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Supreme Court delivers Redwater decision for oil/gas business

Posted on February 7, 2019 by Vauxhall Advance

By Greg Price
Vauxhall Advance

A historic Supreme Court Redwater Energy decision last week has been deemed a victory by the Action Surface Rights Association.

Canada’s top court overturned by a 5-2 vote an Alberta Court of Queen’s Bench decision from 2016 that allowed energy companies to abandon wells during bankruptcy proceedings without having to clean up the sites.

The Supreme Court decision notes bankruptcy is not a licence to ignore environmental regulations, and there is no inherent conflict between federal bankruptcy laws and provincial environmental regulations.

The 2016 ruling — known as Redwater Energy, based on the case involving the bankruptcy trustee of Redwater Energy Group — essentially directed that the assets of bankrupt energy companies should go to compensate creditors rather than be used for environmental clean-up costs.

The Alberta court ruled that federal bankruptcy laws supersede provincial environmental regulations. Since that decision, more than 1,800 wells representing more than $100 million in liabilities had been abandoned at the time the case was going to the Supreme Court back in early 2018.

Okotoks-based Redwater Energy owned a stake in 17 producing oil and natural gas wells, as well as many more inactive wells. At the time of its insolvency, the company owed its bank, ATB Financial, just over $5 million.

After Redwater became insolvent in 2015, its bankruptcy trustee wanted to sell the firm’s valuable wells to repay debt to its bankers and walk away from the non-producing wells — leaving them to Alberta’s Orphan Well Association (OWA) to cleanup. The OWA is funded by the energy industry.

“We’ve always had the polluter pay principle in Alberta, but that was only confirmed at the court of appeal level. The Supreme Court probably went a little further than they needed to, to firmly entrench the principle that polluters will pay and regulators are not unsecured creditors so they cannot enforce the law,” said local farmer Daryl Bennett, who serves as a director of the Action Surface Rights Association which held intervener status in the appeal.

“They have also stated that the Federal Bankruptcy and Insolvency Act was not put in place to absolve companies of their environmental liabilities. It was a really good decision.”

Numbers have been bantered about of cleanup liabilities equaling as much as $260 billion from abandoned wells.

Bennett admitted a true figure is hard to pin down when you talk about parametres.

“That $260 billion would be what is remaining. Now that includes oilsands and not just Alberta, I think that’s Western Canada,” said Bennett.
“There are some internal numbers of $40-$50 billion dollars for conventional oil — some think it’s $150 billion. We just don’t know for sure because the AER (Alberta Energy Regulator) is not very transparent.”

“We have had some guys FOIP (Freedom of Information and Protection of Privacy Act) the information and analyzing the numbers, but still we don’t have a firm grasp of what those numbers are. We just know that there are 160,000 suspended and abandoned wells in Alberta right now and there is no required timeline to reclaim them. There is another 107,000 wells that are marginal that are not paying royalties. When you have 260,000 wells that are going to need to be reclaimed, industry doesn’t want to pay for it and the Orphan Wells Association can’t handle it. It puts the Alberta taxpayer at risk.”

The Alberta Liberal Party has gone on record renewing its call that Alberta energy companies be mandated to purchase reclamation and cleanup bonds as insurance against financial catastrophe.

“They already have the liability management rating system in place where they can enforce security deposits. The problem is to do that, they are going to bankrupt these smaller companies,” said Bennett.

“We already have a current system that would work, but it is being refused to enforce it. Going forward they are talking about putting some financial assurance bond to make sure these wells are being cleaned up. A shallow gas well can probably be cleaned up for $50,000. Some of the heavy oil wells, it could take $1 or $2 million. It’s hard to regulate and determine on a case-by-case basis how much it will take for each well to be reclaimed. A lot of the big companies have a firm grasp on this with reserves set aside. It’s the smaller companies that have been having problems, going bankrupt and have never put a dime on a deposit to reclaim these wells.”

While the Supreme Court ruling is seen as good news to many vested interests, including the Action Surface Rights Association, Bennett noted it will be up to the powers that be to have the political will to enforce it.

“Both the NDP and the UCP haven’t really shown any interest in really addressing this because it’s a huge problem. Anytime the NDP looks to be doing something, the UCP criticizes them that’s it’s too hard on industry,” said Bennett. “The fact of the matter is that industry should be accountable and we have to figure out a way to get them to pay without bankrupting them and without allowing them to shift the burden onto the taxpayer or the landowner.”

Bennett stressed that the Action Surface Rights Association intervened in the case not to get money for landowners, bur rather have the regulator take the remaining assets from a bankrupt company and use it to make sure the wells are safe.

“To make sure they are capped. These landowners are having to farm these leases that are contaminated. In many cases, they are prohibited from growing specialty crops, especially near the irrigated sector. You can’t risk that to contamination getting into the food chain,” said Bennett. “And in a lot of cases, it’s not safe to operate around these wells. They are overgrown with weeds, they are not marked. Farmers are farming with expensive equipment and at night, what if you hit one of these things? Who is liable for it? Some farmers can’t get mortgages on their land anymore because there is contamination. Some farmers are dependent on the annual rent to pay their mortgages and now the bank is calling asking where their money is. Some farmer shave builder leans with unpaid utility and contractor bills. There are a lot of problems that can come from this.”

With the previous Alberta Court of Queen’s Bench decision incentivized oil companies to simply dump their abandoned wells onto the Orphan Well Association, creating a backlog well beyond the scope and capability of the organization.

Early last year, the Orphan Well Association had 3,500 wells in their inventory, where best-case scenarios showed 50 of them being reclaimed per year with the funding the association possesses.

“It (the Supreme Court Decision) is a move in the right direction. But is there the political will to enforce it?” questioned Bennett.

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