New development in oil and gas environmental claims in a bankruptcy

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In May 2016, after much anticipation, the reasons for judgment in a closely-watched Alberta court case, Redwater Energy Corporation, were released. The judgment addresses the clash between provincial and federal legislation. The implications of the judgment have the industry abuzz over the way receiverships and bankruptcies of oil and gas companies are now likely to proceed in the province.

Why the debate?

Redwater was a junior oil and gas producer that became insolvent. After being appointed as Redwater’s receiver in May 2015, Grant Thornton chose to take possession of 20 of Redwater’s licensed and valuable wells, leaving behind another 71 uneconomic ones. Grant Thornton was subsequently appointed Redwater’s trustee in bankruptcy in October. As bankruptcy trustee, Grant Thornton’s position was that pursuant to 14.06 of the Bankruptcy and Insolvency Act of Canada, the trustee could renounce the uneconomic wells and not be responsible for clean-up costs associated with those wells.

The Alberta Energy Regulator (AER) and the Orphan Well Association responded swiftly. Relying on provisions under Alberta’s Oil and Gas Conservation Act (OGCA) and Pipeline Act (PA), the AER issued closure and abandonment orders and filed an application to enforce them. The AER sought to make Grant Thornton, whom the AER now considered a Redwater licensee, responsible for all of Redwater’s licensed assets, which would encompass environmental abandonment and remediation work for the uneconomic wells.

Further, unless a licensee posts a security deposit in respect of the abandonment orders, the AER has the authority to refuse the transfer of licensee’s assets if the licensee fails to meet a minimum Liability Management Rating ratio – a common scenario for insolvent companies whose deemed liabilities for well abandonment exceed its deemed assets.

Grant Thornton’s compliance under the circumstances would have a significant negative impact to the marketability of Redwater’s assets.

Arguments and decision

The case was heard in December 2015. The AER maintained that a licensee may not pick and choose among wells, but is obliged to reclaim all licensed assets, including uneconomic ones and that such obligations extend to receivers and trustees.

Grant Thornton argued that compliance with both the provincial legislation and the federal bankruptcy and insolvency legislation is not possible, adding further that without the discretion to renounce uneconomic assets, receivers and trustees under similar situations would not be able to properly carry out their mandate.

Federal legislation prevailed on the basis that it is paramount where there is an operational conflict with provincial legislation. Any changes would therefore need to be made at the federal level.

The decision means that receivers and trustees are no longer considered licensees under provincial legislation where renounced assets are concerned. They will not responsible for liabilities associated with these assets and cannot be obliged to pay a security deposit before the AER will issue a licence transfer for those assets. Receivers and trustees can now expect to be free of the AER orders that might otherwise have restricted their ability to pick and choose assets of an insolvent oil and gas company.

Creditors benefit from decreased costs and increased recoveries. Lenders breathe more easily knowing that they maintain their priority over secured assets. Meanwhile, questions linger over who will ultimately shoulder the costs for what could end up being a spike in orphaned wells in the wake of the Redwater decision.

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