticipated
economic”
conditions
requirement
of
the
“established
reserves”
definition
enunciated
by
the
ERCB),
the
evidence
shows
that
well
10-24
has
not
proved
to
be
economically
viable.
However,
the
terms
the
legislator
used
in
the
Act
are
neither
“established
reserves”
nor
“oil
pool”
nor
“reservoir”
but
rather
“the
discovery
of
a
natural
accumulation
of
petroleum
or
natural
gas”.
In
Petroleum
Fiscal
Systems
In
Canada,
Department
of
Energy,
Mines
and
Resources
(August
1991),
which
deals
with
the
CEE,
we
find
at
page
16
that:
Canadian
exploration
expenses
(CEE)
includes
costs
incurred
at
two
stages
of
play
development:
i)
all
geological,
geophysical
and
geochemical
activities
for
determining
the
existence,
location,
extent
or
quality
of
an
oil
or
gas
accumulation;
and
ii)
costs
incurred
in
drilling
or
completing
a
well,
building
a
temporary
access
road
or
preparing
the
well
site,
if:
(a)
the
well
results
in
the
discovery
of
a
new
accumulation
of
oil
or
natural
gas
(i.e,
the
discovery
well);
(b)
the
well
is
abandoned
without
ever
having
produced
commercially
(i.e,
a
dry
hole);
(c)
the
well
has
not
produced
commercially
within
24
months
after
completion
of
drilling
(i.e,
a
shut-in
well);
or
(d)
the
well
is
expected
to
have
costs
in
excess
of
$5
million
and
not
to
produce
commercially
within
24
months
(i.e,
a
high-cost
well)
as
certified
by
the
Minister
of
Energy,
Mines
and
Resources.
It
suggests
that
the
expression
“discovery
of
a
natural
accumulation
of
petroleum
or
natural
gas”
would
be
akin
to
“discovery
well”
in
industry
terms.
The
terms
“discovery”
and
“discovery
well”
are
defined
as
follows
in
the
industry:
AGI
Glossary:
discovery
well:
The
first
well
to
encounter
gas
or
oil
in
a
hitherto
unproven
area
or
at
a
hitherto
unproductive
depth;
a
successful
wildcat,
outpost
well,
deeper-
pool
test,
or
shallower-pool
test.
Dictionary
of
Geological
Terms:
Discovery
well:
A
well
discovering
oil
or
gas
in
a
pool
hitherto
unknown
and
unproductive.
Manual
of
Oil
&
Gas
Terms:
discovery:
Drilling
of
a
well
to
a
formation
capable
of
production
of
oil
and/or
gas.
discoveries:
Proved
reserves
credited
to
new
fields
and
new
pools
in
old
fields
as
the
result
of
successful
exploratory
drilling
and
associated
development
drilling
during
the
current
year.
The
definitions
of
“discovery
well”
implicitly
or
directly
make
reference
to
the
capability
of
a
well
to
produce,
without,
however,
referring
to
any
economic
requirement.
The
AGI
Glossary
definition
speaks
of
the
first
well
to
encounter
gas
or
oil
in
a
hitherto
unproven
area
or
at
a
hitherto
unproductive
depth,
one
example
given
being
a
successful
wildcat.
The
Dictionary
of
Geological
Terms
defines
a
“discovery
well”
as
a
well
discovering
oil
or
gas
in
a
pool
hitherto
unknown
and
unproductive.
The
Manual
of
Oil
&
Gas
Terms
defines
“discovery”
as
the
drilling
of
a
well
to
a
formation
capable
of
production
of
oil
and/or
gas.
The
ordinary
meaning
given
to
the
words
“discovery”,
“discover”,
“accumulation”
and
“accumulate”
in
the
Concise
Oxford
Dictionary,
is:
Discovery:
the
act
or
process
of
discovering
or
being
discovered.
Discover:
find
out
or
become
aware
of
...
be
the
first
to
find.
Accumulation:
the
act
or
process
of
accumulating
or
being
accumulated.
Accumulate:
acquire
an
increasing
number
or
quantity
of.
The
French
version
of
the
Act
speaks
of
“découverte
...
d’un
gisement
naturel”.
Le
Petit
Robert
defines
as
follows
“découverte”
and
“gisement”:
Découverte:
action
de
découvrir
ce
qui
était
ignoré,
inconnu.
Gisement:
disposition
de
couches
de
minéraux
dans
le
sous-sol;
masse
minérale
importante,
propre
à
l’exploitation.
It
is
noteworthy
that
subparagraph
66.1(6)(a)(ii)
which
is
applicable
to
expenses
incurred
before
April
1987
requires
that
in
order
for
expenses
to
qualify
as
CEE,
the
well
had
to
be
the
first
one
capable
of
production
in
commercial
quantities.
For
expenses
incurred
after
March
1987,
subparagraph
66.1(6)(a)(ii.
1)
requires
that
the
well
result
in
the
discovery
of
a
natural
accumulation
of
petroleum
or
natural
gas.
From
the
definitions
of
“discovery”
and
“accumulation”
found
either
in
the
industry
or
in
the
dictionaries,
it
seems
to
be
intended
that
the
word
“discovery”
be
substi-
tuted
for
“the
first
well
capable
of
production”,
and
the
expression
“a
natural
accumulation”
would
be
substituted
for
“an
accumulation
...
not
previously
known
to
exist”.
In
this
regard,
the
principle
of
implied
exclusion
might
apply.
In
Driedger
on
the
Construction
of
Statutes?
this
principle
is
defined
as
follows:
An
implied
exclusion
argument
lies
whenever
there
is
reason
to
believe
that
if
the
legislature
had
meant
to
include
a
particular
thing
within
the
ambit
of
its
legislation,
it
would
have
referred
to
that
thing
expressly.
