For years, Alberta’s oil and gas regulator (Regulator1) threatened to use its power under section 29 of the Oil and Gas Conservation Act (OGCA) to hold trustees personally liable for a bankrupt company’s abandonment and reclamation obligations (Obligation). It also threatened to use its section 24 privilege to refuse to transfer licences to produce oil and gas from the bankrupt’s wells unless satisfied that the Obligation was met. As between the two sections, the latter was the trump card: no buyer wants a well without the licence to produce from it. Without the licence, the well is merely a hole in the ground.
In 1997, the federal government amended the Bankruptcy and Insolvency Act (BIA). Afterward, trustees believed that sections 24 and 29 of the OGCA were unconstitutional, and that they were free to conduct their business without regard for the Obligation. For almost 20 years, the Regulator occasionally rattled its sword, but no litigation of the issue resulted. Then, in 2016, Chief Justice Wittmann read down the offending legislation. The Regulator appealed to the Alberta Court of Appeal, but lost. It then appealed to the Supreme Court of Canada (SCC). This decision is still pending.
Environmentalists and landowners watched these in dismay as trustees and receivers disclaimed or renounced assets to the Orphan Well Association. In February 2018, the CEO of the Regulator lamented that, since the judgment, more than $110 million had flowed from the Obligation’s regime to creditors.
The Regulator warns that if the SCC upholds the decision, its Obligation regime will be destroyed, leading to greater turmoil and havoc. Meanwhile, Alberta’s insolvency community suggests if the SCC overturns it trustees will be forced to refuse mandates that involve environmentally damaged properties. As a result, future bankruptcy proceedings in Alberta will be undermined. However, as the circumstances leading to this litigation – and their fallout – reveal, neither is correct. The SCC’s decision will have little impact on either.
This article asserts that only one issue truly hangs in the balance, and the rest is just a distraction. The issue is whether the SCC will reverse the lower court’s removal of the disinterested regulator defence. Without this defence (or something similar), a regulator is robbed of its capacity to enforce the public interest upon a bankrupt party when such enforcement depletes the assets that are otherwise available to creditors.
Regulatory compliance always costs money. As a result, detangling debt enforcement from other types of enforcement actions is not as easy as some might assume. Bankruptcy should free one from debt obligations, allowing for a fresh start. However, doing so should not come at the expense of disinterested regulators, who are merely enforcing the public interest.
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Framing this case in proper context begins with an explanation of why it took 20 years for this litigation to occur. The Regulator has always consented to the transfer of a well licence if the buyer accepts the Obligation. Things ran smoothly, because buyers agreed to accept it as standard practice. But why did they agree? One suggestion is that a well inactive today may become a producer tomorrow when the market improves. However, an empirical study has established that such reactivation in Alberta is so rare that this explanation lacks credibility.2 Another is that Alberta law has never required a time frame for the Obligation to be completed, meaning a buyer could produce from the good wells and ignore the Obligation. The legislature created this loophole; the Regulator had to abide by it; and business calculated its risk based on it. So, the buyers regarded the Obligation as a low risk. Thus, the whole system ran smoothly… that is, unless you were a landowner with inactive wells on your land.
The other piece of this story is the rise of hydraulic fracturing. Prior to hydraulic fracturing, economists confidently predicted $200 per barrel in the near future. Then fracked crude – particularly from Texas – flooded the global market. Prices plummeted. Texas crude demonstrated that global oil reserve projections were grossly underestimating future supply. Texas crude was high quality, and cheap to produce. Soon, Texas production tripled.3
Texas crude sobered Alberta well-buyers, who started to doubt the wisdom of taking the Obligation along with a bankrupt company’s other assets. Long before the 2017 CD Howe report estimated the cost of the total Obligation could be over $8 billion,4 the Alberta industry feared this market change could trigger regulatory failure. Bankruptcies spiked. Foreign investors fled. Even the bravest had their risk appetite satiated before they contemplated accepting the Obligation of bankrupts. Then it happened. ATB Financial was edgy to liquidate Redwater’s assets, and a buyer refused to accept the Obligation. The Regulator entrenched; the trustee pushed back. Next thing, Chief Justice Wittmann was adjudicating the matter.
So, what are the remaining stakes of the SCC’s judgment? A few big ones can be crossed off the list. First, creditors are still petitioning companies into bankruptcy or receivership while the going’s good (relatively speaking; it is never the creditor’s favoured option to have its debtor insolvent), but much of the dead weight has cleared. Moreover, oil markets have adjusted, prices have increased, the cost of production (and transport) is optimizing, and foreign investors are regaining interest in Alberta oil development. In other words, the market has stabilized and the damage is done. The SCC decision cannot change this fact. Second, the regime imposing the Obligation has failed catastrophically, and needs a complete rebuild regardless of the SCC’s judgement. Third, the SCC will read down section 29, but trustees were de facto never really exposed to its liability anyhow – it was always a side show.
