Five years after the Supreme Court of Canada’s landmark decision in Orphan Well Association v. Grant Thornton Ltd., restructuring and insolvency experts say lenders, debtors, and creditors are still grappling with the fallout.
Often called the “Redwater” case, the dispute at the heart of Orphan Well involved Redwater, an oil and gas company that had gone bankrupt. Under Alberta law, oil and gas companies are required to take down wells, pipelines, and other facilities once they’ve finished operating at a well site, and clean up the land.
Because cleaning up Redwater’s well sites would have cost millions of dollars more than the wells were worth, the trustee managing the company’s insolvency attempted to disown the sites and focus on selling productive wells to repay creditors instead.
Alberta’s energy regulator ordered Redwater to dismantle its unused wells. The SCC majority sided with the regulator in its 2019 decision and determined that the regulator could require Redwater to meet its clean-up obligations using money made through sales of the company’s assets. In effect, the ruling gave the energy regulator’s order super-priority status over repaying Redwater’s other creditors.
The impact of the SCC’s decision has been twofold, says Kelly Bourassa, a partner at Blake, Cassels & Graydon LLP who represented the senior lender in Redwater’s receivership proceedings and acted as lead counsel in the SCC case.
“The impact came first on the lending side, in terms of lenders into the oil and gas industry taking a closer look at how they were valuing oil and gas collateral, and how they were accounting for abandonment and reclamation obligations in that exercise,” Bourassa says.
“From the perspective of insolvency, it did change the landscape in terms of who could seek relief under bankruptcy law,” she says.
Prior to the Redwater decision, receivers in an oil and gas insolvency proceeding could sell some assets to recover what funds they could for creditors. The Alberta Energy Regulator has since taken the position that in debtor and creditor-initiated insolvencies, a debtor company must address all of its environmental obligations before creditors can recover any funds.
In practice, this means the energy regulator has generally been reluctant to approve piecemeal sales in insolvency proceedings. When oil company Bow River Energy sought bankruptcy protection in 2020 and found purchasers for more than 90 percent of its operating assets, for example, the AER contested the transaction because it believed the sale would not fully address Bow River’s outstanding environmental obligations.
The AER also expressed concern that the sale would leave the Orphan Well Association – the industry-funded organization that closes Alberta oil and gas sites without financially viable owners – to deal with the remaining liabilities.
“The Alberta Energy Regulator and the Orphan Well Association have said, if you have an oil and gas company and you’re marketing the assets for sale, you’ve got to find someone who will take all of the assets, or you have to creatively sell them in a way that you effectively sell the bad assets first and then sell the good assets at the end,” Bourassa says. “But you have to somehow bundle it all together. You can’t leave anything behind.”
These circumstances have hit junior oil and gas companies particularly hard. Because smaller companies tend to have fewer producing wells, or assets, relative to their environmental obligations, “it became a matter of getting pretty creative to be able to find an exit where someone would be willing to take on all of the assets, but also all of the abandonment and reclamation obligations of a company,” Bourassa says.
But the AER’s stance on piecemeal sales has impacted the insolvency process for companies of other sizes too. Keely Cameron, a partner at Bennett Jones LLP who represented the AER in the Redwater case, says in cases where stakeholders are unsure that a sales process run during an insolvency will result in the sale of all assets, “there’s less of a willingness to even commence a formal [insolvency] filing.”
“Otherwise, they’re just incurring further costs and losses with no chance of recovery,” Cameron says. “In Alberta, for example, we’ve seen a growing number of insolvencies which end up being commenced by the… Orphan Well Association” rather than by creditors.
The SCC decision has created “challenges for winding off energy companies when a company is struggling” unless “they have that certainty that they have a buyer for everything,” Cameron says.
Like Bourassa, Cameron says the Redwater case has also made it harder for oil and gas companies to borrow money. The task has generally “become more difficult, especially if you’re looking for longer-term financing,” Cameron says. “Short-term financing is still somewhat available but potentially more expensive given the heightened risk to lenders.”
While lenders have always considered regulatory compliance, Cameron says many are focusing more on the issue post-Redwater.
Adding to the challenges of navigating these issues is that the scope of the Redwater decision remains uncertain. In recent years, Bourassa says, “there have been parties to proceedings who seek to either expand the application of the Supreme Court of Canada decision or seek clarity as to the application of it.”
One of these cases involving Mantle Materials Group, for example, broached the question of whether the priority of environmental obligations in insolvency proceedings applies beyond the oil and gas industry. In another case, Qualex-Landmark Towers v. 12-10 Capital Corp., the Alberta Court of Appeal confirmed that the super-priority status given to environmental obligations does not extend to private litigants.