The Alberta Energy Regulator said Friday it will appeal to the Supreme Court of Canada a case that pits creditors' rights to oil and gas assets against environmental liabilities.

The lawsuit involving bankrupt Redwater Energy Corp. has been closely watched as a precedent-setting case, as financial difficulties continue to afflict the oil and gas industry after more than two years of low commodity prices.

On Monday, the Alberta Court of Appeal upheld in a 2-1 decision a lower court's ruling in favour of Grant Thornton, Redwater's trustee in bankruptcy, and its lender, ATB Financial, who wanted to sell off its productive wells to pay creditors and leave the others for the industry-supported Orphan Well Association to remediate.

The AER argued funds from the sale of the productive wells must be used to cover cleanup expenses for the unproductive wells, a position backed by appeal interveners from the Alberta, B.C. and Saskatchewan governments as well as the Canadian Association of Petroleum Producers.

The regulator said it was disappointed by Monday's decision, and will continue to press its case that the regulator is not acting as a creditor as it looks to protect the public and the environment.

In their majority decision, two of the appeal court judges found "no errors" in the Alberta Court of Queen's Bench ruling in May 2016 that provincial regulations are in conflict with the federal Bankruptcy and Insolvency Act, and that the latter takes precedence.