The Alberta Court of Appeal has upheld the contentious decision of the Court of Queen's Bench that in the event of an energy company's insolvency, secured creditors have priority over the costs of abandonment and reclamation obligations. At issue in these decisions was whether the province's Oil and Gas Conservation Act ("OGCA") and Pipeline Act ("PA") frustrated the purpose of the federal Bankruptcy and Insolvency Act ("BIA").
This case involved Redwater Energy Corporation ("Redwater") which was placed in receivership in 2015 by Alberta Treasury Branch ("ATB"). The Receiver, Grant Thornton Ltd., sought to renounce or disclaim Redwater's unattractive assets, being non-producing wells licensed by the Alberta Energy Regulator ("AER"), which needed to be reclaimed. The abandonment and reclamation costs of these wells far outstripped their remaining economic value.
Broadly speaking, the case pitted the public interest in ensuring that oil and gas facilities are reclaimed, represented by the AER and the Orphan Well Association ("OWA"), a statutory body charged with abandoning and reclaiming wells and facilities where the operator is insolvent or otherwise unable to do so, against the interests of secured creditors and the federal bankruptcy regime.
A number of interveners appeared before the Court of Appeal in support of the OWA, including the Canadian Association of Petroleum Producers ("CAPP"), the Attorneys General/Minister of Justice for Alberta, B.C., Saskatchewan and Canada, and the British Columbia Oil and Gas Commission. The Canadian Association of Insolvency and Restructuring Professionals intervened in support of the receiver and ATB. This list of interveners is indicative of the potential far-reaching implications and precedential value of this decision, not only in Alberta, but across Canada.
The concerns of the OWA and AER are summarized as follows by Madam Justice Martin in her dissenting reasons:
 The appellants argue that if Redwater can shed its end of life obligations, this would provide an incentive for many other similarly situated enterprises to organize their affairs to do the same, resulting in even more orphaned wells. They have a point, as the ability to avoid end of life obligations will not arise only on bankruptcy, but under the CCAA as well. This may encourage licensees to place wells with significant end of life expenses into one entity and separate that entity from other, more profitable, holdings. If that entity goes bankrupt or is re-organized, there is the fear that these public duties would be washed away from the entity and placed instead on others...
The OWA and AER argued that giving priority to secured creditors will increase the number of orphan wells in Alberta, which in turn could force the OWA to increase levies on oil and gas producers, who continue to feel the pressure of low commodity prices.
Ultimately, Mr. Justice Slatter, writing for the majority of the Court of Appeal, dismissed the appeal and upheld Chief Justice Wittmann's decision that forcing a Receiver or Trustee to comply with AER Abandonment Orders would create an operational conflict between provincial environmental legislation and the BIA, and frustrate the BIA's purpose and priority rules. Under the doctrine of "paramountcy", where there is an operational conflict between provincial and federal legislation, the federal legislation prevails.
While the decision is likely to increase the number of orphan wells in Alberta, and thus increase costs for producers, it provides greater certainty to insolvency professionals who would have potentially refused appointments where the insolvent corporation held non-producing or low value assets with significant end of life reclamation obligations.
Further, by protecting the priority regime under the BIA, the Court of Appeal has provided greater certainty to secured lenders who may have reconsidered advancing credit to the oil and gas industry.
Given the precedential value of the decision for environmental and regulatory regimes across the country, a further appeal to the Supreme Court of Canada seems like a distinct possibility.
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