Post Redwater

The insolvency community experienced a shock in February 2019, when the Supreme Court of Canada (SCC) overturned the decision of the Alberta Court of Appeal in Orphan Well Association v Grant Thornton Limited (Redwater).[1]

Tensions had been simmering since the 1990s between Alberta’s oil and gas regulator, now called the Alberta Energy Regulator (AER), and the insolvency community. Its members regarded bankruptcy as a private matter between insolvent parties and their creditors. Moreover, to the degree that government intervention was ever necessary, Parliament – not the provinces – had the authority to do so. The AER saw things differently, regarding the proper abandonment and reclamation of oil and gas sites as one of its key mandates and a duty to be addressed prior to obligations to creditors. The AER’s position was consistent with a 1991 Alberta Court of Appeal decision which found that serving the public interest in this manner was not subject to the Bankruptcy and Insolvency Act (BIA).

Creditors and their agents took issue with such enforcing of the public interest, when it interfered with the bankruptcy process, specifically the extent of recovery available for creditors. They asserted that the AER was really a creditor, seeking to impose a superior claim on the bankrupt’s assets, which the BIA disallowed. The basic reasoning was that the BIA as federal law trumped provincial law. If the BIA forbade such action, the AER had to abide.

Thus, Redwater played out as a Constitutional case, which hinged on the rules of Canadian federalism.[2] If the provincial law in question conflicted with or frustrated the purpose of the BIA, then the provincial law would be inoperative to the degree that it did so.[3] If said provincial law did not, then it would remain operative. The lower court held the former; the SCC overturned, holding the latter.

The span of the Redwater case coincided with the worse oil crash in Alberta’s history.[4] In 2016, Chief Justice Wittmann of the Alberta Court of Queen’s Bench authored the first judgment, rendering the provincial law inoperative.[5] By 2018, the AER’s CEO lamented that the regulatory hole left by this judgment had cost the program responsible for orphaned sites about $110 million.[6] Though the AER’s CEO suggest that Wittmann’s judgement was central to its troubles, the SCC reversal has done nothing to help low commodity prices or the financial difficulties effecting the energy industry.[7] Complications associated with the oil crash continue to wreak financial havoc throughout the industry unabated,[8] adding to the swelling inventory of wells with no owners left to assume abandonment and reclamation obligations.[9]

Alberta Oil and Gas Orphan Abandonment and Reclamation Association (Orphan Well Association) manages the program responsible for the clean-up of sites which have been orphaned by the AER.  Orphaning typically occurs where a licensee is no longer able to address its obligations, often following insolvency. The OWA’s Board is made up of members from the Alberta Government, the AER, and industry. AER annually prescribes an orphan well levy which is typically funded by industry, which provides the association its operational funding. This levy is a mandatory regulatory charge issued upon the members of Alberta’s oil and gas industry for the clean-up of their former competitors energy sites.

From 1992 to 2015, the AER prescribed a total orphan well levy of just under $200 million.[10] Over the last 4 years, the levy totalled $165 million, almost doubling the total levy charged before then.[11] Put differently, AER prescribed a levy of $8.7 million per year on average for the first 23 years of the program. After 2015, the levy spiked to $41.25 million per year – almost 5 times the charge prior. To help manage the orphan well crisis, the Alberta Government loaned the Orphan Well Association $235 million to help fund activities.[12] The loan is to be repaid by 2027.[13] The Federal government has also committed an additional $30 million, which is earmarked to cover the interest payments for the loan over this period.[14] It is expected that industry will pay off the principle of the loan through the AER orphan levy.

Alberta’s oil and gas companies are still suffering mightily and face significant challenges before an economic recovery will be achieved.[15] Moreover, Alberta’s conventional oil industry is mature with about as many active wells (176,000 in 2018) as inactive and abandoned wells (167,000 in 2018).[16] Unfortunately, this number represent only a portion of the risk as it does not include licensed sites other than wells (e.g., natural gas plants and facilities), which are nearing the end of life and must be retired.[17]

If the status quo is maintained, we can expect to see more orphaned wells and higher levies ultimately resulting in more bankruptcies and even more orphaned wells. It’s a cycle that needs to be broken. Without question, reform is coming.

