Where to from here? More Green Regs and Ham in Calgary (October 24, 2019)

Where to from here? More Green Regs and Ham in Calgary (October 24, 2019)

Where to from here?

More Green Regs and Ham in Calgary (October 24, 2019)

On October 24, 2019 the Environmental Law Centre (ELC) hosted its Calgary Green Regs and Ham event. (Spring 2020 will see our law and policy breakfast feast in Edmonton). The breakfast discussion included a review of the impacts of the Redwater decision (Orphan Well Association v. GrantThornton Ltd., 2019 SCC 5) and ensuing legal and practical challenges faced by the industry, the environment, and the public purse.

A Very Brief and Simplified Overview of the Redwater Decision

The Redwater decision (Orphan Well Association v. GrantThornton Ltd., 2019 SCC 5) was issued by the Supreme Court of Canada on January 31, 2019. In this case, Redwater was an Alberta oil and gas company that went bankrupt in 2015. At that time, Redwater owned over one hundred wells, pipelines and other facilities. Most of the wells were dry which meant that dismantling and restoring the sites would cost millions more than than they were worth.

 

In the course of the bankruptcy proceedings (under the federal Bankruptcy and Insolvency Act), a trustee was assigned and it decided to disown certain wells and sites that had limited value and which had pre-existing liabilities arising from regulations for abandonment and reclamation of the sites. The intention was to sell any productive wells and sites, and to distribute the funds to creditors. The Alberta Energy Regulator (AER) took the position that the trustee could not simply disown the worthless wells and sites, and directed the trustee to abandon the wells in accordance with regulatory requirements.

 

The matter made its way to court to resolve two issues:

 

  • Was the trustee able to simply disown the worthless wells and sites under the Bankruptcy and Insolvency Act? In effect, keeping only the profitable assets as part of the bankrupt estate for distribution to creditors and leaving the worthless assets to be abandoned by the Orphan Well Association (or the public purse). A central argument in this regard was that the regulatory orders of the AER would frustrate the purpose of the federal bankruptcy law and therefore was unconstitutional.

 

  • What was the status of the AER’s abandonment orders? Were the abandonment orders provable claims meaning that the abandonment costs were to be treated like other debts owing by Redwater?

 

The Court of Queen’s Bench found that the trustee could walk away from the worthless wells and sites, and that the AER’s abandonment order was a provable claim. The majority at the Court of Appeal agreed.

 

However, the majority of the Supreme Court of Canada (SCC) disagreed with the lower courts and said the AER and OWA were not to be treated as creditors, rather the AER’s orders were public duties owed by the bankrupt estate. The SCC found that regardless of any power to disclaim property that the public duty to comply with environmental orders continued. The result is that any money obtained by the trustees by sale of the productive wells and sites must first be used to meet the abandonment obligations, and then any remaining funds can be paid to Redwater’s creditors.

 

ELC Executive Director Jason Unger started the morning by providing some context for the morning’s discussion. He pointed out that there are currently about 176,000 active wells in Alberta along with approximately 90,000 inactive and 77,000 abandoned wells. Estimates of liabilities associated with oil and gas wells in Alberta range from $4 billion to $260 billon. Regardless of the “right” number, the ELC’s goal is to see effective implementation of the polluter pays principle where the polluter bears the costs of these liabilities rather than the environment or the public.

Jason noted that land owners, both private landowners and the Crown, continue to face challenges in having obligations met by insolvent (or near insolvent) operators. Municipalities, it was further noted, are also typically high on the list of creditors owed money in bankruptcy proceedings with municipalities having heavily relied on industry taxation.

The landscape of liabilities has been shifting, some might say seismically, over the past 5 years, and the focus of the discussion was on assessing our current tools and how we might move forward.

Lars De Pauw, Executive Director of the Orphan Well Association (OWA), which is a non-profit, delegated authority of the Alberta Energy Regulator (AER) to manage wells for which there is no longer an operator (typically as a result of insolvency).   The OWA manages orphan wells which are those wells for which there is no legally responsible or financially viable party. The OWA works to safely decommission orphan oil and gas wells, pipelines and production facilities, and to restore the land as close to its original state as possible.