Because
of
this
expectation,
the
legislature’s
failure
to
mention
the
thing
becomes
grounds
for
inferring
that
it
was
deliberately
excluded.
Although
there
is
no
express
exclusion,
exclusion
is
implied.
The
force
of
the
implication
depends
on
the
strength
and
legitimacy
of
the
expectation
of
express
reference.
The
better
the
reason
for
anticipating
express
reference
to
a
thing,
the
more
telling
the
silence
of
the
legislature.
On
this
reasoning,
I
must
conclude
that
the
legislator
deliberately
excluded
from
the
definition
of
CEE
the
requirement
of
production
in
commercial
quantities.
In
my
view,
the
expenses
in
issue
will
qualify
as
CEE
if
the
appellants
are
able
to
show
and
establish
on
a
balance
of
probabilities
that
oil
or
gas
was
found
in
certain
quantities
in
well
10-24
and
that
this
well
was
capable
of
production.
Was
There
a
Discovery
of
a
Natural
Accumulation
of
Petroleum
or
Natural
Gas
with
Respect
to
Well
10-24
Experts’
Evidence
The
appellants’
expert
John
McGilvary
is
Futurity’s
Vice-President,
Exploration.
He
graduated
with
a
bachelor’s
degree,
having
majored
in
Geol-
ogy
and
minored
in
Mathematics.
He
has
been
working
in
the
oil
and
gas
industry
for
the
past
22
years
performing
duties
consisting
in
determining
whether
wells
hold
an
accumulation
of
petroleum
or
natural
gas,
assessing
well
porosity
and
permeability
and
determining
other
factors
indicating
the
actual
existence
of
petroleum
or
natural
gas.
According
to
the
experts,
porosity
refers
to
the
empty
spaces
in
the
rock
in
which
oil,
gas
or
water
has
collected.
Permeability
refers
to
the
ability
of
the
rock
to
allow
oil,
gas
or
water
to
pass
through
it.
Mr.
McGilvary
is
of
the
opinion
(and
the
respondent’s
expert,
Mr.
Davidson,
does
not
agree
with
this
specific
point)
that
permeability
would
not
necessarily
be
required
in
order
to
determine
that
an
oil
or
gas
well
has
an
accumulation
of
oil
or
gas
since
it
is
the
porosity
that
actually
contains
the
accumulation
of
oil
and
gas.
Permeability
would
simply
allow
the
oil
and
gas
to
travel
into
the
porosity
from
the
adjacent
carbon
rich
shales
where
it
was
formed.
Permeability
is
also
the
controlling
factor
in
the
rate
at
which
a
well
produces.
The
determination
as
to
whether
an
accumulation
of
petroleum
or
natural
gas
has
been
discovered
is
made
during
the
drilling
process
through
such
means
as
actual
core
samples,
open
hole
well
logs
and
geological
well
samples.
All
these
tests
measure
the
porosity
and
permeability
and
help
determining
if
the
porosity
is
filled
with
oil,
gas
or
water.
Open
hole
well
logs
also
record
the
resistivity
of
the
zone.
Since
the
porosity
is
filled
either
with
oil
and
gas
or
salt
water,
the
resistivity
log
determines
the
presence
either
of
oil
and
gas,
which
have
high
resistivity,
or
of
salt
water,
which
has
low
resistivity.
Analysis
of
well
10-24
Well
10-24
had
two
developed
sand
zones
referred
to
as
the
“Upper
Zone”
and
the
“Lower
Zone”.
1
)
Core
Data
No
core
was
taken
from
the
Upper
Zone.
Crowdis
Oil
Consultants
Ltd.
in
its
geological
report,
which
is
the
well
site
geologist’s
report
(“Crowdis
report”),
summarized
its
review
of
the
core
by
stating
“minor
evidence
of
live
hydrocarbons
was
evident
in
the
sands
which
generally
displayed
fair
to
good
porosity”.
According
to
the
Crowdis
report,
fair
porosity
ranges
from
6
to
12
per
cent,
whereas
good
porosity
ranges
from
12
to
20
per
cent.
Mr.
McGilvary’s
review
of
the
Crowdis
report
reads
as
follows:
22.
My
review
of
the
Crowdis
Oil
Consultants
Ltd.
report
indicates
that
both
the
Upper
and
Lower
Zones
have
porosity
that,
filled
with
oil
and
gas,
would
represent
an
accumulation.
Both
zones
appear
to
have
contained
oil
and
gas
as
indicated
by
the
oil
staining
and
fluorescence
of
light
oil
under
ultraviolet
light.
The
oil
may
have
been
either
the
main
component
or
condensate
associated
with
gas.
According
to
Mr.
McGilvary,
the
Geotechnical
Resources
Ltd.
core
analysis
report
dated
March
7,
1989,
which
is
described
as
the
laboratory
core
analysis
(“Geotech
report”),
shows
porosity
for
the
Lower
Zone
approaching
6
per
cent
and
permeability
of
up
to
0.84
mD.
As
to
the
core
summary,
it
shows
an
average
porosity
of
4.1
per
cent
and
an
average
permeability
of
0.13
mD.
The
analysis
also
shows
a
trace
of
oil
and
12.7
per
cent
to
72.5
per
cent
water
saturation
as
well
as
fractures
in
some
samples.
In
the
view
of
the
appellants’
expert,
the
empty
space
(ranging
from
27
per
cent
to
87
per
cent)
between
the
trace
of
oil
and
the
water
was
probably
filled
up
with
gas
(as
it
was
not
filled
with
water)
which
escaped
from
the
core
during
transportation
to
the
laboratory.
