Bankrupt energy companies await key Supreme Court ruling on old oil wells

CALGARY — Trustees for bankrupt energy companies will learn Thursday whether they can refuse to pay clean up costs for old and inactive oil and gas wells in Alberta.

The Supreme Court of Canada is set to rule on whether the trustee for bankrupt Redwater Energy Corp. can hand over the remediation responsibilities for old and inactive oil and gas wells to Alberta’s Orphan Well Association — while still keeping its more valuable wells and facilities, which can be sold to repay the company’s debt.

The case has been closely watched in the Calgary oilpatch and will have major implications across the country’s resource sectors as the Supreme Court will determine whether debt holders have a higher priority over environmental clean-up responsibilities in bankruptcy cases.

• Alberta to crack down on oil executives that dumped orphan wells on taxpayers
• Bankrupt oil companies dump $100 million in clean up costs on Orphan Well Association in under two years
• Major oil companies caught in orphan wells crisis as tiny Lexin Resources goes insolvent
• Appeal allowed: Supreme Court to decide how abandoned oil wells to be handled

The Alberta Court of Appeal ruled in favour of the trustee in April 2017 in a 2-1 decision but the provincial government and Alberta Energy Regulator has challenged that decision.

Notably, Prime Minister Justin Trudeau appointed the lone dissenting judge in that decision, Justice Sheilah Martin, to the Supreme Court in Nov. 2017.

Since the lower court decision, the AER has implemented a series of new regulations that would make it more difficult for insolvent oil and gas companies to disclaim their obligation to clean up old and idle oil and gas wells and facilities.

Analysts expect more regulations will be rolled out after the decision and the AER has confirmed that it is rolling out its new “Remediation Regulation,” replacing the former “Remediation Certificate Regulation,” through 2019.

“Regardless of the decision, we believe the AER (and other jurisdictions) will likely implement new proactive requirements related to abandonment liabilities,” Raymond James analysts wrote in a research note published Monday.

The analysts also believe the decision could have implications for banks, apart from junior and intermediate oil producers’ access to capital.

“If the AER wins, the direction from the banks is going to be bank (credit) lines being cut because these banks will be ranking second behind the abandonment liabilities,” Raymond James analyst Jeremy McCrea said in an interview.

“It means the banks will be assuming these liabilities,” he said.

In some cases, the liabilities could be massive. The AER began tracking the surge in well remediation liabilities handed over to the Orphan Well Association after the Redwater case in 2016 and found a $100 million uptick in just two years.

Additional bankruptcies by firms such as Sequoia Resources Corp. have added to that total and brought new scrutiny on bigger firms like Perpetual Energy Corp. for allegedly selling uneconomic oil and gas wells to smaller firms in attempts to reduce their liabilities.

The Canadian Association of Petroleum Producers has also supported the Alberta government in its attempt to force oil companies to clean up, rather than sell off, old and inactive wells.

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