Bankrupt oil and gas companies must fulfill provincial environmental obligations before paying anyone it owes money to, the Supreme Court has ruled, overturning a lower court decision in the legal saga of Alberta’s Redwater Energy Corp., and marking major implications across the country’s resource sectors.
The 5-2 Supreme Court decision on January 31, 2019 in the case of the Orphan Well Association, Alberta Energy Regulator (AER) v. Grant Thornton Limited and ATB Financial, was highly anticipated across Alberta, where some 450,000 inactive oil and gas wells have been abandoned. It has left intense pressure on oil and gas companies to undertake expensive remediation work.
The case has been widely viewed as a test of the “polluter pays” principle, and the ruling suggests that money left over from Redwater’s assets must now be used to clean up the wells it left behind.
“Most of Redwater’s wells were dry when it went bankrupt,” the Supreme Court’s communications team states in its case summary. “Dismantling the sites and restoring the land would have cost millions of dollars more than they were worth. To avoid paying these costs, the trustee decided not to take responsibility for (basically, to disown) the useless wells and sites.”
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The ruling may eventually impact other provinces that are also dealing with massive backlogs of wells in need of remediation, and affect the environmental liabilities of other industries, such as mining. AER-verified calculations estimate Alberta’s current total of accumulated environmental liability at $58.65 billion.
Alberta’s Minister of Energy, Marg McCuaig-Boyd, reacted on social media to last week’s Supreme Court ruling: “We’re pleased and encouraged by today’s Supreme Court ruling. Everyday folks shouldn’t be left with the tab when operators walk away from cleanup of old wells. Vast majority of companies are responsible – need protection from the few bad actors.”
The Alberta Court of Appeal ruled in favour of Redwater in April 2017 in a 2-1 decision, but the provincial government and AER challenged the decision. Grant Thornton, trustee for Redwater, had previously argued that federal bankruptcy laws should prioritize the rights of creditors and allow the firm to focus only on Redwater’s economically viable oil and gas wells, so it could sell those assets to repay debtors.
When Redwater went bankrupt in 2015 with 17 producing wells, it argued that creditors, such as the banks that lent it money, should collect what they were owed prior to any leftover funds being used to pay for any environmental cleanup.
Abandoned wells have typically been handed over to the Alberta’s Orphan Well Association for remediation.
In a statement following the decision, the AER announced that it “is steadfast in our belief that the public should not be on the hook for the closure and reclamation costs of insolvent licencees.” It added that, “with the decision now in hand, we can align our plans with the court ruling as we continue to build a new liability management framework.”