https://business.financialpost.com/commodities/energy/bankrupt-energy-companies-await-key-supreme-court-ruling-on-old-oil-wells
Bankrupt energy companies await key Supreme Court ruling on old oil wells
The decision could have implications for banks, apart from junior and
intermediate oil producers' access to capital
Geoffrey Morgan
January 29, 2019 6:15 AM EST
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.
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.