De Pauw noted that, in 2018, the OWA saw a large influx of new orphan wells (about 2,100 wells). He indicated that there may be changes made to the OWA mandate (possibly including expanding the scope to include large orphan facilities). He also mentioned that some savings in decommissioning wells have been achieved by proceeding on area based approach which allows for economies of scale and efficiencies by dealing with similar wells in the same time frame.

Keely Cameron, a lawyer with Bennett Jones, discussed highlights of the Redwater decision. She noted that the decision only considered the Liability Management Rating (LMR) and Licensee Liability Rating (LLR) programs of the AER which are used to determine what, if any, security requirements apply and to determine if transfer of well licences is permitted. These programs assess a company’s deemed assets (production) to its deemed liabilities (abandonment and reclamation costs) expressed as a ratio. A ratio below certain levels means security for potential abandonment and reclamation costs will be required and may place limitations on transfers of well licenses. Cameron noted that other programs, such as the Mining Financial Security Program, were not considered in the Redwater decision.

Cameron pointed out that the Supreme Court of Canada in Redwater found the AER’s LMR/LLR program to be consistent with the polluter pays principle. Importantly, the Court found that the AER was not acting as a creditor when applying the LMR/LLR program or enforcing abandonment orders. This meant that the AER’s regulatory framework and related orders had to be complied with and were not subject to being treated as a “provable claim” in the bankruptcy process. The Court held that a regulator must demonstrate that it is acting in the public interest (and not for a personal benefit to the regulator) when enforcing a regulatory requirement in order to not be considered a creditor. The Court also stated that there is a need to amend the Bankruptcy and Insolvency Act to directly address this issue (although, unfortunately, the Court did not specify how).

Cameron concluded that, while this was the right decision from a policy perspective (i.e. applying the polluter pays principle), the decision has not increased certainty in practical terms. A regulator needs to tread carefully about negotiating with a receiver for the enforcement of an order. Negotiation may lead to a regulator acting more like a creditor and less like a regulator strictly enforcing a regulatory order.

Cameron noted that, in Alberta, some changes have followed directly from the original Redwater decision. There have been changes to LMR requirements with respect to transferring well licenses and to Directives 11 and 67. In addition, the provincial government has been working on a liability review.

The discussion with the audience revolved around numerous questions of transparency of the amount of liabilities that Alberta faces in relation to existing and potential orphan sites and how to pay for them. The issue of transparency, while recognizing it was likely impossible to get an accurate number, is important to inform public discourse around potential future regulatory changes.

Further, it was noted that industry funding for the OWA was set to continue to rise in the next couple of years.  The sufficiency of that funding was questioned.

The ELC concluded that the scope and scale of liability requires regulatory changes so that we do better in applying the polluter pays principle as we move forward. Therefore there are two key tracks of policy work to be done: one dealing with the legacy of sites we have on our doorstep and the other to ensure future orphaned sites are limited.

A huge thank you to our distinguished speakers, to our sponsors and, of course, all our wonderful supporters. See you next year for another serving of green regs and ham!

Want to keep the discussion going? We’d love to hear your respectful and thoughtful comments below. (The ELC moderates all commentary and reserves the right to refuse to post comments we deem to be disrespectful.)

We’ll be continuing to watch these issues as they unfold and encourage you to subscribe to our blog for further updates and analysis.

Please join us in Edmonton in the spring for our next Green Regs and Ham! (If you subscribe to the blog, you will get notifications when the date, speakers and topics are determined – and if you have suggestions for topics or speakers, please also comment below).

 

 

ABOUT THE ENVIRONMENTAL LAW CENTRE:

The Environmental Law Centre (ELC) has been seeking strong and effective environmental laws since it was founded in 1982. The ELC is dedicated to providing credible, comprehensive and objective legal information regarding natural resources, energy and environmental law, policy and regulation in Alberta. The ELC’s mission is to educate and champion for strong laws and rights so all Albertans can enjoy clean water, clean air and a healthy environment. Our vision is a society where laws secure an environment that sustains current and future generations.

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