The
interpretation
of
the
core
data
by
the
respondent’s
expert,
Mr.
Davidson,
differs
on
some
points.
He
mentioned
first
of
all
that
the
Geotech
report
and
the
Crowdis
report
are
at
variance
with
one
another.
The
Crowdis
report
mentioned
minor
evidence
of
live
oil
whereas
the
Geotech
report
mentioned
no
oil
staining
or
fluorescence.
From
this,
Mr.
Davidson
drew
the
following
conclusion:
From
this,
I
can
only
conclude
that
the
term
“minor”
should
actually
be
negligible.
I
would
consider
Mr.
McGilvary’s
conclusion
in
paragraph
22
of
his
statement
to
be
very
optimistic.
The
presence
of
minor
amounts
of
oil
in
a
core
may
represent
residue
of
oil
that
passed
through
this
location
during
its
migration
to
other
areas.
It
only
indicates
that
oil
was
there
at
one
time,
not
now.
Mr.
Davidson
explained
that
he
had
no
scientific
evidence
from
which
to
conclude
that
live
hydrocarbons
were
present
in
negligible
quantities.
He
said
that
he
drew
this
conclusion
from
comparing
the
Crowdis
and
the
Geotech
reports.
He
admitted
that
there
could
be
some
evaporation
of
live
hydrocarbons
while
being
transported
from
the
well
site
in
Brazeau
River
to
Geotech’s
laboratory
in
Calgary,
which
is
an
eight-hour
drive.
With
regard
to
Mr.
Davidson’s
allegation
of
migration,
Mr.
McGilvary
said
that
there
is
no
migration
in
the
Cardium
formation
and
that,
had
imigration
occurred,
there
would
have
been
traces
of
bitumen
(dead
oil).
However,
Mr.
McGilvary
conceded
that
when
the
core
analysis
shows
a
trace
of
oil,
it
means
less
than
one
per
cent.
In
analyzing
the
core
data,
Mr.
Davidson
obtained
porosity
and
permeability
results
somewhat
higher
than
Mr.
McGilvary’s
results.
Applying
a
general
rule
of
thumb
for
sand
reservoirs
which
requires
a
minimum
of
6
per
cent
porosity
and
0.3
mD
permeability
in
order
for
a
zone
to
be
capable
of
production,
he
concluded
that
the
“10-24
core
indicates
that
there
is
not
likely
to
be
any
reservoir
since
the
highest
measured
core
porosity
is
only
5.7
per
cent”.
During
his
examination-in-chief,
Mr.
Davidson
admitted
that
for
gas
the
permeability
standard
could
drop
from
0.3
mD
to
0.1
mD
because
gas
flows
more
readily
than
oil.
2)
Open
hole
well
logs
data
Mr.
McGilvary
put
forward
the
following
summary
of
the
open
well
The contents of this table are not yet imported to Tax Interpretations.
His
conclusions
with
regard
to
these
logs
read
as
follows:
My
review
of
the
open
hole
well
logs
indicates
that
both
the
Upper
Zone
and
the
Lower
Zone
have
porosity
filled
with
oil
and/or
gas
that
represents
an
accumulation.
The
Upper
Zone
has
better
porosity
than
the
Lower
Zone
with
values
in
the
range
of
commercial
fields
in
the
area
(12%).
The
ERCB
list
of
Cardium
pools
in
the
area
with
economic
producing
reserves
range
from
8%
to
17%
porosity
with
a
13%
to
35%
water
saturation.
The
neutron
log
on
the
Upper
Zone
gives
a
strong
indication
that
the
porosity
is
filled
with
gas
rather
than
oil.
The
resistivity
log
on
both
zones
is
reading
high
values
proving
the
porosity
is
filled
with
oil
and/or
gas
and
not
salt
water.
The
self
potential
log
and
the
caliper
log
indicate
that
the
zone
has
permeability
as
well
as
porosity.
The
gamma
ray
log
indicates
that
the
Upper
Zone
has
less
shale
material
mixed
with
the
sand
than
the
Lower
Zone.
Mr.
Davidson
agreed
with
the
data
provided
in
Mr.
McGilvary’s
summary,
except
for
the
density
porosity
value
of
12
per
cent
for
the
Upper
Zone.
According
to
Mr.
Davidson,
the
density
porosity
of
the
Upper
Zone
is
3
to
4
per
cent
rather
than
12
per
cent
and
the
average
porosity
is
9
per
cent
(when
a
cross
plot
analysis
of
the
density
and
neutron
porosities
is
done).
He
explained
this
difference
in
that
the
logs
readings
on
the
density
show
a
washout
and
that
would
give
an
abnormally
high
porosity
reading.
Mr.
Davidson
then
reduced
the
porosity
to
5
per
cent
as
a
result
of
a
calibration
between
the
core
and
the
log
results.
However,
he
admitted
that,
should
his
washout
theory
prove
to
be
wrong,
he
would
agree
on
a
porosity
value
of
7
per
cent
for
the
Upper
Zone.
Mr.
McGilvary
is
of
the
opinion
that
there
was
no
washout
or
if
there
was,
it
was
of
no
consequence.
According
to
him,
the
log
tool
is
able
to
make
a
correction
for
a
washout
and
in
the
present
case,
the
12
per
cent
value
for
porosity
is
already
corrected
for
any
washout.
Furthermore,
the
operators
of
the
well
log
tools
conducted
a
second
test
to
check
the
repeatability
of
the
two
logs
and
the
results
were
virtually
identical.
The
corresponding
reading
on
the
neutron
log
also
supported
the
two
readings,
which
led
Mr.
