Appeal over Redwater Energy's idle wells heard this week

Redwater Energy Corp. — the tiny energy company whose bankruptcy made huge waves in the oilpatch — is back in the spotlight as the Alberta Energy Regulator appeals a decision made by a lower court that gave creditors priority over the cleanup of oil wells.

• Creditors get priority over environment in Redwater Energy insolvency: judge

• Bankrupt energy firms add to Alberta's abandoned well problems

The appeal was heard Tuesday in Calgary, with the Alberta Energy Regulator (AER) and Alberta's Orphan Well Association (OWA) arguing that the lower court made a mistake last spring when it ruled that that federal bankruptcy law took priority over provincial environmental regulations.

To give a sense of the far-reaching implications of this appeal, Saskatchewan's attorney general and B.C.'s Ministry of Natural Gas Development, supported the AER in the appeal.

The AER has long said that when a company applies for a well licence, it agrees to take on the costs of cleaning up the well at the end of its life and that obligation is not in conflict with bankruptcy law.

Can environmental rules and bankruptcy law work in harmony?

"The [lower] court found there was a conflict between federal insolvency law and operation of this provincial regime," said David Bish, an insolvency lawyer with Torys.

"Essentially, the AER said the court was wrong, that there is no operational conflict such that the court had to pick one trumping the other. They seem to be suggesting that the two could exist in harmony."

• Saskatchewan, B.C., toughen deposit requirements for cleanup of oil and gas wells

• Alberta looks at different ways of making sure companies clean up old wells

Redwater Energy was a tiny company that went into receivership in 2015, owing $5 million to ATB Financial, a financial institution owned by the province. At the time of its bankruptcy, Redwater had few producing oil and gas wells, as well as many more assets that were not producing and would need to be reclaimed.

Under provincial regulations, proceeds from the producing wells are to be used to pay for cleanup on the old wells. But ATB and Redwater's receiver, Grant Thornton, challenged that rule.

They were looking to sell the producing wells to pay back the loan, and to leave the non-producing wells to be cleaned up by the Orphan Well Association, which is funded by industry.

Alberta vs. Alberta

The lower court ruled in favour of ATB and Grant Thornton, saying that federal bankruptcy law had paramountcy over provincial regulations. That decision allowed Grant Thornton to renounce 100 of Redwater's assets, while putting the other 20 up for sale.

The renounced assets become the responsibility of the Orphan Well Association, which is funded by industry and already has thousands of wells and old pipeline segments to properly abandon and reclaim.

Also arguing in favour of the appeal was the Canadian Association of Petroleum Producers, which funds the OWA, and Alberta Justice.

Interestingly, this case pits two arms of the Alberta government against each other, since ATB Financial argued against granting an appeal, while the AER argued in favour of the appeal, with support from the provinces of B.C. and Saskatchewan, and Alberta Justice.

The Alberta Court of Appeal reserved its decision.

"It's a significant issue," said Bish. "There is always that prospect of a further attempt to appeal, seeking leave to appeal to the Supreme Court of Canada, so I think they will take their time."