Canada: Redwater SCC Leave Decision

Introduction

The Redwater Energy Corporation (Redwater) saga endures as the issues in the case continue to loom large in the Alberta oil and gas industry and the Federal bankruptcy regime. On Thursday, November 9, 2017, the Supreme Court of Canada granted leave to appeal the Alberta Court of Appeal's decision on the matter on an expedited basis. The crux of this case, followed very closely by the Canadian oil and gas industry, is whether the provincial regulatory regime conflicts operationally with the federal Bankruptcy and Insolvency legislation. The Alberta Court of Appeal upheld the Alberta Court of Queen's Bench decision that a receiver and a trustee in bankruptcy are permitted to renounce or disclaim an insolvent debtor's interest in unproductive oil and gas assets, including those subject to abandonment and reclamation obligations and orders.

The Facts

Redwater was a public oil and gas corporation that became insolvent in the spring of 2015. It owed its principal secured lender, Alberta Treasury Branches (ATB), approximately $5 million. Following an application by ATB, Grant Thornton Limited was appointed as the receiver and trustee. Redwater owned a number of oil wells, some of which were valuable and others that were at risk of becoming "orphans wells" due to the fact that the costs of remediating and abandoning the wells exceeded the value of the wells and Redwater was not financially able to pay for the remediation.

Redwater's trustee in bankruptcy wished to renounce or disclaim Redwater's interest in the wells at risk to become orphan wells. The Alberta Energy Regulator (AER) argued that the benefit of obtaining licences to produce should come with the burden of abandonment/reclamation and therefore a sufficient portion of the sale proceeds from the profitable wells should be set aside to meet the expected costs of remediating the orphan wells.

Overview of the Lower Court Decisions

On May 19, 2016, the Alberta Court of Queen's Bench held that a trustee in bankruptcy has the right to disclaim unproductive oil and gas assets, including those subject to abandonment orders. As set out in our June 22, 2016 blog post, this creates an inherent risk that if the Orphan Well Association is unable to fund the increase in abandonment and reclamation liabilities from disclaimed assets, the obligation to do so will borne by Alberta taxpayers. In response to the decision, the AER issued two bulletins: Bulletins 2016-16 and 2016-21, summarized in our previous post from June 22, 2016 and our post from July 12, 2016, respectively.

On April 24, 2017, the Honourable Mr. Justice Slatter affirmed the Alberta Court of Queen's Bench decision, writing for a 2-1 majority. The AER and the Orphan Well Association argued that the Alberta Court of Queen's Bench erred in finding that the receiver should not have to carry out the abandonment, reclamation and remediation obligations of the insolvent company's unproductive oil and gas assets or perform the abandonment orders as issued by the AER. The majority of the Alberta Court of Appeal dismissed the appeal and held, based on the doctrine of federal paramountcy, that the obligations of trustees and receivers pursuant to the Oil and Gas Conservation Act and the Pipeline Act frustrate the federal purpose of the Bankruptcy and Insolvency Act regarding the priority of creditors and that the obligations of the licensee (debtor) under the AER licensing regime are essentially unprotected monetary claims and therefore unenforceable against the trustee and receiver. The Court of Appeal clearly stated that the AER cannot insist that a trustee dedicate parts of the bankrupt estate to satisfy environmental claims in priority to those of the secured creditor – to the extent that provincial legislation leads to a different result, the paramountcy doctrine is engaged.

Pending SCC Decision and the Assignment of Environmental Responsibility

Thus the question that remains to be decided by the Supreme Court of Canada: who should ultimately bear the responsibility for abandoning, reclaiming and remediating sites and fulfill the environmental responsibilities associated with unproductive oil and gas assets?

As stated in the Leave to Appeal Application, the SCC is being asked to consider a number of questions, including whether the majority of the Alberta Court of Appeal erred in:

  • Its broad interpretation of the trustee's powers to disclaim certain assets (wells) under s.14.06 of the BIA?
  • Whether the provincial licensing regime that obligates an oil and gas producer to abandon and reclaim its well sites creates an unauthorized priority in bankruptcy proceedings?
  • Whether the provincial oil and gas licensing regimes and obligations to abandon and reclaim well sites and the federal bankruptcy regimes can co-exist without conflict such that both can operate as they are presently drafted?

The matters to be argued have public importance and broad reaching impacts to the oil and gas industry, the federal insolvency industry, the banking industry and the public that will be looked upon as the funder of last resort in the event the environmental obligations to clean up unproductive well sites are left in limbo.

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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