Canada: Supreme Court Of Canada Grants Leave To Challenge Unconstitutionality Of Alberta's Oil And Gas Licensing Regime

On November 9, 2017, the Supreme Court of Canada (SCC) granted the leave application (Leave Application) filed by the Alberta Energy Regulator (AER) and the Orphan Well Association (OWA) in Orphan Well Association, et al v. Grant Thornton Limited, et al, which sought leave to appeal the decision of the majority of the Alberta Court of Appeal in Orphan Well Association v. Grant Thornton Limited (Appeal Decision).

In the Appeal Decision, the majority upheld the decision of former Chief Justice N.C. Wittmann in Redwater Energy Corporation (Re) by confirming that certain sections of the Oil and Gas Conservation Act (OGCA) and Pipeline Act (PA) are inoperative to the extent that they are: (i) used by the AER to prevent the renunciation of an insolvent debtor's assets by a court-appointed receiver or licensed insolvency trustee, or (ii) relied on by the AER to require such court officer to satisfy environmental claims outside of the scheme of distribution set out in the Bankruptcy and Insolvency Act (BIA).

Of particular note, the majority recognized that the AER and OWA sought to replace the "polluter pay" system previously set out by the SCC in Newfoundland and Labrador v. AbitibiBowater Inc. with a "third-party pay" system that placed the costs of an insolvent debtor's environmental obligations squarely on its creditors' shoulders. The majority's affirmation that the scheme of distribution under the BIA and the general law of priority of claims applied in this context provided considerable certainty that Alberta courts would recognize the rights of secured lenders with properly registered security. Moreover, the majority confirmed that, when evaluating the creditworthiness of a potential borrower, the industry practice of accounting for outstanding environmental obligations would not prejudice or result in the subordination of security in enforcement proceedings under the BIA.

LEAVE GRANTED

Although the hearing of the appeal is anticipated to be held in the first half of 2018, the final disposition is unlikely to occur until much later in the year and possibly 2019. The SCC's decision to grant the Leave Application injects uncertainty into whether the majority's clear interpretation and application of the BIA will prevail, where conflicts with the OGCA and PA arise. It also leaves uncertain how the priority of registered security interests vis-à-vis abandonment and reclamation obligations claimed by the AER and OWA may be resolved in the future. Further updates on the status and timing of the hearing will be provided as they become available.

Blakes acts for Alberta Treasury Branches, Redwater's principal secured lender, in this matter.

For more information on this matter, please see our May 2017 Blakes Update: Court of Appeal Affirms Unconstitutionality of Alberta's Oil and Gas Licensing Regime, May 2016 Blakes Bulletins: Alberta's Oil and Gas Licensing Regime Found to be Unconstitutional and Blakes Update: Alberta Licensee Liability Rating Program Imposes Financial Challenges for Junior Oil & Gas Companies and September 2013 Blakes Bulletin: Increases to Alberta Licensee Liability Rating Program.

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