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The only true stake left is a legal one: the salvage of the figure Justice Gascon described as the “disinterested regulator.” The disinterested regulator is Chief Justice Laycraft’s vision of the regulator from the infamous Northern Badger case – that is, infamous at least in insolvency circles.6 This regulator simply enforces the law. It is not a creditor and is not enforcing a debt. Ergo, the regulator is disinterested, and its provincial authority remains, shielded from the doctrine of federal paramountcy. Put differently: if saved, the notion of the disinterested regulator rebuts the claim that a regulator abuses the law to take money that rightfully belongs to creditors, thereby frustrating the BIA. (Which is, in fact, what the disreputable regulator did in both of the leading cases some see as challenging Northern Badger.7)
However, the lower courts interpreted the SCC in AbitibiBowater as having overturned Northern Badger and, thus, the disinterested regulator defence. Without such a defence, a regulator must overcome the three-part test in AbitibiBowater, that is: (1) a bankrupt must owe an obligation to a creditor (i.e., “creditor requirement”); (2) the obligation must have incurred before bankruptcy (i.e., “timing requirement”); and (3) a monetary value can be attached to the obligation (i.e., “monetary requirement”).8 The SCC explained the application of the creditor requirement as follows:
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At this first stage of determining whether the regulatory body is a creditor, the question of whether the obligation can be translated into monetary terms is not yet relevant. This issue will be broached later. The only determination that has to be made at this point is whether the regulatory body has exercised its enforcement power against a debtor. When it does so, it identifies itself as a creditor, and the requirement of this stage of the analysis is satisfied. [emphasis added].9 |
Respectfully, delaying consideration of the monetary requirement is problematic, since a regulator becomes a creditor as a presumption of fact. If a regulatory body is exercising any enforcement power against a debtor, it is a creditor. Bracketing the monetary issue means a regulator is a creditor when it exercises authority, since the regulated party is always a debtor in bankruptcy cases. Ergo, the regulator is always a creditor.
I have argued that the AbitibiBowater and Northern Badger decisions complement each other, and thus the disinterested regulator defence ought to be preserved.10 If the judgment of the lower courts remains, future courts will be led to conclude that a regulator is never disinterested. Respectfully, this conclusion defies both co-operative federalism and common sense. In reality, most regulators enforce the law without any nefarious, self-interested ends. Surely the lower courts did not intend this consequence, but that is now how the law stands. If the law remains unchanged, I predict that it will prove problematic in the future.
In the end, the critical issue is whether the SCC untangles what has been done, thereby providing proper guidance for future courts to identify disreputable regulators from disinterested ones. For more analysis, you can read my articles on the topic.11
Dr. Fenner L. Stewart is an associate professor at the University of Calgary, and the 2018 Dentons Canada LLP Research Fellow in Energy Law and Policy.
1 When using the term “Regulator” in this article, I am also referring to the Alberta Energy Regulator’s predecessors as well, since it has only existed since 2013.
2 Lucija Muehlenbachs, “80,000 Inactive Oil Wells: A Blessing or A Curse? (2017) 10 SPP Briefing Paper, online, School of Public Policy: <https://www.policyschool.ca/wp-content/uploads/2017/03/Inactive-Oil-Wells-Muehlenbachs-1.pdf>.
3 James W Coleman, ‘Pipelines & Power-lines: Building the Energy Transport Future’ 79 Ohio St Law Journal (forthcoming 2019).
4 Benjamin Dachis, Blake Shaffer, & Vincent Thivierge, ‘‘All’s Well that Ends Well: Addressing End-of-Life Liabilities for Oil and Gas Wells” CD Howe Institute Commentary No 492 (2017), online: CD Howe Institute <https://www.cdhowe.org/sites/default/files/attachments/research_papers/mixed/Commentary_%20492_0.pdf> [Dachis, Shaffer, & Thivierge].
5 AbitibiBowater inc. (Arrangement relatif à), 2010 QCCS 1261, [2010] QJ 4006 at para 176.
6 PanAmericana de Bienes y Servicios v Northern Badger Oil & Gas Limited, 1991 ABCA 181, 81 DLR (4th) 280.
7 See Newfoundland and Labrador v AbitibiBowater Inc, 2012 SCC 67, [2012] 3 SCR 443, and Alberta (AG) v Moloney, 2015 SCC 51, [2015] 3 SCR 327 [AbitibiBowater].
8 AbitibiBowater, ibid. at para. 26.
9 AbitibiBowater, ibid. at para. 27.
10 Fenner L Stewart, ‘Interjurisdictional Immunity, Federal Paramountcy, Co-operative Federalism, and the Disinterested Regulator: Exploring the Elements of Canadian Energy Federalism in the Grant Thornton Case’ (2018) 33 Banking & Finance Law Review 227 at 258-261 [Stewart].
11 Stewart, ibid.; Fenner L Stewart, ‘How to Deal with a Fickle Friend? Alberta’s Troubles with The Doctrine of Federal Paramountcy’, in Janis P. Sarra and Barbara Romaine, eds., 2017 Annual Review of Insolvency Law (Toronto: Carswell, 2018) 163.