An Alberta court recently issued a decision on the question of ‘lifting the stay’ in the context of replacement of operator provisions in oil and gas joint venture agreements.
What Happened?
Lexin operated wells in Alberta and went into receivership in 2017.
The wells and Facilities were shut-in pursuant to an Alberta Energy Regulator (“AER”) order dated February 15, 2017. At that time, the wells and facilities were co-owned by Lexin and Exxon Mobil Energy Canada and operated by Lexin.
Exxon did not apply to lift the stay imposed by the receivership order. On December 21, 2017, Midstream agreed to purchase Exxon’s interest in the wells and Facilities. This sale closed on February 1, 2018. It included not only Exxon’s interest in the 21 wells jointly owned with Lexin, but also 32 additional wells in which Lexin has no interest.
Midstream had applied to the AER for approval of the transfer of the Exxon well licenses, but had not yet obtained such approval at the time the application was heard.
The receivership order imposing the stay was granted on March 20, 2017. Since July, 2017, the Receiver has been marketing Lexin’s assets, including the wells and Facilities in issue. The marketing materials specify that Lexin is the operator of the wells and Facilities. The sales process has been extended a number of times, due in part to complications arising from an unrelated claim.
On May 3, 2018, Midstream filed its application to lift the stay.
Midstream applied to lift the stay of proceedings in the receivership of Lexin in order to allow it to assume operatorship of certain gas facilities and gathering systems. Originally, Midstream applied to lift the stay imposed under the receivership order with respect to three gas facilities and gathering systems (the “Facilities”) and 21 wells in which Midstream and Lexin have various interests. However, when the application was argued, Midstream proceeded only on the basis of the Facilities.
The Facilities are governed by Construction, Ownership and Operation Agreements (the “CO&O Agreements”) that were materially identical with respect to the provisions relevant to this application.
These CO&O Agreements adopted the standard form model Petroleum Joint Venture Association 1999 Standard Operating Procedure (the “1999 PJVA”).
Midstream submitted that it suffered prejudice from its inability to rely on the ipso facto or operator insolvency contractual provisions.
Issues
The issue was whether it was appropriate to lift the stay in the circumstances of the receivership and with reference to Midstream’s contractual rights.
Decision
The court began by reviewing the law on the test for lifting a stay, and stated:
“[T]he mere existence of [ipso facto or operator insolvency] contractual provisions is not in itself a sufficient basis to lift a stay. While they may be valid between contracting parties in the ordinary course of events, these provisions are void against a receiver on policy grounds.
The reason for such a policy is clear: the prejudice to a creditor seeking to rely on such a clause is no different from that suffered by other creditors by reason of the debtor’s insolvency, and giving effect to such clauses would undermine the purpose of a stay in insolvency, to permit the orderly and equitable realization and distribution of the debtor’s assets.”
The court explained that the insertion of ipso facto clauses in agreements relating to operation of oil and gas assets reflected the fact that operators deal with funds on behalf of the non-operating parties, and that the insolvency of an operator can give rise to a risk that the operator will comingle funds and/or put a non-operator’s share of revenues at risk. However, that risk ceases to exist when a receiver is appointed.
The court concluded that the prejudice to the Receiver was more significant that that to Midstream. It found that the prejudice to the Receiver and other creditors of Lexin if the stay was lifted outweighed the prejudice, if any, that would be suffered by Midstream if the stay was not lifted, and there are no equitable grounds that would otherwise justify the lifting of the stay. The court stated:
“As noted by the Receiver, the insolvent operator provisions are not intended to be utilized strategically by co-owners or their assignees to obtain operatorship that would otherwise not be contractually available. Rather, they are intended to protect non-operators from the real risks and prejudices that can arise when an operator becomes insolvent.”
As a result, the court denied Midstream’s application on the basis that, in the circumstances of this receivership, the prejudice to the Receiver of lifting the stay far outweighed the prejudice to Midstream, and it was not equitable to lift the stay for other reasons.
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