Redwater Energy case tests importance of environmental obligation
The Supreme Court of Canada will hear the Alberta Energy Regulator’s appeal of a ruling involving Redwater Energy, the company at the centre of a case revolving around whether bankrupt companies can walk away from environmental liabilities.
Calgary-based Redwater was pushed into bankruptcy by ATB Financial in 2015. The court-appointed receiver, Grant Thornton, took possession of only 20 of the 127 wells owned by Redwater. The rest were deemed uneconomic due to associated abandonment liabilities. The receiver, as allowed under the Business and Insolvency Act, was seeking to maximize what it could recover for the secured creditors.
In May 2016, an Alberta Court of Queen’s Bench judge ruled in favour of Redwater, finding the act superseded provincial legislation and that asset sale proceeds should first go to creditors and not cleanup costs.
The Alberta Energy Regulator disagreed, arguing end-of-life obligations associated with well licences do not disappear if a company becomes insolvent. It also viewed the environmental obligations as a public duty and not a debt to be managed through bankruptcy proceedings.
The AER took the case to the Alberta Court of Appeal, which also ruled — in a split decision — in favour of Redwater and its creditors.
The narrow decision — and the dissenting judge’s reasoning that Business and Insolvency Act provisions don’t take into account the unique nature of the oil and gas industry, including its regulation — is arguably why the Supreme Court has agreed to hear the AER’s appeal.
It’s highly unusual for cases involving commercial decisions to enter the Supreme Court, which suggest it’s also interested in this intersection of business and public duty.
“I don’t believe (the Business and Insolvency Act) was ever written to look at what is going on right now. There is a case to be made to interpret the federal legislation differently,” Jim Ellis, president of the AER, said in an interview.
It’s also possible the Supreme Court sees, in the Redwater case, an issue that goes beyond the energy sector.
“This is a national issue ... and it’s bigger than the oil and gas industry,” said Ellis. “It has to do with any activity that has difficulty.
“In the future this could be a trustee receiver issue of a mining company in Quebec or a pulp and paper company in British Columbia. This decision opens it up more broadly than just oil and gas in Canada.”
Maybe, when it comes to business and matters of the environment, primacy of the Business and Insolvency Act (BIA) will no longer be so absolute.
One legal expert suggested it’s a way for the Supreme Court to highlight an issue that needs to be addressed through provincial legislation.
Or, as Ellis said Thursday afternoon, “… before anything goes in front of the BIA, the companies must close the obligation to the province, which came through the issuance of the well licence, which allows them to develop the resource.”
Ellis did emphasize the intent of taking the case to the Supreme Court was not to challenge the issue of primacy.
Still, there is no getting away from the feeling of a piling-on effect, given persistent challenges in the energy sector.
There will be some sentiment in the oilpatch that this case — especially if the Supreme Court sides with the AER — will further constrain capital availability, exacerbate the already slow asset disposition market and even change the definition of what constitutes a secured creditor.
The reality, as one seasoned lawyer pointed out, is that a financial institution is unlikely to lend if there is an existing encumbrance on an asset, much less on an unsecured basis. In fact, it could be argued secured creditors are no longer secure.
It’s important to remember the AER’s mandate is to “provide for the efficient, safe, orderly, and environmentally responsible development of Alberta’s energy resources.”
The official orphan well count currently sits at 3,764. Almost half of those have been added since the Redwater decision. In addition, there are 24 active insolvencies in the energy sector involving 5,000 licences and operating wells.
Ellis notes many companies are fulfilling their obligations, reclaiming wells and paying into the Alberta Orphan Well Association fund, which supports the work on behalf of industry.
“This is as much to protect Alberta taxpayers as it is to protect the (Orphan Well Association), which was never designed to deal with what was going on now — and certainly not to reclaim the poor assets and allow the good assets to be sold off and the money going to creditors,” he said.
The first two legal rulings raised the possibility that insolvent companies would choose to bypass the creditor protection phase and move to liquidate the company instead. The main reason for taking that route was the fact environmental and abandonment obligations would follow the restructured entity but could be avoided by winding down the company.
At its heart, this is really an issue of where environmental obligations rank in the context of bankruptcy and insolvency.
What happens if the Supreme Court rules against the AER? Presumably, it would mean primacy of federal legislation is paramount — even when the issue is one of the public good, as environmental stewardship is all about.
A Supreme Court decision will establish what can and cannot be relied upon in terms of legislative primacy.
That will be as good a starting point as any for the provincial government to work with the AER to determine the necessary policies to re-establish certainty for the sector, which remains critical for future investment.