Alberta seeks to lessen financial hit of Supreme Court ruling on orphan wells

Alberta Premier Jason Kenney has vowed his government will do "everything" it can to mitigate the impact that he says the Supreme Court's Redwater ruling on orphan wells is having on oilpatch investment.

Kenney vows to do 'everything' possible to mitigate effect of Redwater decision

Alberta Premier Jason Kenney says one of the unintended consequences of the Redwater ruling is that it's restricted the oil and gas industry's access to capital and credit. (Justin Tang/Canadian Press)

Alberta Premier Jason Kenney is vowing his government will do "everything" it can to mitigate the impact he says the Supreme Court's Redwater ruling on orphan wells is having on oilpatch investment. 

Earlier this year, the country's top court ruled energy companies must fulfil their environmental obligations before paying back creditors in the case of insolvency or bankruptcy.

Insolvency professionals and banks had both warned prior to the decision that such a ruling could decrease the amount of financing available to the oil and gas industry. 

Speaking to members of Canada's oil well drilling sector this week, Kenney indicated the decision is having a harmful effect on the sector and that his government is working on addressing it.

"We also will be focusing in the next few weeks on doing everything we possibly can to mitigate the unintended consequences of the Redwater decision, which has done so much to restrict access to both capital and credit, equity and credit, for this industry," Kenney said.

He did not provide any further details.

He made the remarks during a "state of the industry" luncheon, hosted by the Canadian Association of Oilwell Drilling Contractors (CAODC) in Calgary on Wednesday.

Earlier, the drillers released their 2020 forecast, which expects drilling activity to remain flat and layoffs to continue while some companies relocate to the United States, taking jobs and equipment with them.

An abandoned oil well awaiting removal.
An abandoned oil well awaiting removal. As of Nov. 1, there were 3,406 orphan wells set to be decommissioned. (Orphan Well Association)

The Supreme Court's ruling in January overturned two lower court decisions that said bankruptcy law has paramountcy over provincial environmental responsibilities in the case of Redwater Energy, which became insolvent in 2015. That meant energy companies could first pay back creditors before cleaning up old wells. In practical terms, that means energy companies could walk away from old oil and gas wells, leaving them someone else's responsibility.

But the top court ruled 5-2 to overturn the earlier ruling. In doing so, it determined that bankruptcy is not a licence to ignore environmental regulations, and there is no inherent conflict between federal bankruptcy laws and provincial environmental regulations.

The Redwater case had been watched closely across the country. Ontario, British Columbia and Saskatchewan all intervened, supporting the Alberta Energy Regulator's position that the polluter must pay for cleanup before creditors are paid back loans.

At the time of the ruling, representatives of the oil and gas sector — including companies both big and small — indicated they were happy with the ruling and said it shouldn't cause too many problems for the junior sector.

But Tristan Goodman, president of the Explorers and Producers Association of Canada, said Thursday the Redwater decision is having a "significant" negative effect on financing, mostly on smaller and mid-sized producers.

He said a balanced approach to the issue is needed.

"The good thing about Redwater is it does ensure that the public is protected to a greater extent — you want to keep that," Goodman said.

"At the same time, you need to find other vehicles to ensure financing of a product that everybody is still demanding can occur. Otherwise, we're gonna be getting this product from external sources rather than our own domestic supply."

Goodman said his association is bringing forward suggestions to the province about how to help the sector following Redwater, though he did not say what those would be.

Alberta has been dealing with a tsunami of orphaned oil and gas wells in the past five years.

In 2014, the Orphan Well Association listed fewer than 200 wells to be plugged. As of Nov. 1, 2019, there are 3,406 orphan wells set to be decommissioned. The tally doesn't include pipeline segments or other orphan facilities.

Kenney also said Wednesday his government would approach the federal government about supporting flow-through shares to accelerate well reclamation, something he said would create jobs, economic growth and help the environment.