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Providing coverage of Alaska and northern Canada's oil and gas industry
February 2019

Vol. 24, No. 6 Week of February 10, 2019

Supreme Court of Canada says bankrupts responsible for cleanup

Gary Park

for Petroleum News

The Supreme Court of Canada ended a drawn-out legal dispute by ruling that bankrupt oil producers can’t walk away from old wells - a verdict that will affect tens of thousands of so-called “orphan” wells across Alberta.

“Bankruptcy is not a license to ignore rules,” Chief Justice Richard Wagner wrote in the court’s 5-2 verdict.

“Insolvency professionals are bound by and must comply with valid provincial laws during bankruptcy,” he said.

A report by the independent C.D. Howe Institute said the potential cleanup costs associated with the liability from inactive wells could be as high as C$8.6 billion and ultimately land on the backs of taxpayers.

A Globe and Mail investigation last year calculated that 20 percent of all oil and gas wells in Alberta, Saskatchewan and British Columbia are inactive, with the number of inactive wells - those that no longer produce but have not been plugged - up 54,147 from 2005. Other estimates put the total of inactive wells at 89,589.

Alberta Energy Minister Marg McCuaig-Boyd told reporters that the court’s decision “means that Albertans are better protected from the few irresponsible producers and operators. Working families across this province should not have to pay for the financial and environmental liabilities left behind when companies walk away from their obligations.”

She would not say when or how the government would revise rules to ensure that taxpayers were not exposed to further risks, beyond pledging that changed will be introduced “soon.”

Long-standing principle

Keith Wilson, an Edmonton attorney who represents landowners in disputes with energy companies, said the Supreme Court has reinforced a long-standing principle that polluters pay in bankruptcy cases.

“But we have a policy and laws that allow companies to postpone indefinitely cleaning up messes and that just causes the problems to get worse from an environmental point of view,” he said.

The Alberta government has offered C$235 million in loans to the industry to accelerate the cleanup of wells when there is no solvent operator.

The industry-funded Alberta Orphan Well Association, OWA, currently takes over remediation when there is no owner left to pay the bill.

OWA Chairman Brad Herald, who is also a vice president of the Canadian Association of Petroleum Producers, said that when a company declares bankruptcy “the value of any assets should go to abandonment or reclamation costs first.”

There is a concern that the court ruling will have some unintended consequences.

Jeremy Opolsky, a litigator and bankruptcy lawyer with the Toronto-based firm of Torys, said it will be harder to finance upstream companies “because secured creditors will have to look at a greater possibility of the lack of recovery in the future.”

Raymond James analyst Jeremy McCrea told the Financial Post the result will be a cut to bank credit lines “because those banks will be ranking second behind the abandonment liabilities.”

- GARY PARK






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