Canada: Redwater – Impacts

Last Updated: February 7 2019
Article by Dentons LLP

On January 31, 2019, the Supreme Court of Canada (SCC) released its decision in Orphan Well Association, et al v. Grant Thornton Limited, et al, 2019 SCC 5 (Redwater), overturning the decisions of the majority of the Alberta Court of Appeal and Court of Queen's Bench. The Redwater case is of critical importance to both the oil and gas industry, and to lenders, particularly in the environmental and economic circumstances the industry currently finds itself. On one hand, there has been increasing concern by governments, environmental groups, industry and other stakeholders as to the responsibility for end-of-life environmental liabilities of oil and gas assets, and the desire to recognize the "polluter pays" principle. On the other hand, there is concern that if these environmental obligations rise in priority above that of a secured creditor, it may restrict the ability for a lender to recover from secured assets and accordingly, will further restrict the availability of capital to the industry.

Until today, the law in Alberta permitted receivers and trustees to limit their possession to valuable estate assets, and renounce possession of wells, pipelines, facilities, and other assets on the basis of environmental liabilities associated with such assets (Undesired Assets). The proceeds of saleable assets were distributed in accordance with the priority structure of the Bankruptcy and Insolvency Act, RSC 1985 c B-3, typically resulting in payments to creditors. In Redwater, the SCC found that the Alberta Energy Regulator (AER) was not a creditor when it issued abandonment orders and enforced LMR requirements, and instead recognized its first charge on real property affected by an environmental condition, or damage in order to fund remediation. In other words, these environmental obligations shape the parameters of the debtor's estate, which is then available for distribution to creditors. Receivers and trustees in bankruptcy are not entitled to walk away from the abandonment and reclamation liabilities of a debtor's estate. Accordingly, the SCC's decision fundamentally changes the application of the law by receivers and trustees.

The impact on receivers and bankruptcy trustees

  • Sales processes will likely become more complex and costly as the ability to successfully sell a debtor's assets will be impacted by the liability associated with the Undesired Assets.
  • May result in a significant number of more assets being turned over to the Orphan Well Association (including valuable and/or producing assets) if packages become too unattractive with the inclusion of Undesired Assets.   
  • The AER may require the receiver or trustee to hold all sale proceeds pending resolution of the estate's abandonment and reclamation obligations rather than distribute such proceeds to secured lenders to ensure the environmental liabilities of the debtor's estate are properly accounted for before distribution. In Redwater, the SCC ordered the proceeds of the sale of the debtor's valuable assets, previously held in trust, be used to address end-of-life obligations associated with the remaining assets. 
  • The ability of receivers and trustees to satisfy their fees from estate assets may be impaired, and as such receivers and trustees may be more cautious in taking appointments.

The impact on secured lenders

  • Will result in an overall increased cost of capital to take into account increased realization risk and may result in renegotiation of existing facilities or renewal on stricter terms.
  • May result in the recalculation of debt ratios based on the present value of a borrower's asset retirement obligations (ARO).
  • Because lenders will become, at best a second lien debt, subject to the risk of compliance by borrowers with their reclamation obligations, lenders will spend more time and effort on monitoring and managing this risk:
    • Lending agreements will require increased representations and covenants regarding remediation liabilities and the tightening of covenants related to ARO as well as increased scrutiny of the reclamation practices and overall financial wherewithal of the borrower;
    • Will see increased monitoring by secured lenders of operational and regulatory matters of the borrower. In particular, secured lenders may want to receive reports submitted or generated with respect to the borrower's compliance with certain AER programs, including: (i) the Inactive Well Compliance Program; (ii) the monthly (and transfer related) LMR calculations; (iii) the Remediation Certificate Amendment Regulation; (iv) Directive 013 obligations; (v) the borrower's licensee eligibility status pursuant to Directive 067; and (vi) any licensee specific to AER remediation, or compliance plans or orders.
    • Lenders may begin imposing their own cash reserve requirements for future reclamation obligations.
  • Secured lenders seeking to appoint receivers and trustees may face requests to provide indemnification for the fees of receivers and trustees, given the increased uncertainty with realization of estate assets.
  • Lending community likely to further retrench on lending to this sector until the impact of the decision is better understood.  

The impact on potential purchasers

  • Increased opportunity to acquire inexpensive assets for potential purchasers who are comfortable with the cost of end-of-life obligations associated with other packaged assets.
  • Will continue to be subject to regulatory requirements placed by the AER regarding the transfers, which may also involve less leniency with respect to discretionary waiver of the LMR 2.0 post-closing requirement.

The impact on producers/operators

  • Will continue to be subject to regulatory requirements, including conditions on transfers. The AER may impose further pre-closing requirements and take a stricter position on partial license transfers in order to monitor ongoing abandonment and reclamation liabilities. 
  • Potential for the reduction in access to capital, as well as higher rates of interest, stricter borrowing conditions, and increased monitoring by lenders.
  • Terms of current banking facilities may come under scrutiny on a more expedient basis in order for lenders to manage their risk prior to insolvency occurring.
  • Although not expressly addressed by the AER at this time, the AER may impose timing requirements with respect to abandonment and reclamation work in order reduce the number of un-reclaimed but non-producing assets in Alberta. The imposition of timing requirements will significantly impact how a company accounts for its ARO.

The impact on the AER

  • The AER may take a more active role in monitoring all potential asset transactions in insolvency proceedings to ensure that (i) transfer applications qualify on an LMR basis; (ii) the cost of the abandonment and reclamation activities associated with the estate are accounted for; and (iii) where such costs are not satisfactorily accounted for at the time of sale, funds are held in trust subject to a determination of their proper distribution.
  • The AER may be called upon to provide a clarity and consistency in its liability management program, the costs of abandonment and reclamation, and any new or relevant regulations impacting ARO.

Redwater will have an impact on all participants in insolvency proceedings and in particular, an immediate effect on clients involved in the oil and gas industry. The fall out of this decision is expected to continue in the near term as provincial regulators and stakeholders in the oil and gas industry and other industries grapple with the practical implications of the decision. In Alberta, within a few hours of the release of Redwater, the AER released its initial response, wherein the AER indicated it would continue to "build a new liability management framework". We expect that Redwater will heavily influence this new framework and the frameworks of other regulators, and accordingly, await the reverberations that will compound the impacts set out above.

About Dentons

Dentons is the world's first polycentric global law firm. A top 20 firm on the Acritas 2015 Global Elite Brand Index, the Firm is committed to challenging the status quo in delivering consistent and uncompromising quality and value in new and inventive ways. Driven to provide clients a competitive edge, and connected to the communities where its clients want to do business, Dentons knows that understanding local cultures is crucial to successfully completing a deal, resolving a dispute or solving a business challenge. Now the world's largest law firm, Dentons' global team builds agile, tailored solutions to meet the local, national and global needs of private and public clients of any size in more than 125 locations serving 50-plus countries.

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. Specific Questions relating to this article should be addressed directly to the author.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Events from this Firm
20 Mar 2019, Seminar, Toronto, Canada

Dentons is pleased to invite you to join us for a breakfast seminar as part of the Les Matinées Dentons series on issues relevant to you and your business.

Similar Articles
Relevancy Powered by MondaqAI
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Sign Up
Gain free access to lawyers expertise from more than 250 countries.
Email Address
Company Name
Confirm Password
Mondaq Newsalert
Select Topics
Select Regions
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions