Supreme Court of Canada says bankrupt energy companies must clean up old oil, gas wells before paying off creditors

Supreme Court of Canada says bankrupt energy companies must clean up old oil, gas wells before paying off creditors

CALGARY—When energy companies go bankrupt, the cleanup of their old oil and gas wells must take priority over paying off creditors, the Supreme Court of Canada ruled Thursday.

Though centred in Alberta, the 5-2 decision sets a precedent across Canada, empowering provincial governments to stop defunct companies from off-loading their messes onto other companies or the public.

“Bankruptcy is not a licence to ignore rules,” wrote Chief Justice Richard Wagner in the court’s decision.

The case revolved around the failure of Redwater Energy, a small oil and gas company that went bankrupt in 2015 amid the global oil price collapse. The dispute is between the Alberta Energy Regulator (AER) and accounting firm Grant Thornton, which is Redwater’s receiver — a bankruptcy trustee appointed to liquidate a failing business.

When Redwater became insolvent, it owed $5 million to provincially owned ATB Financial. Very few of the company’s wells were producing and profitable, while the rest were in need of expensive, legally required cleanup processes.

Under Alberta law, the move wouldn’t be allowed — money from the sale of Redwater’s assets should be used to return the company’s well sites to a natural state, the AER argued. However, that provincial law conflicts with a federal bankruptcy law, which gives priority in such cases to lenders.

Two lower courts found the federal law took priority over the provincial one and sided with the receiver. The Supreme Court heard the appeal, led by the AER, last February.

In the end, the Court decided there’s no conflict between the two laws, as the federal law doesn’t allow trustees of a bankrupt business to walk away from the company’s environmental liabilities. (The two dissenting judges disagreed and found the two laws are inconsistent.)

Though widely hailed as a victory by environmental groups, some noted that the decision doesn’t solve broader issues caused by insolvent companies’ environmental obligations.

“While the Supreme Court’s decision ensures bankrupt companies’ remaining assets first go to clean up, those assets are often insufficient to cover full costs,” wrote Jodi McNeill, a policy analyst at the Pembina Institute, a think tank focused on clean energy policy.

The case has attracted national attention and input from a wide variety of intervenors, third-parties who the court allows to make arguments in a case. The list includes provinces concerned about the implications — Saskatchewan, British Columbia, and Ontario — as well as environmental groups, Alberta farmers concerned about wells on their land, and the Canadian Association of Petroleum Producers (CAPP).

In its filings, ATB Financial suggested the fault lies with Alberta’s regulatory system, which unlike other jurisdictions, doesn’t require upfront bonds to cover cleanup costs. At the time it went bankrupt, the AER hadn’t required Redwater to post any financial security.

The reversal of the lower court decision could also drive away investment in the already-struggling energy sector, ATB Financial argued.

However, the AER argued that the impact of dismissing its appeal would be “catastrophic,” potentially putting the public on the hook for “billions of dollars in environmental costs.” Not only would it undermine a long-standing system, the regulator said, it could drive up the number of orphan wells, encouraging lenders to place companies into insolvency and dump weak assets.

CAPP also sided with the regulator, saying a dismissal of the appeal would unfairly push the financial burden onto responsible companies.

In November, a joint investigation involving the Star found the cost of cleaning up Alberta’s oil and gas wells could reach $100 billion. So far, the AER has collected $200 million in security.

Meanwhile, the Orphan Well Association currently has more than 3,000 wells in its inventory, up from about 700 in 2015. The Supreme Court’s decision notes it may take a generation to complete the cleanup of the association’s current backlog.

Emma McIntosh is an environment, justice and investigative reporter with StarMetro Calgary. Follow her on Twitter at @EmmaMci

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