BEFORE IT WENT bust in 2015 Redwater Energy was a small oil-and-gas company in Alberta with 84 wells that few people had heard of. That changed when the accounting firm managing the bankruptcy, Grant Thornton, and the Alberta Energy Regulator began sparring over the disposition of Redwater’s assets. The bankruptcy receiver wanted to sell 17 producing wells, walk away from the rest and put the proceeds toward paying off the firm’s C$5.1m ($3.9m) of debt. The regulator insisted the money be used to properly close and clean up wells the receiver proposed to abandon, even if that exhausted the funds. By the time their legal battle reached the Supreme Court of Canada last year, much of corporate Canada was watching.
The environment won. On January 31st the court’s justices sided with the regulator in a 5-2 decision that reversed a lower court’s ruling and reinforced the principle that polluters must pay. “Bankruptcy is not a licence to ignore rules,” the justices wrote. They were referring specifically to a rule that the Alberta Energy Regulator attaches to operating licences, which states that the holder, if operations are discontinued, must plug and cap oil wells, dismantle surface structures and restore the surface to its previous condition. Since this rule is a provincial one, and bankruptcy law is federal, firms had been treating the federal law, putting financial creditors first, as binding.
The court’s shift has a range of implications, for companies and lenders. The ruling was a victory for the Orphan Wells Association, a group mostly funded by the oil-and-gas industry, whose members are growing tired of cleaning up the mounting mess left by insolvent firms. Orphan wells and related facilities are an increasing problem in Alberta, chiefly because of the slump in the oil price that started in 2014. The association had 162 abandoned wells on its books in March 2014; as of last month it had a whopping 3,127, plus 3,186 pipelines and 296 facilities. It plans to decommission 700 wells this year, which still leaves a hefty backlog.
This problem is mirrored in the mining industry. There are an estimated 10,000 mines in Canada where the owner either cannot be found or cannot afford to pay for a clean-up. At the defunct gold Giant Mine in Yellowknife, for example, taxpayers are currently footing the bill, estimated to be close to C$1bn, to clean up the surface and keep 237,000 tonnes of highly-toxic arsenic trioxide frozen underground. The government is also paying for environmental work at the closed Faro lead-zinc mine in the Yukon, for an estimated cost of C$1bn.
Bankruptcy receivers, lawyers and financial institutions were dismayed by the court’s ruling. They warn that putting environmental claims ahead of financial ones in bankruptcy proceedings may make some lenders hesitant to loan money to any firm likely to have sizeable environmental liabilities. Receivers and lawyers might even become reluctant to act in bankruptcies where environmental bills could wipe out remaining assets along with funds to pay their fees, they argued. But Canada’s energy companies (represented by the Canadian Association of Petroleum Producers), including smaller firms which might normally find it harder to get loans, supported the court’s ruling.
How big environmental liabilities are is a matter of debate. Cleaning up Alberta’s entire oil-and-gas industry could cost a staggering C$260bn, warned Robert Wadsworth of the Alberta Energy Regulator last year. The regulator later backtracked, saying that was a worse-case scenario meant to spur the industry and government into doing more to reduce environmental liabilities, which it said were in fact closer to C$59bn. Among other things, Mr Wadsworth wants timelines set for permanently sealing inactive wells, a new requirement for firms to hand over security deposits for specific wells, and a requirement that they should have to complete an application procedure in order to take wells out of service.
The Supreme Court decision in the case of Redwater Energy will not reduce existing environmental liabilities. But by forcing lenders to consider whether corporate borrowers have the wherewithal to fulfil their environmental obligations it could slow their rise.
This post was originally posted at https://www.economist.com/business/2019/02/04/canada-tackles-the-scourge-of-orphaned-oil-wells.