All sides will win under recent orphan well ruling

Last week’s Supreme Court decision establishing that bankrupt oil companies cannot renounce their environmental responsibilities strikes the appropriate balance between economic opportunity and the environment.

The 5-2 decision released Jan. 31 means that trustees who oversee disbursement of assets belonging to insolvent companies must first use the proceeds from those assets to clean up abandoned oil and gas wells before paying secured creditors. This gives the polluter-pay principle real teeth.

The case centred around Redwater Energy Corp., which became insolvent in 2015, leaving 127 wells, most of which were abandoned or not profitable. Twenty wells were still commercially viable. The trustee argued that it should not be responsible for cleaning up the abandoned well sites and instead sought to direct funds from assets sold toward secured creditors.

Two lower courts agreed with the trustee, but an appeal to the Supreme Court clarifies the issue.

Many of these wells are on farmland, and it’s important to note that farmers cannot deny access to oil or gas where companies hold the mineral rights.

The Orphan Well Association, which is funded by the oil and gas industry and the province, lists more than 1,550 wells in need of reclamation in Alberta and more than 3,100 are abandoned, along with more than 3,100 pipeline segments. There are hundreds more sites in Saskatchewan.

It’s thought that there are about 155,000 wells in Alberta alone that will eventually require reclamation. The estimated cost of cleaning up each well is more than $300,000.

Many abandoned wells were owned by smaller oil companies who, until this decision, could make money when oil prices were high and declare insolvency when wells were no longer profitable and thus leave the wells abandoned. That may not have been the plan, but in many cases, that is what happened.

The ruling noted that “the end-of-life obligations the regulator (the appellant) seeks to enforce against Redwater are public duties.… These public duties are owed, not to a creditor, but, rather, to fellow citizens.…”

Canadians should welcome a ruling with such an emphasis.

It will take years for the decision to play out. The legal firm Osler noted there are several important implications of the decision.

While the decision concerns an Alberta firm, “this decision will impact the regulation of natural resources across Canada, and the financing sources available to industry participants,” the firm’s analysis concludes.

As well, lending rules and attitudes may change. Oil companies, especially smaller firms, seeking access to funds for investment to develop wells, will have to build environmental clean-up costs into their business plans.

Companies will likely have to set money aside to reclaim properties out of operating costs, lowering annual profits.

Regulators will have to pay closer attention to how oil and gas companies work.

Members of boards of directors of oil and gas companies will have to focus due diligence on environmental obligations and the financial duties that go with them.

These are sensible outcomes. There need not be a win-lose situation here. The oil industry is not being punished. It’s not being restrained. It is simply being told to clean up after itself.

Oil and gas extraction represents seven percent of the national gross domestic product, so some might lament that there may be lost opportunity as a result of the decision, but there is also a cost to environmental damage.

Public policy should encourage development of Canada’s natural resources, but not at the expense of the larger public good.

So, oil companies must now develop business plans that make money, reward shareholders and reclaim the environment in their wake.

It’s an enlightened position that should be good for Canadian farmers.

Karen Briere, Bruce Dyck, Barb Glen, Brian MacLeod and Michael Raine collaborate in the writing of Western Producer editorials.

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