Redwater Ruling’s implications for oil and gas lending

Orphan Well Association profoundly changes the treatment of environmental obligations in insolvencies and may impact the availability of capital to the natural resources sector and the functioning of the insolvency system.

Redwater Ruling’s implications for  oil and gas lending

On Jan. 31, the Supreme Court of Canada released its decision in Orphan Well Association v. Grant Thornton Limited, the closely watched appeal of the Alberta Energy Regulator and Orphan Well Association. The decision profoundly changes the treatment of environmental obligations in insolvencies and may impact the availability of capital to the natural resources sector and the functioning of the insolvency system. 

Redwater Energy Corp. was an insolvent oil and gas company whose environmental obligations exceeded the value of its assets. Its receiver and trustee, Grant Thornton Limited, disclaimed the unsellable wells under s. 14.06 of the Bankruptcy and Insolvency Act. Alberta’s oil and gas regulatory laws deemed GTL to be a licensee, required GTL to perform Redwater’s environmental remediation obligations, did not permit GTL to disclaim licensed assets and empowered the AER to condition licence transfers on the performance of those obligations.

The majority of the Supreme Court allowed the AER’s appeal and made the following key findings:

a) Under s. 14.06(4), disclaimers only protect receivers from personal liability. Receivers must still remediate property after its disclaimer and cannot make distributions to creditors until the remediation work is complete.

b) Regulatory obligations are only subject to BIA priorities where:
1) the regulator is not acting in the public interest and for the public good;
2) the regulator is seeking a financial benefit or engaging in a colourable attempt to recover debt; and
3) there is sufficient certainty that the regulator will perform the work and file a claim for its costs. 

c) Provincial law that requires the performance of environmental obligations before distributions are made does not disrupt the BIA’s priority regime.

The decision gives rise to a number of questions and issues relating to the provision of credit to the oil and gas sector:

1. Super-priority for regulatory obligations. Regulatory obligations will generally not be characterized as monetary claims payable in accordance with BIA priorities. For all practical purposes, they are now treated as super-priority claims that must be paid or performed before distributions are made to creditors.
2. Quantification of environmental obligations. It is unclear how lenders and receivers will be able to quantify regulatory obligations. The AER’s deemed liability calculations may understate the actual remediation obligations and, therefore, the due diligence requirements for lending and enforcement may now be significantly greater.  
3. Loan value redeterminations. As lenders calculate borrowing limits for the purposes of renewals and new loans, their calculations will likely account, on some basis, for the present value of the super-priority environmental remediation obligations. In many circumstances, there will be reduced loan availability that could impact the operations and capital programs of producers and their servicers.
4. Are receivership costs paid before environmental obligations? While the majority did not indicate how the fees and costs of receivers are paid, implicitly, receivers are paid before remediation obligations because they are expected to perform the remediation work.
5. Is there a point to a disclaimer? Because disclaimers appear to provide no additional protection from personal liability and receivers remain obliged to remediate disclaimed property, it appears that there may only be limited benefit to disclaiming.
6. Chilling effect on insolvencies? If remediation obligations exceed the value of the estate, it is unclear why lenders would provide additional loans or initiate insolvency proceedings without prior arrangements with the AER being made.
7. Protection of court officers. Provincial law that makes receivers personally liable for environmental obligations is likely inoperative under the paramountcy doctrine.

The decision could have real economic consequences if there is a significant reduction in capital available to the oil and gas sector and it becomes less practical for lenders and borrowers to address financial crisis through insolvency proceedings.

Tom Cumming and Caireen E. Hanert are partners in Gowling WLG’s restructuring and insolvency group in Calgary. Gowling WLG was co-counsel to Grant Thornton Limited, Redwater’s receiver and trustee.

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