Alberta Court Of Appeal Reserves Decision In RedWater Energy Court Case

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Following a one-day hearing Tuesday, the Alberta Court of Appeal has reserved its decision in an appeal of an Alberta Court of Queen’s Bench decision in the RedWater Energy Corp. case.

The Orphan Well Association and the Alberta Energy Regulator (AER) had appealed the decision by Chief Justice Neil Wittmann. Grant Thornton Limited, the receiver in the bankruptcy, and Alberta Treasury Branches, the lender, responded to the appeal.

The judge had determined that a receiver in bankruptcy has the right to renounce certain assets, ruling that where there was a conflict between the federal Bankruptcy and Insolvency Act and Alberta’s Oil and Gas Conservation Act and the Pipeline Act, federal legislation prevails (DOB, May 20, 2016).  

The decision said that in the insolvency process Grant Thornton may “renounce” certain AER-licensed assets and is not required to comply with AER abandonment orders, even if that results in outstanding and unfunded reclamation and abandonment obligations under provincial legislation.  

Intervening in the appeal in support of the AER and OWA were the Canadian Association of Petroleum Producers (CAPP), the attorney general for Saskatchewan and the province of British Columbia as represented by the Ministry of Natural Gas Development and the B.C. Oil and Gas Commission. The Canadian Association of Insolvency and Restructuring Professionals supported the decision.

Wittmann’s decision is seriously limiting the ability of the AER to manage its liability risks, the appeal court heard.

The ruling also will unfairly require the Orphan Well Association, funded mainly by oil and gas producers, to pick up additional well abandonment costs while rural landowners with wells on their properties will bear the environmental burden, appellants argued.

Appearing before a three-member panel, Ken Lenz, counsel for the Orphan Well Association, argued that  the Alberta law requiring companies to be responsible for abandonment costs is a regulatory, not a monetary obligation which would require the receiver to meet the obligations of the licensee. He also suggested that if the decision is allowed to stand, the OWA could see more renouncements of assets by trustees. The association, funded by a levy from producers, administers the fund which abandons well sites when the operator cannot be traced.

The Alberta regulatory system provides for a liability management rating (LMR) program that assesses a company’s ability to meet its abandonment obligations and gives the AER the right to approve a licence transfer, said Keely Cameron, AER counsel. When a company applies for a licence, it also is expected to comply with the law regarding its end-of-life obligations, she said.

The decision is “severely limiting” the AER’s ability to manage its liabilities, Cameron told the court. Creditors are well aware of a company’s obligations which are designed to reduce the risk to the public and the environment as lenders look for that information, she noted.

The AER’s risk management system in which companies with an LLR (Licensee Liability Rating) of less than one are required to provide a security deposit is the regulator’s effort to minimize risk to the public and the environment, said Cameron. “It is not a cash grab.”

Lisa Semenchuk, counsel for Alberta Justice and the Solicitor General, argued that the “real property” in the section of the bankruptcy and insolvency legislation that Wittmann cited in his decision is not really owned by RedWater. The company has the right to work the land of a third party such as a private or public landowner but if the asset is renounced, these parties will be left with the environmental burden, she said.

Appearing for CAPP in favour of the appeal, Lewis Manning said that association members support the existing LMR system which was developed by industry, the regulator and the government. “It may not be perfect but it works and should be allowed to work,” he said.

Oil and gas producers benefit from the right to produce oil and gas and should be obligated to abandon and remediate wells and believe all producers have the same obligation, according to Manning. If the OWA does not have adequate money to remediate all wells the AER has designated as “orphans,” it will be passed along to the Crown and the public, he suggested.

Jeff Oliver, counsel for Grant Thornton, told the court that the receiver, which chose to renounce 107 of RedWater’s 127 assets by refusing to take control of them, has an obligation to take economic interests into account. Because the assets were renounced prior to the abandonment order from the AER, the receiver has no further obligation, he said.

Section 14.06 of the BIA, one of the six issues to be decided by the Court of Appeal, was a “delicate balance” of stakeholder interests that could perhaps be subject to some sort of amendment, according to Oliver.

ATB counsel, Ryan Zahara, said that packaging assets as Grant Thornton had done would increase the money raised for creditors. The ATB’s relationship with RedWater went back to 2009 and it had always kept close tabs on the company, he noted.

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