Alberta oil and gas companies cannot hide behind the federal Bankruptcy and Insolvency Act to shield themselves from the cost of abandoning wells. On January 31, 2019, the Supreme Court of Canada gave the final word on the Redwater case, ordering the trustee of the bankrupt Redwater Energy Corporation to pay the cost of rehabilitating the company’s abandoned wells before settling the company’s outstanding debts.
The court found that the clean-up costs of Redwater’s wells were not debts, but duties that had to be fulfilled before creditors could be paid.
This decision reverses the decisions of two lower courts and is a welcome relief to Alberta’s Orphan Well Association, which otherwise would have been left with the clean-up bill. The Orphan Well Association is largely funded by Alberta’s oil and gas industry.
When Redwater went bankrupt in 2015, it had 127 facilities — wells, pipelines and related infrastructure — most of which were inactive and burdened with onerous environmental liabilities imposed on them by their provincial operating licences. The trustee in bankruptcy, Grant Thornton Ltd., said it would disclaim ownership of the assets with heavy environmental liabilities, and sell the remaining valuable assets to satisfy Redwater’s creditors. The Alberta Energy Regulator ordered that the sites be properly rehabilitated, Grant Thornton refused, and the Alberta Energy Regulator and the Orphan Well Association took Grant Thornton to court.
In a carefully-worded statement, the Orphan Well Association says it is “encouraged” by the Supreme Court’s ruling and will review the decision in more detail to determine its implications.
The question of abandonment costs in the oil and gas industry in Alberta has been front-page news in recent months. A report leaked to media in October 2018 put Alberta’s liability at $260 billion. The Alberta Energy Regulator later walked that back to $58 billion, saying the larger figure was a worst-case scenario. Since then, the Alberta Energy Regulator has imposed additional measures intended to ensure that operators bear the cost of closure.