McGilvary
conclude
that
the
density
log
was
quite
accurate.
Mr.
Davidson
admitted
that
he
had
not
previously
seen
the
repeatability
log.
When
it
was
shown
to
him,
he
admitted
that
there
was
good
repeatability.
3)
Water
saturation
Having
determined
the
degree
of
porosity
and
permeability,
Mr.
Davidson
mentioned
that
the
next
step
was
to
determine
the
water
saturation
of
the
potential
zone.
Using
the
average
formation
water
resistivity
of
this
zone
in
this
area
(0.6
ohm/m
@
25°C),
as
corrected
by
taking
into
account
the
formation
temperature
according
to
the
bottom-hole
temperature
(82°C)
indicated
in
the
logs,
thus
giving
a
corrected
water
resistivity
of
0.25
(Schlumberger
Chart),
he
computed
water
saturations
of
100
per
cent
for
the
Upper
Zone
and
95
per
cent
for
the
Lower
Zone
which
means
that
oil
or
gas
saturation
is
very
low.
The
minimum
water
saturation
would
be
55
per
cent.
According
to
Mr.
Davidson,
a
viable
well
will
have
a
maximum
of
60
per
cent
water
saturation.
In
his
view,
even
under
the
most
optimistic
of
scenarios,
well
10-24
barely
meets
accepted
industry
criteria.
Mr.
McGilvary
indicated
in
his
report
that
water
saturation
could
vary
between
12.7
per
cent
and
72.5
per
cent.
According
to
Mr.
Davidson,
Mr.
McGilvary
would
have
used
water
saturation
values
taken
directly
from
the
core
analysis.
Mr.
Davidson
believes
this
to
be
an
error.
He
said
in
his
report
that
water
saturations
from
core
analysis
cannot
be
taken
as
indicative
of
the
zone’s
water
saturation
since
the
core
was
cut
with
a
water-based
mud
that
contaminated
the
original
formation
fluids.
According
to
Mr.
Davidson,
only
when
the
core
is
cut
using
formation
oil
can
uncontaminated
cores
be
obtained.
In
the
case
of
well
10-24,
the
drilling
report
indicates
that
a
gel
chem
mud
(which
is
water
based)
was
used
to
drill
the
well.
This
is
why
Mr.
Davidson
concludes
that
core
water
saturations
as
measured
from
well
10-24
core
are
unreliable
as
indicators
of
true
water
saturations.
In
cross-examination,
Mr.
McGilvary
admitted
that
the
mud
used
“when
coring”
could
influence
the
determination
of
water
saturation
but
not
in
such
a
manner
as
to
affect
his
conclusion.
He
said
that
the
core
generally
gives
a
ballpark
idea
of
the
water
saturation
level.
In
his
opinion,
if
water
saturation
had
been
significant,
it
would
have
shown
up
in
the
core
analysis.
From
the
core
analysis
report
he
concluded
that
the
water
saturation
readings
were
fairly
low
and
in
line
with
the
irreducible
water
saturation
in
the
Cardium
formation
(which
he
earlier
said
varied
between
20
and
30
per
cent).
He
further
mentioned
that
the
fact
that
there
is
a
trace
of
oil
is
also
good.
He
said:
“In
a
case
where
you
get
a
trace
of
oil
left
behind
and,
you
know,
this
amount
of
water,
it
probably
means
it’s
filled
up
with
gas”.
He
also
explained
that
the
core
analysis
report
did
not
contain
any
indication
of
gas
as,
by
the
time
the
core
gets
to
the
laboratory,
the
gas
in
the
core
has
evaporated.
Regarding
Mr.
Davidson’s
water
saturation
calculations,
Mr.
McGilvary
first
mentioned
that
the
0.6
ohm/m
water
resistivity
data
used
by
Mr.
Davidson
were
erroneous.
Instead
of
using
the
value
for
the
closest
well,
Mr.
Davidson
took
the
value
for
a
well
situated
25
miles
closer
to
the
mountains
which
according
to
Mr.
McGilvary
flaws
the
results
because:
...if
any
water
is
flushing
through
that
Cardium
formation,
which
it
really
isn’t
because
it’s
a
stratigraphic
trap,
but
if
it
were
it
would
be
coming
from
the
mountains
and,
like
an
artesian
well,
it
would
be
coming
down
and
flushing
up
in
the
zone.
So
naturally
if
you
go
towards
the
source,
you
will
get
a
fresher
or
a
higher
reading
...
Using
a
0.2
ohm/m
water
resistivity
value
(this
value
is
taken
from
a
well
located
over
30
miles
to
the
north
of
well
10-24
and
in
the
opposite
direction
to
the
mountains)
instead
of
the
0.6
value,
Mr.
McGilvary
computed
a
42
per
cent
water
saturation.
Mr.
Davidson
conceded
that
the
0.6
value
was
taken
from
the
well
that
would
give
the
worst
result
but
stated
that
this
was
supported
by
the
0.5
value
for
a
well
located
north
of
well
10-
24.
He
did
not
know,
however,
which
well
that
was.
Mr.
McGilvary
noted
a
few
other
flaws
in
Mr.
Davidson’s
calculations
of
water
saturation
(such
as
use
of
the
wrong
bottom
hole
temperature
and
failure
to
take
into
account
either
the
thin
bed
effect
or
the
shaly
sand
correction
in
determining
porosity).
While
he
seemed
to
agree
with
Mr.
McGilvary
on
this,
Mr.
Davidson
was
of
the
opinion
that
these
flaws
were
favorable
to
the
appellants.
In
his
report,
Mr.
