Province must clean up rules after verdict on orphan wells
It has always seemed profoundly unfair that insolvent petroleum producers could dump their environmental liabilities onto other companies and Albertans without consequence.
The principle of polluter-pay hinges on the concept that companies pick up the environmental freight for the damage caused as a result of their business operations.
After a marathon legal case surrounding bankrupt Redwater Energy Corp. that went all the way to the Supreme Court of Canada, the country’s top judges agreed on Thursday, overturning lower court rulings in Alberta.
For the province, taxpayers and the industry itself, this is a welcome development.
But it now ramps up the pressure on the Notley government to take action and establish timelines on when inactive oil and gas wells should be cleaned up, rather than letting them linger for decades as a testament to feeble regulation.
“It is good news for Alberta, it’s good news for landowners, taxpayers and the environment,” said lawyer Keith Wilson, who represents private landowners with orphan wells on their property.
“A major problem has been addressed, something that was going to make the problem even greater . . . but, still, the core problem is no timelines to deal with old wells.”
The case of Redwater Energy might seem like merely a matter for legal minds and policy wonks, but it’s important in a province that has seen roughly 450,000 oil and natural gas wells drilled over the past century.
A publicly traded company, Redwater borrowed money from ATB Financial in 2013. As the price of oil plummeted, the producer ran into financial trouble and owed more than $5 million to ATB. By May 2015, a receiver was appointed.
Although Redwater had licences for 84 wells and related infrastructure in central Alberta, only 19 were producing. The rest were inactive or “spent,” yet needed to be remediated.
The tricky question was who should shoulder the bill?
The trustee wanted to sell off the producing assets to pay creditors, but disclaim the inactive wells and their liability; the regulator disagreed.
The dispute headed to the courts, weighing the duelling interests of the federal Bankruptcy and Insolvency Act against the province’s environmental obligations.
In 2016, an Alberta Court of Queen’s Bench justice ruled money from the sale of the company’s assets didn’t have to be used to reclaim these non-producing wells.
The remaining wells would become the responsibility of the Alberta Orphan Well Association (OWA), an industry-funded group that takes over remediation when there’s no owner left to pick up the tab.
The case was appealed by the association and Alberta Energy Regulator to the Supreme Court, which handed down its decision Thursday in a 5-2 ruling.
“Bankruptcy is not a licence to ignore rules, and insolvency professionals are bound by and must comply with valid provincial laws during bankruptcy,” Chief Justice Richard Wagner wrote in the decision.
The top court pointed out the regulator is not a creditor in Redwater’s estate.
Instead, the AER has a duty to the public.
The Notley government, the regulator and petroleum producer groups welcomed the precedent-setting decision.
As former Alberta Energy Regulator CEO Jim Ellis said in a 2017 interview, the initial Redwater decision placed the province’s regulatory regime in jeopardy.
He worried some companies were using the OWA as a “dumping ground” to jettison their environmental responsibilities.
Since 2013, the number of orphan wells has ballooned from 74 to 3,127.
The OWA has ramped up its work, and expects to decommission more than 700 wells in the current year, in part because of a loan from the provincial government.
The association will collect $60 million in levies from industry this year.
For petroleum producers seeing their fees escalate because of a higher number of orphan wells, the court ruling was also well-received.
“When a company declares bankruptcy, the value of any assets should go to abandonment and reclamation costs first,” OWA chairman Brad Herald, who’s also a vice-president of the Canadian Association of Petroleum Producers, said in a statement.
Similarly, the Explorers and Producers Association of Canada said the decision provides clarity and supports the current liability management system in Alberta.
Now, the ruling could weaken the ability of highly leveraged companies to borrow money. Lenders may decide the risk assessment calculation has changed.
“It is going to be harder to finance these upstream companies, because secured creditors will have to look at a greater possibility of a lack of recovery in the future,” said lawyer Jeremy Opolsky, a litigator and bankruptcy lawyer with Torys LLP.
The decision also doesn’t tackle a significant issue for the sector and all Albertans: What will the government do to deal with the 89,589 inactive wells in the province.
In a problem that dates back decades, Alberta lacks hard timelines spelling out when a producer must complete downhole wellbore abandonment and surface reclamation on these wells.
A 2017 study by University of Calgary economist Licija Muehlenbachs noted wells have been left in suspension for up to 60 years.
U.S. states have time limits that range from six months to 25 years.
A C.D. Howe Institute report said the potential cleanup costs associated with the liability from inactive wells could be as high as $8.6 billion, and ultimately fall back on taxpayers.
On Thursday, Energy Minister Marg McCuaig-Boyd told reporters the government is talking with industry players about putting new rules in place.
However, there’s no clarity when the government will act, even though the issue has been percolating for more than two years.
“When we come out with rules, there will be more onus on people to clean up,” the minister said.
“I can commit that it will be soon. I don’t have an exact timeline.”
But that’s been the problem all along — no hard-and-fast schedule for dealing with aging wells.
No one wants to push companies into bankruptcy by forcing them to take immediate action, but it’s also irresponsible to leave wells idle for six decades.
The Redwater case and ensuing debate illustrate the current system needs to be cleaned up, just like all those orphan wells.