Canada: The SCC In Redwater Confirms The Oil And Gas Industry Status Quo: Bankruptcy Is Not A Licence To Disregard Environmental Rules

In a case that pitted the federal Bankruptcy and Insolvency Act (BIA) against Alberta's constitutional rights to legislate in relation to property and civil rights in the Province, the Supreme Court of Canada (SCC) in Orphan Well Association v Grant Thornton Limited (Redwater) has determined that the Alberta Energy Regulator (AER) has been and continues to act lawfully in accordance with the statutory framework established under Alberta's valid constitutional authority to oversee and manage the oil and gas industry in Alberta.

Specifically, in Redwater, Chief Justice Wagner reaffirmed the AER, the Orphan Well Association (OWA) and industry position throughout the various steps in the case (from the Alberta Court of Queen's Bench, to the Alberta Court of Appeal, and to the Supreme Court of Canada) that end of life obligations to properly clean-up wells and facilities—and remediate the land on which such facilities are located—are attached to and form part of an oil and gas company's licence to produce hydrocarbons in Alberta. Without licences, which are issued pursuant to the Alberta statutory framework administered by the AER, oil and gas companies' right to produce, market and sell oil and gas (profits à prendre) are of limited value at best, because production cannot take place without them. All licences held by an oil and gas company in Alberta, such as Redwater, are received by it subject to the end-of-life obligations that could one day arise. These end-of-life obligations form a fundamental part of the value of the licensed assets, the same as if the associated costs had been paid up front.

Having received the benefit of the "Renounced Assets" (now unproductive wells) during the productive period of their life cycles, the Court held that the lender and the receiver appointed to administer the estate on its behalf could not now disclaim and avoid the associated liabilities that were attached to the licence from the outset. The result is that even in the event of bankruptcy, the law requires the trustee in bankruptcy to use the bankrupt's assets to abandon and reclaim wells and facilities.

Background

Redwater was about an attempt by the receiver, Grant Thornton Limited (GTL), to pick only the valuable assets out of a bankrupt oil & gas operator's estate and disclaim the rest, leaving the liabilities in the estate. Liabilities left in the estate could become "orphaned wells" potentially subject to clean up at some point in the indeterminate future by the OWA, which is largely funded by industry.

The AER ordered GTL to properly abandon the Renounced Assets pursuant to the AER's established policies, and refused to allow the transfer of licences for productive wells out of the estate until the AER's Licensee Liability Rating Program requirements were met (the program establishes a ratio of assets to liabilities that the AER requires licensees to maintain, known as the Liability Management Rating or "LMR"). GTL disagreed and applied to the Alberta Court of Queen's Bench for an order approving the sale process and directing that the AER could not prevent the transfer of the licenses, on the basis that the federal BIA is paramount over the provincial regulatory scheme.

The Court's decision

GTL argued first that the provision in the BIA limiting trustees' liability for environmental conditions released it from all environmental liability associated with the Renounced Assets. Second, GTL argued that the AER's use of its statutory powers unconstitutionally reordered the priorities in the federal BIA. GTL failed on both arguments.

On the first point, GTL argued that the AER's interpretation would frustrate the purpose of the BIA, and that if environmental claims are binding on estates, trustees would refuse to accept appointments. The Court rejected this argument, noting, in part: " ... there is nothing to suggest that this well-established state of affairs [the status quo before the Redwater QB decision] has led insolvency professionals to refuse to accept appointments or has increased the number of orphaned sites. There is no reason why the Regulator and trustees cannot continue to work together collaboratively, as they have for many years, to ensure that end-of-life obligations are satisfied, while at same time maximizing recovery for creditors." The Court held there is nothing in the BIA that relieves the estate (as opposed to the trustee) from liability, and as a result the licensee (in this case, GTL) must expend estate assets on abandonment.

On the second point, the Court held that the provincial legislation could potentially be inoperative to the extent it reorders BIA priorities. But that was not the case here, and the SCC overruled the courts below, stating that the federal BIA and the provincial regulatory scheme governing oil and gas development were not in operational conflict. To the contrary, the provincial and federal legislation both dealt with separate and different things and could co-exist without the need to consider whether the obligation to make a well site environmentally safe interfered with the scheme of distribution under the BIA.

Central to the Court's reasoning here was that in order to fall within the BIA scheme, a claim must be provable in bankruptcy. The Court reaffirmed that whether a claim is provable in bankruptcy in this context is determined by the three-part test in the SCC's 2012 decision in Newfoundland and Labrador v. AbitibiBowater Inc., and significantly, Abitibi's application to a regulatory agency acting in the public interest.

The Abitibi test states first that there must be a debt, a liability or an obligation to a creditor. Second, the debt, liability or obligation must be incurred before the debtor becomes bankrupt. Third, it must be possible to attach a monetary value to the debt, liability or obligation.

On the first part of the test, the AER, argued that it was not asserting any claims provable in the bankruptcy, so GTL must comply with the Redwater estate's environmental obligations, to the extent that assets are available to do so. The SCC agreed that the AER was not a creditor when it was acting in its bona fide regulatory capacity, in the public interest and for the public good enforcing environmental obligations.

In doing so the SCC also reaffirmed the Alberta Court of Appeal's 1991 decision in Northern Badger, which established that a regulator enforcing a public duty by way of non-monetary order is not a creditor.

In holding that the third part of the test was not satisfied either, the SCC noted that the AER is not in the business of performing abandonments, noting that remains the responsibility of the licensee. The Court accepted the AER's evidence that it had no intention of performing the abandonment, and also indicated that the OWA's involvement is not sufficiently certain to satisfy the test either. The Court noted that the OWA is an independent organization that has its own considerations as to how it chooses to prioritize environmental work, and that the work could take years in any event. As noted by the Court, "Much could change within the next decade, both in terms of government policy and in terms of the willingness of those in the Alberta oil and gas industry to discharge environmental liabilities."

Conclusion

Overall, Chief Justice Wagner reaffirmed that compliance with the LMR conditions prior to the transfer of licences reflects the inherent value of the assets held by the bankrupt estate.

The SCC ordered the proceeds from GTL's sale of the Redwater assets (which were being held in trust) to be used to address Redwater's end-of-life obligations.

In short, bankruptcy does not amount to a licence to disregard environmental rules set by the AER, Northern Badger remains good law, and practically speaking the industry can continue to operate as it has successfully prior to the proceedings.

Lewis Manning and Toby Kruger acted for the Canadian Association of Petroleum Producers in the proceedings.

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