Davidson
made
some
comparisons
between
well
10-24
and
well
7-6-42-10
WS
(“well
7-6”)
which
is
the
closest
Cardium
pool
to
the
subject
well.
Well
7-6
has
a
pool
recognized
by
the
EUB
and
NEB,
even
though
it
has
yet
to
produce.
From
this
comparison,
Mr.
Davidson
made
the
following
findings:
Logs
from
7-6
indicate
that:
1)
the
Lower
Zone
has
a
higher
pure
sand
content
and
lower
shale
component
than
that
of
10-24,
as
reflected
by
the
gamma
log
data
from
both
wells;
2)
7-6
is
more
resistive
than
10-24
by
2.5
times
although
both
have
similar
log
porosities;
and
3)
Core
data
indicates
a
permeability
in
7-6
about
10
times
greater
than
10-24
and
core
porosities
2.5
times
the
results
in
10-24.
Mr.
Davidson
also
added
that
the
results
of
a
comparison
with
discovery
wells
for
all
Cardium
oil
and
gas
pools
within
18
miles
of
well
10-24
supported
not
assigning
any
pay
thickness
to
well
10-24.
However,
Mr.
Davidson
admitted
that,
if
his
washout
theory
proved
to
be
wrong,
well
10-24
would
be
comparable
to
well
7-6
and
would
even
have
a
better
log
porosity
than
well
7-6.
During
his
examination
in
chief,
Mr.
McGilvary
did
some
water
saturation
calculations
for
well
7-6,
based
on
Mr.
Davidson’s
methodology,
using
for
example,
the
0.6
ohm/m
water
resistivity
value;
he
did
not
make
any
shaly
sand
correction
or
thin
bed
correction.
He
obtained
a
water
saturation
of
80
per
cent,
which
is
above
Mr.
Davidson’s
standard
of
60
per
cent
water
saturation
for
a
productive
zone.
Mr.
Davidson
agreed
with
these
calculations.
In
light
of
those
same
calculations,
Mr.
McGilvary
came
to
the
following
conclusion:
If
this
[well
7-6]
is
a
discovery
well
that’s
capable
of
producing
gas,
he[Mr.
Davidson]’s
saying
it’s
80
per
cent
water
and
I
would
have
to
conclude
that
this
method
doesn’t
work.
4)
Well
completion
and
production
test
results
After
an
evaluation
of
the
core,
the
geological
well
samples
and
the
open
well
logs,
Benchmark
and
its
partners
were
satisfied
that
they
had
discovered
an
accumulation
of
oil
or
gas:
“As
a
result,
casing
was
run
into
the
hole
and
the
well
was
prepared
for
production
testing
to
determine
the
profitability
of
the
well”.
Mr.
McGilvary
testified
that
if
there
had
been
any
doubt
as
to
the
existence
of
an
accumulation
of
oil
or
gas,
they
would
have
run
another
test
(called
a
drill
stem
test),
which
was
not
done
as
they
felt
it
was
not
necessary.
He
further
added
that
he
“would
not
have
run
the
casing
if
they
did
not
expect
to
produce
the
well”.
In
his
report,
Mr.
McGilvary
summarized
the
completion
and
production
testing
of
well
10-24.
He
interpreted
the
test
reports
as
follows:
28.
My
review
of
the
completion
and
production
test
results
confirm
the
presence
of
an
oil
and
gas
accumulation
since
naturally
occurring
gas
was
recovered
consistently
from
the
Upper
Zone
and
the
Lower
Zone.
It
is
not
possible
to
tell
whether
the
oil
recovered
was
naturally
occurring
because
oil
was
used
to
control
the
well
during
the
completion
process.
The
gas
may
be
the
primary
component
of
the
accumulation
or
it
may
be
associated
with
oil.
No
water
was
recovered.
While
being
examined
in
chief,
Mr.
McGilvary
went
over
some
of
the
most
significant
facts
contained
in
the
summary
of
the
completion
and
pro-
duction
testing
of
well
10-24.
He
mentioned
the
fact
that
during
the
perforation
of
the
Lower
Zone,
the
well
started
flowing
and
then
they
started
to
see
traces
of
gas
in
the
returns.
As
the
gas
in
the
returns
was
not
flowing
at
the
rate
they
were
looking
for,
it
was
decided
to
fracture
the
well
to
try
to
improve
the
productivity
rate
of
the
well.
These
new
tests
showed
that
the
rate
of
gas
flow
in
the
returns
was
increasing.
Mr.
McGilvary
said:
“At
this
point
we
knew
without
a
doubt
we
had
—
that
the
porosity
and
permeability
were
filled
with
hydrocarbons”.
However,
the
rate
of
gas
flow
remained
unstable.
The
report
then
indicates
“Gas
showing
in
returns
TSTM”,
which
means
too
small
to
measure.
According
to
Mr.
McGilvary,
this
does
not
mean
that
they
did
not
get
much
gas
but
rather
that
the
gas
they
were
getting
was
not
measurable
with
the
equipment
available
on
the
site.
He
expressed
himself
this
way:
Now
there
could
still
be
quite
a
substantial
flow
rate
and
still
be
too
small
to
measure.
As
for
the
Upper
Zone,
they
perforated
it,
and
immediately
had
gas
showing
in
the
returns.
Again,
the
gas
returns
were
too
small
to
measure.
It
was
decided
to
fracture
the
Upper
Zone
as
well.
Traces
of
gas
came
out
and
few
days
later
the
well
blew
gas.
The
report
indicated
“Well
gassing
after
swabs”,
meaning
that
every
time
they
took
a
little
bit
of
pressure
off
it,
a
blast
of
gas
came
out.
