When an oil well operator becomes insolvent, a significant liability will often exist for "orphan wells," wells with environmental remediation costs which exceed any remaining value. Under provincial legislation, such remedial costs must be paid before even secured creditors recover any money. But does this legislation, having the goal of environmental protection, conflict with the priority regime under the federal Bankruptcy and Insolvency Act("BIA")?
Can a trustee in bankruptcy sell oil wells subject to this environmental regime for the benefit of secured creditors while disclaiming the orphan wells, or must the proceeds of sale go towards the costs of remediation?
In a 2-1 decision released on April 24, 2017, the Alberta Court of Appeal affirmed the lower court, finding in favour of the interests of the secured creditors of Redwater Energy Corporation, and against the interests of the Alberta Energy Regulator ("AER").
Writing for the majority of the Court of Appeal, Slatter JA determined a trustee is entitled under the BIA to renounce property facing environmental liabilities, such as the unproductive wells. His Honour found that the claims of AER in this case were akin to claims provable in bankruptcy, and that such claims could not interfere with the priority of secured creditors in bankruptcy proceedings. As the relief sought by the AER amounted, in effect, to provincial environmental claims taking priority over secured claims, they were found to be in operational conflict with the BIA, and unenforceable pursuant to the doctrine of federal paramountcy.
Accordingly, the secured creditors were found to have priority to the proceeds of sale of the productive wells, without any liability or obligation to account for the costs of remediating the unproductive wells. Those remediation costs will fall on the Orphan Wells Association, an industry-developed fund that seeks to cover the costs of remediation where owners of oil or gas resources are insolvent.
AER has since confirmed it will be seeking Leave to Appeal to the Supreme Court of Canada, and given the public importance of the decision, both for the oil and gas industry, and for environmental protection, we likely have yet to hear the last word on it.