Environment, future of companies take back seat to creditors in oil well case

It’s being viewed as a win for the banks but a loss for insolvent oil companies and the environment.

Alberta Court of Queen’s Bench Chief Justice Neil Wittmann ruled last week in favour of insolvent Redwater Energy and against requirements around dealing with non-performing oil wells in an insolvency situation.

In the May 17 decision, Wittmann decided in favour of Grant Thornton Ltd., the bankruptcy trustee in the Redwater Energy Corp.’s receivership and bankruptcy proceedings, upholding its right to “disclaim” Redwater’s non-producing oil wells and sell its producing wells.

Redwater was a junior oil and gas producer that went into insolvency in the spring of 2015. It owed its bank, ATP Financial, about $5 million.

Upon appointment, the receiver conducted an assessment of Redwater’s assets and advised the Alberta Energy Regulator that of the 91 wells to which Redwater held licences, it would only be taking possession of 20 wells, facilities, and associated pipelines.

It was a case being watched closely by those in the oil sector — especially the banks.

At issue was whether the provincial regulatory regime under the Oil and Gas Conservation Act and the Pipeline Act conflicted operationally with the federal Bankruptcy and Insolvency Act.

Wittman looked to the Supreme Court of Canada’s 2012 decision Newfoundland and Labrador v. AbitibiBowater  to decide if it is something that in fact falls within the jurisdiction of the federal legislation.

The decision dismissed the application of the AER and Orphan Well Association, which argued Grant Thornton should have to carry out the abandonment, reclamation, and remediation obligations of Redwater’s non-producing wells, or perform abandonment orders as issued by the AER, which included paying a security deposit.

The implications of this decision for the Alberta oil and gas industry are far-reaching, says Melanie Gaston, a partner with Osler Hoskin & Harcourt LLP in Calgary.

“Typically a receiver takes the less profitable wells or those that require decommissioning and sells them as packages. Now, with this decision, it’s clear that doesn’t need to happen. They can go in and pick the good, producing wells and leave the non-profitable ones,” says Gaston. “If I’m an oil company and I’m restructuring what I’m left with post-restructuring is not necessarily all that helpful.”

The question now becomes how to fund dealing with the non-producing wells of companies in an insolvency position. The court’s decision may lead to a dramatic increase in the number of wells determined to be “orphaned” by the AER. This will undoubtedly increase pressure on industry to fund the completion of work to abandon and remediate such wells, and on the boards of directors who serve companies in the industry.

“With these decisions the regulator is in a tough position because it will now be burdened with, potentially, exponentially more wells to manage with the Orphan Well Fund,” says Gaston.

If the legislation remains the same, the regulator will be left to find other sources of funding to manage it — possibly an increased levy on the oil companies already hurt by low prices and the fires in Fort McMurray, or approaching the government for an injection of funds from the taxpayers — just another hit for Albertans.

“The oil companies are now going to be challenged by what happens to them because it does give them some uncertainty. Is the AER, through the Orphan Well Fund, now going to increase levies so they have to pay more and therefore essentially support other players in the industry without having the necessary liquidity to do that right now?”

The court’s decision (which is not yet been posted publically) does however provide certainty to secured lenders that the priority is maintained over their interests.

“This certainty should result in continued access by the oil and gas industry to readily available credit,” Gaston wrote in a post last week about the decision.

Gowling WLG and Cassels Brock LLP served as co-counsel to Grant Thornton throughout the proceedings. They were not available for comment at time of posting.

It is expected an appeal will be launched.

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