Supreme Court of Canada Issues Decision on Environmental Obligations During Bankruptcy of Oil and Gas Company

The Supreme Court of Canada recently issued an important decision affecting the oil and gas industry in Alberta in a case involving the bankruptcy of a company and ongoing environmental obligations after the fact.

Background and Legislative Scheme

In order to exploit oil and gas resources in Alberta, a company needs a property interest in the oil or gas, surface rights and a licence issued by the Alberta Energy Regulator (“Regulator”). Under provincial legislation, the Regulator will not grant a licence to extract, process or transport oil and gas in Alberta unless the licensee assumes end‑of‑life responsibilities for plugging and capping oil wells to prevent leaks, dismantling surface structures and restoring the surface to its previous condition.

The insolvency of an oil and gas company licensed to operate in Alberta engages Alberta’s licensing regime and the Bankruptcy and Insolvency Act (“BIA”). Alberta’s Environmental Protection and Enhancement Act (“EPEA”) ensures that a licensee’s regulatory obligations will continue to be fulfilled when it is subject to insolvency proceedings by including the trustee in certain reclamation obligations. However, the EPEA expressly limits a trustee’s liability. The Oil and Gas Conservation Act and the Pipeline Act also include trustees in the definition of “licensee”. As a result, the Regulator can theoretically exercise the same powers against a trustee as a licensee.

What Happened?

This case involved Redwater, a publicly traded oil and gas company that went into receivership.

The parties to the case were the Orphan Well Association (“OWA”), an independent non‑profit entity that has the Regulator’s delegated authority to abandon and reclaim oil and gas assets and their sites left behind in an improperly abandoned or unreclaimed state by defunct companies at the close of their insolvency proceedings, and Grant Thornton Limited (“GTL”), which was appointed as Redwater’s receiver in 2015.

Upon being advised of Redwater’s receivership, the Regulator notified GTL that it was legally obligated to fulfill abandonment obligations for all licensed assets prior to distributing any funds or finalizing any proposal to creditors. GTL decided that it could not meet the Regulator’s requirements because the cost of the end‑of‑life obligations for the spent wells would likely exceed the sale proceeds for the productive wells.

The Regulator issued “Abandonment Orders” requiring Redwater to suspend and abandon the “Renounced Assets” (those assets it had refused to take possession of).

The Regulator and the OWA then filed an application for a declaration that GTL’s renunciation of the Renounced Assets was void, and for orders requiring GTL to comply with the Abandonment Orders and to fulfill the end‑of‑life obligations associated with Redwater’s licensed properties. GTL brought a cross‑application seeking approval to pursue a sales process excluding the Renounced Assets and an order directing that the Regulator could not prevent the transfer of the licences associated with the retained assets. A bankruptcy order was issued for Redwater and GTL was appointed as trustee.

Lower Courts Decisions

The chambers judge and a majority of the Court of Appeal agreed with GTL and held that the Regulator’s proposed use of its statutory powers to enforce Redwater’s compliance with abandonment and reclamation obligations during bankruptcy conflicted with the BIA in two ways: (1) it imposed on GTL the obligations of a licensee in relation to the Redwater assets disclaimed by GTL, contrary to s. 14.06 of the BIA; and (2) it upended the priority scheme for the distribution of a bankrupt’s assets established by the BIA  by requiring that the provable claims of the Regulator, an unsecured creditor, be paid ahead of the claims of Redwater’s secured creditors. The dissenting judge in the Court of Appeal would have allowed the Regulator’s appeal on the basis that there was no conflict between Alberta’s environmental legislation and the BIA.

Issues

At issue in the appeal was the applicability during bankruptcy of the two powers conferred on the Regulator by the provincial legislation designed to ensure that licensees satisfy their end-of-life obligations.

Supreme Court of Canada Decision

The court found that there was no conflict between Alberta’s regulatory regime and the BIA. It found that while GTL remained fully protected from personal liability by federal law, it could not walk away from the environmental liabilities of the bankrupt estate by invoking s. 14.06(4) of the BIA, stating:

“[T]he end-of-life obligations binding on GTL are not claims provable in the Redwater bankruptcy, so they do not conflict with the general priority scheme in the BIA. This is not a mere matter of form, but of substance. Requiring Redwater to pay for abandonment before distributing value to creditors does not disrupt the priority scheme of the BIA. In crafting the priority scheme set out in the BIA, Parliament intended to permit regulators to place a first charge on real property of a bankrupt affected by an environmental condition or damage in order to fund remediation. Thus, the BIA explicitly contemplates that environmental regulators will extract value from the bankrupt’s real property if that property is affected by an environmental condition or damage.”

The court added:

“Bankruptcy is not a licence to ignore rules, and insolvency professionals are bound by and must comply with valid provincial laws during bankruptcy.”

As a result, the appeal was allowed and the Redwater estate was required to comply with ongoing environmental obligations that are not claims provable in bankruptcy.

Get Advice

When disputes arise in the oil and gas industry they can be complex, involving international parties and various pieces of specialized legislation. If you are involved in such a dispute, it’s important for you to have a legal team in place who knows how these interests and laws work together and can help you navigate this intricate terrain.

At DBH Law, our Calgary-based lawyers we are uniquely positioned to advise clients on issues that may arise in oil and gas. We have worked with clients in Alberta, across Canada, and around the world and are intimately familiar with the global nature of this ever-changing industry.

Our extensive experience representing clients in the oil and gas industry has given us the tools to help our clients with their unique needs. Please contact us online or by phone at 403.252.9937 to find out how we may be able to help you.