Supreme Court’s Redwater case forces bankrupt firms’ assets to be used for environmental cleanup before paying creditors
Landowners with abandoned oil and gas wells on their property may benefit from last week’s Supreme Court of Canada ruling that requires companies to pay cleanup and reclamation costs, though it might not happen soon.
In a 5-2 decision, the court ruled that bankruptcy is not a licence for companies to ignore requirements to clean up energy well sites they created or took over from other companies.
“We were pleasantly surprised that they ruled in that way,” said Daryl Bennett of Action Surface Rights based in southern Alberta.
“We were worried about industry’s influence. We thought that (the court) would have some common sense and entrench that polluter pay model and that’s what they ended up doing but there were a lot of people, including a lot of lawyers, that didn’t think they would rule in that way.”
Dubbed the Redwater decision, the case was initiated in 2015 when an Okotoks, Alta.-based energy company went bankrupt with only a few of its approximately 120 wells still productive. Redwater Energy’s lender, ATB Financial, wanted the receiver to sell the remaining assets to pay down the company’s debt, leaving no funds for reclamation of the unproductive assets.
The Supreme Court overturned two lower court decisions that gave bankruptcy laws priority over environmental obligations.
Alberta Energy Minister Margaret McCuaig-Boyd said the province is happy with the ruling.
“We’re pleased and encouraged … that the Supreme Court of Canada ruled in favour of the polluter pay principle, which is critical to Alberta’s role as a responsible energy producer,” she said.
“The court’s decision means Albertans are better protected from the few irresponsible producers and operators in the system.”
The ruling gives the province clear direction to continue its plans to set timelines for cleanup when wells are abandoned, she added.
Timelines and more action are needed, said lawyer Keith Wilson, who represents landowners in cases involving energy companies.
The court ruling provides landowners with legal assurance that oil and gas well owners must pay for closure and reclamation, but he said that doesn’t mean such work will occur.
“In terms of the impact for farmers, it doesn’t have a really big impact because the fundamental core problem … remains unresolved,” said Wilson.
“The core problem is that Alberta and Saskatchewan and British Columbia … do not have timelines for the cleanup, for the down-hole sealing of the well bore and the surface dismantling of the well site and the reclamation of the land back to equivalent capability. So that problem exists in spades in all three provinces, but most acutely in Alberta because we have the longest history. We have the highest number of wells.”
McCuaig-Boyd said the ruling gives impetus to provincial government plans that will see tighter timelines established for well site cleanup and reclamation and might also involve more thorough assessment of energy companies’ financial health before loans are provided.
“(The Supreme Court) announcement was heartening because it said that bankruptcy isn’t permission to break the rules,” she said.
“I think that’s good news and that helps us move forward to work on this issue.”
The Alberta Energy Regulator said in a news release following the Supreme Court ruling that it has already improved some of its licensing approval regulations and is “developing a framework to assess risk using financial, behavioural, and inventory risk factors to identify which companies might be unable to meet their obligations.”
AER president Gordon Lambert said the ruling removes uncertainty created by lower court decisions on the issue.
However, Wilson said he has doubts about any government action being taken because of Alberta’s volatile political climate. With the governing NDP and the opposition United Conservative Party each vying to portray themselves as champions of the energy industry, policies that affect that industry can easily become fodder in this spring’s provincial election.
From a landowner point of view, however, support for the energy industry is not the issue.
“This is not about whether you’re for or against the oil industry. I’m pretty hard pressed to think of any farmer that I’ve represented or know that’s against the oil industry. They support the oil industry,” said Wilson.
“This is about bad policies and it’s about farmers for too long being quiet about it, not wanting to upset the apple cart, wanting to be good players in the system and good participants, good neighbours, good business partners. And their niceness is getting them nowhere right now.”
Bennett said he is also skeptical about substantive changes for landowners.
“Redwater was never about getting more money for the landowners,” said Bennett.
“It was about trying to make the wells safe when these companies went bankrupt and walked away. So it’s not going to change the fact that a lot of companies are going bankrupt and a lot more will, and a lot of them don’t have any resources on hand to pay for the reclamation.
“The government’s been kicking the can down the road for generations. The NDP government, I think, has realized how big of a problem it is, and maybe trying to do something to correct the situation, but it’s just too big for them.”
Estimates on the number of abandoned wells in Alberta vary according to definition. The government says there are 83,000 inactive wells and 69,000 abandoned ones. Wilson estimates there are about 200,000 inactive wells in the province that have no economic potential and thus should be closed and reclaimed.
The recent Supreme Court ruling has fostered speculation that energy companies may now have more difficulty accessing financing.
Wilson rejects that idea, noting that major banks continue to make financing decisions on the assumption that if companies go bankrupt, remaining assets would go toward environmental liabilities. They did so even before the recent court ruling.
“The only people who are not going to get financing (are) the companies that shouldn’t get financing, which is a good thing.”