Supreme Court Redwater decision: cleaning up orphan wells takes precedence over paying creditors

On Thursday, the Supreme Court of Canada handed down a 5-2 decision ruling bankrupt oil companies have a responsibility first to clean up their non-working wells.  The decision overturns a 2016 Alberta Appeal Court judgement allowing companies to pay debt down before addressing cleanup.  The Narwhal photo by Theresa Tayler.

SCOC Redwater decision: “Bankruptcy is not a license to ignore rules”

In a 5-2 ruling, the Supreme Court of Canada says bankrupt oil companies must clean up inactive wells.  The decision means the Alberta Energy Regulator can order the cleanup of inactive wells, even if the owners have filed for bankruptcy protection.

The ruling overturns lower court decisions which prioritized paying creditors before cleaning up inactive wells.

In the decision, the court wrote “Bankruptcy is not a license to ignore rules”.

In 2015, Redwater Energy Corp became insolvent and when Okotoks-based company filed for bankruptcy, it owned 84 mostly inactive wells.

Its bankruptcy trustee tried to sell the company’s valuable assets to repay its $5.1 million debt its bank, ATB Financial.  Under the plan, Redwater would then walk away from its non-producing wells and leave the cleanup job to the OWA.

Thursday’s Supreme Court ruling overturns a 2016 decision by an Alberta judge that ruled proceeds from asset sales of insolvent oil producer Redwater Energy Corp., should first go to secured creditors, not cleanup.  The 2016 ruling was later upheld by the province’s appeal court.

“With the decision now in hand, we can align our plans with the court ruling as we continue to build a new liability management framework,” Gordon Lambert, CEO of the regulator said in a statement.

“While there has been uncertainty in the energy sector as we waited for the Supreme Court decision, I am confident our regulatory system will be stronger, based on the decision and the lessons we learned through the process.”

The Orphan Well Association (OWA) says that as of late January, there are 3,127 orphan wells, or wells that require cleanup but have no financially responsible owner.  The Orphan Well Association is overseen by the AER and is funded by levies paid out by oil producers in Canada.

In a press release, the association said “The Orphan Well Association is encouraged by the decision from the Supreme Court of Canada.”

“We are pleased that the Supreme Court recognized the potential massive impacts that this issue could have caused – not just for the energy sector— but for many industries across the country,” Lambert said.

According to Jodi McNeill of the Pembina Institute, over the last five decades Alberta’s clean up obligations have steadily grown, and now include over 80,000 inactive oil and gas wells, facilities, and pipelines as well as 1.4 trillion litres in fluid oilsands tailings.

While the Supreme Court’s decision ensures bankrupt companies’ remaining assets first go to clean up, those assets are often insufficient to cover full costs.

“The Government of Alberta officially estimates it will cost CAD$57 billion to clean up these sites, though there are ongoing concerns about the accuracy of this figure. Conversely, only $1.2 billion is currently held in securities to protect the public,” she said in a statement.

While the ruling cuts the burden of cleanup borne by the association, according to Reuters, the decision may increase the perceived risk of investing in the Canadian oil industry.

In a note, Raymond James analysts wrote investors may avoid companies that have a higher risk of abandonment liability, including Cardinal Energy, Bonavista Energy Corp., and Obsidian Energy Ltd.

Alberta’s Minister of Energy, Margaret McCuaig-Boyd, is expected to comment on the ruling later on Thursday.






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