Earlier this year, the Alberta Court of Appeal, in Grant Thornton Ltd. v. Alberta Energy Regulator, 2017 ABCA 124 decided that secured creditors in a bankruptcy should be paid before environmental claims arising from abandoned oil and gas wells. There was a strong dissent and Alberta’s energy regulator is seeking leave to appeal to the Supreme Court of Canada. Ultimately, if the decision stands, it will have a significant impact on who bears the environmental remediation costs of abandoned oil and gas wells.

Redwater Energy Corporation (“Redwater”) was an oil and gas producer, which due to various financial setbacks became unable to pay its obligations owing to the Alberta Treasury Branches (“ATB”), a secured creditor. ATB (which is owned by the Province of Alberta) commenced enforcement proceedings and Grant Thornton (“GT”) was appointed as the receiver and trustee. For some of the wells, the cost of remediation exceeded the value of the well. GT disclaimed Redwater’s interest in the inactive wells so as to avoid liability for the remediation costs while it sought to retain its interest in the active wells to maximize recovery for the secured creditors. Alberta’s Energy Regulator (“AER”) responded by issuing orders requiring GT to fulfil Redwater’s environmental obligations under Alberta’s provincial legislation.

Relying on a trilogy of recent Supreme Court cases, GT argued that Alberta’s provincial legislation effectively created a “super priority” for environmental liabilities that conflicted with the priorities established by the federal Bankruptcy and Insolvency Act (“BIA“). The Court of Appeal ultimately upheld the lower court determination that GT was not required to satisfy the environmental remediation obligations in priority to the claims of ATB. Under the doctrine of paramountcy, where there is a genuine conflict or inconsistency between federal and provincial legislation, federal legislation prevails to the extent of the inconsistency or conflict. The Court of Appeal determined that the provincial regulatory regime operationally conflicted with the BIA by imposing obligations on GT for environmental remediation and by making the transfer of licences for the producing well subject to conditions relating to the orphan wells. In its decision, the Court of Appeal emphasized that provincial legislation cannot intentionally or unintentionally reorder the priority of claims in bankruptcy.

In her dissenting judgment, Justice Martin said that the federal and provincial legislation could be read harmoniously, and that compliance with the provincial regime, while it may affect the value of a corporation’s assets, did not interfere with the priority among creditors. The dissent also acknowledged concerns that the effect of the majority decision would be to create an incentive for corporations to avoid the end-of-life obligations of wells by using insolvency laws. It would transform the “cradle to grave” approach of regulating oil and gas wells into a “cradle to insolvency” and shift the environmental remediation costs onto the Alberta public and other oil and gas producers that pay a levy for abandoned wells.

As it stands, the decision affirms the ability of insolvency professionals to disclaim assets of a insolvent oil and gas producer in order to allow only the valuable assets to be sold for the benefit of creditors. The parties’ materials for the leave to appeal application have now been submitted to the Supreme Court which has discretion to decide which cases to hear based on whether they are deemed to have national importance. Given for the potential increases in the number of disclaimed wells, this decision has significant implications for the oil and gas industry, lenders, and regulators across the country and it will likely be reviewed by the Supreme Court of Canada.