In 2016, the AER issued Bulletin 2016-21 setting out interim measures while it works “with industry, other stakeholders, and the Government of Alberta to develop broader and more permanent regulatory measures in accordance with government policy in response to the Redwater decision.”[18]  It is now 5 months post decision and we continue to await policy changes.

† Fenner Stewart is an Associate Professor at the University of Calgary, Faculty of Law and a SPP Research Fellowship in Energy and Environment.

‡ Keely Cameron is a regulatory and litigation lawyer.  She was counsel for the AER on the Redwater matter.

[1] See Orphan Well Association v Grant Thornton Ltd. 2019 SCC 5; Orphan Well Association v Grant Thornton Ltd, 2017 ABCA 124.

[2] See Fenner L Stewart, “Interjurisdictional Immunity, Federal Paramountcy, Co-operative Federalism, and the Disinterested Regulator: Exploring the Elements of Canadian Energy Federalism in the Grant Thornton Case”, (2018) 33 Banking & Finance Law Review 227.

[3] See Canadian Western Bank v Alberta, 2007 SCC 22 at para 75. Also see Fenner L Stewart, “An Introduction to Canadian Energy Federalism” in Trevor Tombe and Jennifer Winter, eds., Measuring the Contribution of Energy Infrastructure: A Practical Guide (Forthcoming, 2019-2020); Fenner L Stewart, “How to Deal with a Fickle Friend? Alberta’s Troubles with The Doctrine of Federal Paramountcy” in Janis P Sarra & Barbara Romaine, eds, 2017 Annual Review of Insolvency Law (Toronto: Carswell, 2018).

[4] Fenner L Stewart, “The Backstory of Orphan Well Association v Grant Thornton Limited: How Much is Still at Stake?” (August, 2018) CBA Law Matters.

[5] Re Redwater Energy Corporation, 2016 ABQB 278.

[6] Jim Ellis, “‘Why we are fighting’: AER CEO Jim Ellis on the Redwater case” June Warren-Nickle’s Energy’s Regulatory Opinion (16 February 2018), online: jwnenergy <http://www.jwnenergy.com/article/2018/2/redwater-casewhy-we-are-fighting/> [Ellis].

[7] Fenner L Stewart, “Supreme Court decision in Redwater was the right result but does not solve Alberta’s orphan well problem” (April, 2019) C.D. Howe Intelligence Memos (April, 2019).

[8] See Canadian Association of Petroleum Producers, 2019 Crude Forecast, Markets and Transport (2019), online <https://www.capp.ca/publications-and-statistics/crude-oil-forecast> [Canadian Association of Petroleum Producers].

[9] See Alberta Oil and Gas Orphan Abandonment and Reclamation Association, “Orphan Inventory”, online: <http://www.orphanwell.ca/about/orphan-inventory/>.

[10] Alberta Oil and Gas Orphan Abandonment and Reclamation Association, “Orphan Well Association 2014/15 Annual Report” (June, 2015) at 4 online: <https://www.orphanwell.ca/wp-content/uploads/2018/01/OWA-2014-15-Ann-Rpt-Final.pdf>.

[11] See Alberta Energy Regulator, Bulletin 2019-09; Alberta Energy Regulator, Bulletin 2018-07; Alberta Energy Regulator, Bulletin 2017-04.

[12] Loan Agreement Between Alberta and the Orphan Well Association (December 30, 2017) online: < https://www.alberta.ca/assets/documents/energy-owa-loan-agreement.pdf> [Loan]. ; and Alberta Energy Regulator, Bulletin 2016-05; and Alberta Government, “Upstream oil and gas liability and orphan well inventory” (2019), online <https://www.alberta.ca/upstream-oil-and-gas-liability-and-orphan-well-inventory.aspx> [Alberta Government].

[13] Loan, ibid; Alberta Government, ibid.

[14] Loan, ibid; Alberta Government, ibid.

[15] Canadian Association of Petroleum Producers, supra note 8.

[16] Alberta Government, supra note 12.

[17] Alberta Energy Regulator, “Orphan Energy Sites”, online <https://www.aer.ca/protecting-what-matters/protecting-the-environment/orphan-energy-sites>.

[18] Bulletin 2016-21 Revision and Clarification on Alberta Energy Regulator’s Measures to Limit Environmental Impacts Pending Regulatory Changes to Address the Redwater Decision, online <https://www.aer.ca/regulating-development/rules-and-directives/bulletins/bulletin-2016-21>