In
the
end,
they
had
recovered
most
of
the
fluid
they
had
put
into
the
zone
(fluid
is
injected
into
the
well
during
the
fracturing
operations
to
equilibrate
the
pressure
in
the
well)
which,
in
Mr.
McGilvary’s
opinion,
is
indicative
of
a
producing
well.
Mr.
McGilvary
also
mentioned
the
fact
that
no
water
was
recovered
out
of
either
the
Lower
or
the
Upper
Zone,
which
is
normal
in
the
Cardium
Zone
and
leads
him
to
conclude
that
any
water
within
the
reservoir
would
be
irreducible
water
saturation
(around
20
to
30
per
cent)
and
that
the
well
was
filled
with
oil
and
gas.
In
cross-examination,
he
admitted
that
the
simple
fact
of
drilling
a
well
and
getting
no
water
out
of
it
is
not
conclusive
as
to
the
absence
of
water
in
the
well;
additional
information
is
needed,
such
as
with
regard
to
porosity
and
permeability.
However,
for
well
10-24,
Mr.
McGilvary
provided
the
following
answer:
We’re
talking
about
the
specific
case
of
the
10-24
well
where
I
know
the
geology
and
I
know
what’s
on
the
logs
and
I
know
what’s
on
the
core
and
I
know
what
they
got
out
of
the
tests
and
absolutely
not,
there
is
no
way
that
you’re
going
to
get
water
out
of
that
reservoir.
On
this
question
concerning
the
relevance
of
not
having
recovered
any
water,
Mr.
Davidson
provided
the
following
answers
to
counsel
for
the
respondent:
A.
If
they
had
got
oil
or
gas
to
flow
and
no
water,
that
would
be
good
because
obviously
it
can
produce
relatively
clean
hydrocarbons.
As
I
said
a
minute
ago,
the
fact
that
no
water
flowed
gives
further
support
that
you
are
dealing
with
a
low
porosity,
low
permeability
sand.
There’s
just
not
enough
ability
for
the
rock
to
move
any
liquids.
Q.
In
your
opinion
then,
what
does
it
say
about
the
quantity
of
oil
and
gas?
A.
It
would
be
rather
limited.
Q.
Why
is
that?
A.
Because
you’ve
got
the
high
water
saturation
in
the
pore
space
so
that
leaves
very
little
room
for
any
oil
or
gas
movement;
certainly
none
that
could
be
produced.
Q.
Sir,
the
fact
that
no
water
comes
out
of
the
well,
is
that
an
indication
that
water
saturation
is
low?
A.
It
could
be,
but
not
necessarily
so.
With
regard
to
the
completion
and
production
testing
of
well
10-24,
Mr.
Davidson
made
some
comments
in
his
report
although
he
assessed
his
experience
in
reviewing
completion
reports
as
being
“a
little
limited”.
Regarding
Mr.
McGilvary’s
remarks
on
the
fluid
sitting
in
the
well
(“unable
to
locate
fluid”,
as
it
is
put
in
the
completion
report),
which
he
explained
by
saying
that
the
fluid
could
not
flow
if
the
pressure
was
not
reduced,
Mr.
Davidson
commented
that
by
the
10th
day,
the
hydrostatic
pressure
on
the
formation
was
almost
all
reduced.
From
that
he
concluded
that
“if
there
was
any
liquid
that
could
flow
in
the
well
it
should
have
flowed
or
if
there
was
any
gas
in
the
well
that
could
flow
at
a
good
rate,
it
should
be
able
to
come
out
of
the
formation
now”.
According
to
Mr.
Davidson,
the
very
low
fluid
level
indicates
that
the
Lower
Zone
is
unable
to
produce
any
new
fluid
in
the
well.
Mr.
Davidson
concluded
as
follows:
Now,
my
interpretation
or
my
reading
of
those
results
indicates
that
they
got
no
fluid
coming
from
the
formation
into
the
wellbore
in
spite
of
the
fact
that
they
took
all
the
hydrostatic
pressure
off
the
formation
at
which
point,
if
it
was
going
to
flow,
it
would
have
flowed
or
should
have
flowed.
So
based
on
those
production
tests,
it
was
my
conclusion
that
this
was
not
a
very
good
well
in
either
zone
and
at
that
point
I
would
agree
with
the
ERCB
that
there
shouldn’t
have
been
any
reserves
assigned
to
the
well.
Finally,
Mr.
Davidson
pointed
out
that
these
production
tests
agree
with
his
interpretation
of
the
log
and
core
data.
In
his
opinion,
there
was
not
a
discovery
of
oil
or
gas.
At
best
it
could
be
said
that
well
10-24
gave
a
show
of
petroleum
which
is
not
producible.
He
defined
a
“show”
as
this:
A
show
is
that
you’ve
got
some
signs
there’s
petroleum
or
natural
gas
in
the
formation,
but
those
indications
were
too
small
or
could
not
be--the
presence
of
producible
hydrocarbons
could
not
be
proved
by
the
production
test.
So,
it’s
just
an
indication
and
it’s
called
a
show
in
industry
terms,
that
there
are
hydrocarbons
there
at
some
time
or
there
may
have
been
hydrocarbons
there
at
some
time
but
there’s
no
producible
hydrocarbons
there
now.
He
then
mentioned
that
traces
of
gas
could
flow
out
even
where
there
is
low
porosity
and
low
permeability
sand
and
high
water
saturation
as
gas
is
the
first
thing
to
flow.
Water
should
be
next
and
oil
should
be
the
last
thing
to
flow
out.
In
cross-examination,
Mr.
Davidson
admitted
that
the
completion
reports
had
to
be
done
in
a
very
short
period
of
time
due
to
the
bad
condition
of
the
roads.
