Canada: Alberta's Oil And Gas Licensing Regime Found To Be Unconstitutional

In Redwater Energy Corporation (Re) (Redwater Energy), the Court of Queen's Bench of Alberta (Court) held that certain sections of the Oil and Gas Conservation Act (OGCA) and Pipeline Act (PA) are inoperative to the extent that they are used by the Alberta Energy Regulator (AER) to prevent the abandonment or renunciation of an insolvent debtor's assets by a court-appointed receiver or trustee.

Redwater Energy Corporation (Redwater) was a publicly listed oil and gas corporation that held approximately 130 properties licensed under the OGCA and the PA. In May 2015, after Redwater's inability to consummate an out-of-court sale of its assets in order to repay its lender in full, Grant Thornton Limited (GTL) was appointed receiver (Receiver) over the assets of Redwater pursuant to section 243 of the Bankruptcy and Insolvency Act (BIA). In October 2015, Romaine J. granted an order assigning Redwater into bankruptcy and GTL was named trustee of Redwater's estate (Receiver/Trustee).

Two applications were filed during the course of the proceedings:

First, the AER and the Orphan Well Association (OWA) filed a joint application seeking:

  1. To prevent the Receiver/Trustee from renouncing certain AER licensed assets of Redwater (Renounced Assets)
  2. Declaring the Receiver/Trustee the licensee in respect of the Renounced Assets
  3. Forcing the Receiver/Trustee to comply with a number of abandonment and closure orders (Abandonment Orders) in respect of the Renounced Assets

Second, the Receiver/Trustee brought a cross-application seeking the approval of a sales process that excluded the Renounced Assets and seeking a determination of the constitutionality of AER's licensing regime under the OGCA, the PA and Directive 006: Licensee Liability Rating (LLR) Program and Licence Transfer Process to the extent that it (i) prevents the Receiver/Trustee from abandoning the Renounced Assets, and (ii) imposes an obligation on the Receiver/Trustee to expend funds to comply with the Abandonment Orders as a condition precedent to the AER approving a transfer of Redwater's AER licences.

Chief Justice N. Wittmann, in his written decision, dismissed the AER's application and granted GTL's application to commence a sales process to dispose of Redwater's assets. The sales process proposed by the Receiver is expected to proceed on the basis that the AER will be directed to transfer any licences associated with the assets sold by the Receiver without including the Renounced Assets in the calculation of Redwater's post-transfer Liability Management Rating.

Regarding the constitutionality of the Receiver/Trustee's ability to abandon the Renounced Assets, the Court recognized that a plain reading of section 14.06 of the BIA indicates that its purpose is to permit receivers and trustees to make "rational economic assessments of the costs of remedying environmental conditions" and provides them with the discretion to determine whether to comply with regulatory orders or renounce the property subject to those orders.

The Receiver/Trustee is entitled to disclaim assets under the BIA but there is no corresponding mechanism for it to disclaim assets under the provincial legislation. Where the Receiver/Trustee disclaimed all interest in the Renounced Assets under the BIA, the liability imposed by provincial legislation remained. Therefore, the Court held that dual compliance with the OGCA, the PA and section 14.06 of the BIA was not possible and that an operational conflict existed between the provincial and federal legislation.

Moreover, the provisions of the OGCA and the PA, which deemed the Receiver/Trustee to be a licensee, were declared inoperative to the extent they conflicted with the BIA. The Receiver/Trustee was expressly held not be the licensee of the Renounced Assets and was found not to have assumed any liability in respect of the Renounced Assets. Section 14.06(4) of the BIA expressly allows the Receiver/Trustee to disclaim the Renounced Assets and, as long as the statutory requirements of that section are met, the AER is unable to require the Receiver/Trustee to abandon, reclaim or remediate the Renounced Assets on the basis that it is a licensee.

Compliance with the Abandonment Orders would have required the Receiver/Trustee to expend estate funds on orders that were in substance monetary claims. The result of the Receiver/Trustee's compliance with the Abandonment Orders would have seen the AER's unsecured claims paid out from the assets of the estate prior to the claims of Redwater's other creditors. Thus, the usual order of priority in bankruptcy would have been rearranged to the detriment of other creditors and the AER's application would have seen a "third-party-pay" principle substituted for the "polluter-pay" principle recognized by the Supreme Court of Canada in Newfoundland and Labrador v. AbitibiBowater Inc. In this regard, Chief Justice Wittmann found that the AER was not a public enforcer taking steps to enforce the general law, but was instead an "enforcing authority clothed as a creditor".

It is clear from the wording of section 14.06 of the BIA that parliament balanced a number of competing considerations when adopting the provision. Chief Justice Wittmann affirmed that the Court's role is limited to interpreting and applying the existing legislation and held that the purpose of sections 14.06(4) and (6) of the BIA was frustrated by the AER's requirement that the Receiver/Trustee pay or rectify the environmental conditions as costs of administration regardless of whether the Renounced Assets had been properly abandoned. Additionally, the payment of a security deposit or performance of the Abandonment Order obligations was held to frustrate the legislative purpose of sections 14.06(5), (6), (7) and (8) of the BIA, where payment or compliance was a condition precedent to the AER's approval of a licence transfer application by the Receiver/Trustee.

The Redwater Energy decision clarifies the existing law with respect to protection of receivers and trustees, the ability of the receiver or trustee to sell and disclaim licensed assets and the rights and priority of creditors where the AER is actively involved in a distressed sale process. The decision has also affirmed that the principles set out in PanAmericana de Bienes y Servicios v. Northern Badger Oil & Gas Limited may no longer be applicable to the extent that they purport to deal with priorities in relation to the payment of environmental remediation costs in insolvency proceedings. It appears that this area is now exclusively occupied by sections 14.06(6), (7) and (8) of the BIA, which establish the rank of environmental claims in receivership and bankruptcy proceedings.

Blakes acted for Alberta Treasury Branches, Redwater's principal secured lender, in this matter.

Please also see our May 2016 Blakes Bulletin: AER Seeks to Hold Directors, Officers Personally Liable for Obligations of Insolvent Corporate Licensees, our June 2014 Blakes Update: Alberta Licensee Liability Rating Program Imposes Financial Challenges for Junior Oil & Gas Companies and our September 2013 Blakes Bulletin: Increases to Alberta Licensee Liability Rating Program.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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