Nov 17, 2017
An article in Lexpert’s November special edition on energy looks at the wide-ranging implications of the Redwater decision and where responsibilities lie when oil wells are abandoned and environmental clean-up is needed in the case of an insolvent operator. To gain insight on Redwater and its impact on Alberta’s energy industry, author Bev Cline turns to industry experts, including Janice Buckingham, a partner in Osler’s Energy Practice Group and Melanie Gaston, a partner in Osler’s Litigation Practice Group.
According to Janice, the Alberta Court of Queen’s Bench decision in Redwater Energy (Re), 2016 ABQB 278 “established that a trustee in bankruptcy can disclaim an insolvent debtor’s uneconomic oil and gas properties while retaining and selling its valuable assets to maximize recovery for secured creditors.” She also states it clarified what happens when the mandate of provincial oil and gas regulators such as the Alberta Energy Regulator (AER) comes into conflict with principles within the federal Bankruptcy and Insolvency Act. As such, says Janice, “certain provisions of Alberta’s regulatory regime that require a trustee to satisfy abandonment and remediation of an insolvent debtor’s oil and gas wells in priority to the claims of its secured creditors is in conflict with the federal bankruptcy and insolvency laws and is therefore inoperative to the extent of the conflict.”
In July 2017, the AER applied to the Supreme Court of Canada (SCC) for leave to appeal. Janice states that if leave is not granted, or the appeal court decision is upheld by the SCC, “the interests of the lending community to maximize recovery for secured creditors will have priority over the regulator’s rights to enforce end-of-life obligations through bankruptcy.”
Janice explains that such a finding would mean the industry will be responsible to fund a greater share of such liabilities. Obligations linked to renounced properties will mainly fall to the oil and gas industry through annual levies collected by the Orphan Well Association (OWA) to conduct reclamation and remediation activities, the article reports. “While the OWA can assert that costs of performing such activities are provable claims in bankruptcy against the debtor,” says Janice, “the proceeds of sale of the debtor’s valuable assets are often insufficient to repay both the secured and all unsecured debts of the debtor.”
Janice and Melanie further comment on what would happen if the federal government enacted amendments to the Bankruptcy and Insolvency Act that provide that the ‘polluter pay’ principle is “enshrined in a way that assures it is given a super-priority status over the claims of secured creditors.”
“Parliamentary resolution of the purported conflict is appropriate if the court declines to grant leave or determines not to reframe the issues to permit parallel application of federal and provincial laws that preserves the application of the ‘polluter pays’ principle,” says Janice. Melanie adds that if Parliament does not correct legislatively, it seems contrary to the general policy underlying the environmental framework in Canada and would undermine efforts to have licensees deal responsibly with environmental obligations by prioritizing creditors’ rights.
For more of Janice and Melanie’s insight on the implications of Redwater, read “Who Pays?” in Lexpert’s November special edition on energy.