However,
this
fact
did
not
change
his
opinion
that
for
there
to
be
a
viable
gas
well,
gas
should
have
flowed
(and
not
just
traces
found)
by
the
time
the
fluid
was
all
taken
out
of
the
hole,
which
was
not
the
case.
5)
Conclusions
of
the
experts.
Mr.
McGilvary
concluded
that
there
existed
a
natural
accumulation
of
petroleum
or
natural
gas
in
well
10-24.
According
to
him,
the
porosity
and
other
measurable
characteristics
are
comparable
to
other
ERCB
“established
reserves”
which
have
been
economically
viable.
While
he
acknowledged
that
the
Lower
Zone
would
be
considered
economically
marginal
because
of
its
low
porosity,
he
is
of
the
view
that
the
Upper
Zone
fell
into
the
same
range
as
producing
wells
in
the
area
and
should
be
able
to
produce
oil
and
gas.
He
believed
that
in
defining
“discovery”,
quantity
would
have
to
come
into
play
(“you
need
enough
oil
and
gas
from
the
discovery
to
know
that
you’ve
got
it”
),
but
he
was
also
of
the
opinion
that
there
is
no
need
for
a
positive
finding
that
the
discovery
would
yield
income.
He
considered
an
accumulation
to
be
“a
discovery
with
the
possibilities
of
some
economic
viability
to
it”.
This
does
not
mean
however
that
we
should
always
expect
a
well
to
be
profitable
since
many
wells
were
considered
as
not
being
economically
viable
despite
the
recognition
of
the
existence
of
an
accumulation.
His
definition
of
“a
discovery
of
a
natural
accumulation”
is
basically
oil
and
gas,
heretofore
not
identified,
filling
a
porosity
in
the
ground.
According
to
Mr.
Davidson,
when
the
industry
refers
to
a
“discovery”,
it
is
referring
to
the
finding
of
a
significant
amount
of
petroleum,
clearly
enough
to
flow
to
the
surface
under
normal
conditions
and
at
a
rate
that
may
be
economic.
The
finding
of
small
amounts
of
petroleum
would
be
considered
to
be
a
“show”,
not
a
discovery.
“Show”
is
defined
as
follows
in
the
technical
literature:
AGI
Glossary
show:
A
trace
of
oil
or
gas
detected
in
a
core,
cuttings
or
circulated
drilling
fluid,
or
interpreted
from
the
electrical
or
geophysical
logs
run
in
a
well.
Dictionary
of
Geological
Terms:
Show:
(of
oil
or
gas)
A
noncommercial
quantity
of
oil
or
gas,
encountered
in
drilling.
Mr.
Davidson
then
concludes
as
follows:
I
would
agree
with
the
EUB
that
no
reserves
should
be
assigned
to
this
well
for
either
the
Upper
or
Lower
zones
within
the
Cardium
formation.
The
EUB
definition
of
proven
or
established
reserves
allows
for
assignment
of
reserves
to
wells
that
are
currently
uneconomic
provided
that
those
reserves
are
proven
by
drilling,
testing
or
production.
According
to
this
definition
and
all
others
currently
accepted,
the
10-24
well
has
not
proven
the
presence
of
reserves.
Mr.
Davidson
concluded
in
his
report
that
the
geological
data
indicates
that
the
subject
well
has
no
accumulation
of
oil
or
gas
and
hence
no
producible
reserves.
He
is
of
the
view
that
the
porosity,
permeability
and
hydrocarbon
saturation
are
all
below
accepted
norms
for
Cardium
pools
in
the
area.
Some
evidence
was
also
presented
by
Mr.
Davidson
on
the
EUB
review
process
for
assigning
proven
reserves.
Counsel
for
the
respondent
argues
that
this
was
an
independent
review,
which
determined
that
there
was
no
volume
of
oil
or
gas
in
the
well.
Counsel
for
the
appellants
requests
this
Court
to
disallow
such
evidence
on
the
basis
that
it
was
not
set
out
in
Mr.
Davidson’s
affidavit
of
evidence
as
required
by
paragraph
145(2)(b)
of
the
Tax
Court
of
Canada
Rules
(General
Procedure).
In
view
of
the
conclusion
I
have
reached
on
the
meaning
to
be
given
to
“the
discovery
of
a
natural
accumulation
of
petroleum
or
natural
gas”,
which
is
not
the
definition
of
established
reserves
given
by
the
EUB,
I
will
not
deal
with
this
objection
as
I
do
not
find
that
the
evidence
in
question
is
in
any
manner
relevant
to
the
settling
of
the
issue
in
the
present
case.
The
appellants
must
show
that
oil
or
gas
was
found
in
certain
quantities
in
well
10-24
and
that
this
well
was
capable
of
production.
As
I
understand
the
experts’
evidence,
this
can
be
established
by
geological
analysis
of
the
formation.
From
what
I
heard,
I
infer
that
the
various
tests
performed
to
determine
the
porosity,
permeability
and
water
saturation
as
well
as
the
completion
and
production
tests
would
help
us
in
establishing
whether
the
well
holds
a
sufficient
quantity
of
oil
or
gas
to
demonstrate
a
capability
to
produce.
The
analyses
by
the
experts
of
all
these
tests
differ
on
some
points
and
do
not
agree
on
the
final
result.
The
respondent’s
expert
is
of
the
view
that
well
10-24
only
showed
traces
of
gas
which
would
mean
that
there
is
not
a
sufficient
quantity
of
gas
to
allow
one
to
conclude
that
well
10-24
is
able
to
produce.
The
appellants’
expert
is
of
the
view
that,
considering
the
fact
that
no
water
came
out
of
the
well
combined
with
the
fact
that
in
the
Cardium
formation
water
saturation
is
fairly
low,
and
taking
into
account
the
porosity
and
permeability
calculations,
all
this
is
sufficient
to
indicate
that
there
was
a
good
quantity
of
gas
in
the
well.
The
opinion
of
the
experts
can
lead
me
in
one
direction
or
the
other.
Conclusion
My
analysis
of
the
evidence
leads
me
to
conclude
that
the
appellants
have
established
on
a
balance
of
probabilities
that
the
opinion
given
by
Mr.
Davidson
was
in
error.
First,
the
reference
to
producible
reserves
was
inappropriate
as
I
am
of
the
view
that
there
is
no
requirement
in
the
Act
that
the
well
must
have
been
proven
to
be
an
established
reserve
within
the
meaning
given
to
that
term
in
the
industry.
Secondly,
Mr.
Davidson’s
interpretation
of
well
10-24
data
has
been
successfully
weakened
by
the
appellants’
expert.
On
the
matter
of
porosity,
I
am
satisfied
that
Mr.
Davidson
could
have
been
wrong
on
the
washout
theory.
Mr.
McGilvary
explained
that
the
washout
was
already
taken
into
account
in
the
12
per
cent
calculation
of
the
density
porosity
and
that
the
second
set
of
tests
conducted
show
good
repeatability
of
the
first
results.
On
this
point,
Mr.
Davidson
admitted
that
he
had
not
previously
seen
these
second
test
results
and
he
confirmed
the
accuracy
of
the
repeatability
tests.
Mr.
Davidson
admitted
that
if
he
was
wrong
on
his
washout
theory,
well
10-24
would
show
a
good
porosity.
As
to
permeability,
Mr.
Davidson
admitted
the
figures
given
by
Mr.
McGilvary
and
that
permeability
of
0.1
mD
is
enough
for
a
gas
well
to
be
viable.
With
regard
to
water
saturation,
Mr.
Davidson
admitted
that
he
made
his
calculations
based
on
a
value
taken
from
a
well
that
would
give
the
worst
result.
He
then
tried
to
support
his
conclusions
with
a
value
for
another
well
without
knowing
which
well
he
was
talking
about.
Furthermore,
he
did
a
comparison
with
another
well
(well
7-6),
which
is
a
pool
recognized
by
the
EUB
and
NEB
as
being
capable
of
producing
gas.
Mr.
McGilvary
was
able
to
demonstrate,
and
Mr.
Davidson
agreed
with
him,
that
the
water
saturation
of
well
7-6
was
around
80
per
cent,
which
is
over
Mr.
Davidson’s
standard
rule
of
water
saturation
for
a
viable
well
(60
per
cent).
Nevertheless,
well
7-6
was
qualified
as
being
viable.
I
therefore
accept
the
water
saturation
calculations
made
by
Mr.
McGilvary
inasmuch
as
it
did
not
affect
the
capability
of
the
well
to
produce.
Also,
Mr.
Davidson
interpreted
the
completion
and
production
test
results
as
confirming
his
geological
analysis.
His
conclusion
was
based
on
the
fact
that
not
all
the
fluid
put
into
the
hole
was
recovered,
which
would
indicate
a
poor
flow
potential
in
this
well,
and
that
the
amount
of
gas
flowing
to
Surface
was
minimal
and
was
not
measured.
He
conceded,
however,
that
his
experience
was
rather
limited
in
this
field.
He
also
acknowledged
that
the
explanation
given
by
Mr.
McGilvary
as
to
why
they
were
unable
to
locate
the
fluid
put
into
the
hole
might
have
been
right.
Furthermore,
Mr.
McGilvary
did
explain
why
the
amount
of
gas
was
not
measured.
Finally,
Mr.
Davidson
recognized
as
well
that
the
production
tests
were
done
in
a
rather
short
time
period
and
that
this
could
have
affected
the
recovery
of
the
fluid.
In
conclusion,
I
am
of
the
view
that
the
respondent
applied
overly
severe
criteria
which
are
not
set
forth
in
the
Act,
in
determining
that
well
10-24
did
not
result
in
“the
discovery
of
a
natural
accumulation
of
petroleum
or
natural
gas”.
I
am
of
the
opinion
that
the
appellants
have
demonstrated
that
well
10-24
was
able
to
show
a
capability
of
producing
gas
during
the
year
in
issue.
The
fact
that
the
well
failed
later
on
is
irrelevant
as
I
am
convinced
that
in
the
period
in
question
Benchmark
and
its
partners
had
reason
to
be-
lieve
that
there
had
been
a
discovery
of
a
natural
accumulation
of
natural
gas.
Decision
The
appeals
are
allowed
and
the
assessments
are
referred
back
to
the
Minister
of
National
Revenue
for
reconsideration
and
reassessment
on
the
basis
that
the
$100,000
in
expenditures
incurred
by
Benchmark
in
relation
to
well
10-24
did
constitute
CEE
within
the
meaning
of
subparagraph
66.1(6)(a)(11.1)
of
the
Act.
The
appellants
Wheeler
and
Hodge
are
therefore
entitled,
in
computing
their
income
for
the
1988
taxation
year,
to
deduct
an
amount
of
$17,500
each
($25,000
less
a
grant
of
$7,500)
on
account
of
the
CEE
renounced
to
them
by
Benchmark.
As
to
the
appellant
Hepburn,
he
is
entitled
to
deduct
an
amount
of
$42,700
($61,000
less
a
grant
of
$18,300).
The
whole
with
costs
which
are
limited
to
one
set
of
costs.
Appeal
allowed.
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