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Abandoned wells case making way to Supreme Court

Posted on February 14, 2018 by Taber Times

By Trevor Busch
Taber Times

An Alberta Court of Queen’s Bench decision from 2016 that allows energy companies to abandon wells during bankruptcy proceedings without having to clean up the sites is being challenged tomorrow in the Supreme Court of Canada.

Appearing as an intervener in the appeal, representatives of the Action Surface Rights Association (ASRA) are hopeful the court reverses a decision that has had serious impacts for landowners and Alberta’s oil and gas industry.

“The law of the land has been that the polluter pays. We’ve got legal arguments that suggest that the majority judges were wrong in how they applied the Vacancy and Insolvency Act,” said local farmer Daryl Bennett, who serves as a representative of the ASRA. “So I think we have a fairly good chance.”

The 2016 ruling — known as Redwater Energy, based on the case involving the bankruptcy trustee of Redwater Energy Group — essentially directs that the assets of bankrupt energy companies should go to compensate creditors rather than be used for environmental clean up costs. The Alberta court ruled that federal bankruptcy laws supersede provincial environmental regulations. Since that decision, more than 1,800 wells representing more than $100 million in liabilities have been abandoned.

The appeal is being led by Alberta’s energy regulator, but also involves as interveners various banking institutions and other organizations.

“CAPP, the Canadian Association of Petroleum Producers, is actually on the regulator’s side, because everyone’s saying if we don’t overturn this, this is going to be a disaster, because all of these companies — there’s 300,000 wells — that they could just dump on the Orphan Well Association,” said Bennett. “Right now the Orphan Well Association handles about 3,500 wells. That’s what’s in their inventory, and they’d be lucky to reclaim 50 per year. There’s about 150,000 inactive, and there’s about another 150,000 that aren’t producing royalties for the province, they aren’t producing very much at all. This Redwater decision creates an incentive just to dump them onto the Orphan Well Association, and then to the taxpayer, because clearly the Orphan Well Association doesn’t have the money to handle that type of backlog of orphan wells.”

While checks and balances are supposed to be in place, landowners cannot become secured creditors for oil and gas wells on their property. Bennett suggests protections are being ignored by representatives which is causing problems for landowners.

“That’s interesting — there are safeguards in the system, the Orphan Well Association does exist, it’s supposed to clean up wells, and the Minister of Finance is supposed to continue to pay landowners their annual rental. Landowners are protected in that way, but what we’ve seen is receivers are coming in saying we don’t have to follow any of the terms of the lease. We don’t have to wash equipment, we can go wherever we want, they’re not taking care of the weeds, the Orphan Well Association doesn’t take care of the weeds, some landowners can’t get mortgages on their land anymore because of contamination, the banks won’t lend them money against that land.”

The fallout from the Redwater decision should it not be reversed could see backlogs for site clean up escalating dramatically into the range of multiple decades before oil and gas sites are reclaimed. The responsibility of who is to pay would largely be foisted on the taxpayer.

“It’s going to create a huge delay, so where you might have had your well reclaimed in four or five years, you’re probably looking at 20 or 30,” said Bennett. “You don’t know who is on the land, you don’t know the contractors that might be coming, you don’t know if the well is safe, nobody’s checking up on it really to make sure there’s no leaks. There’s a food safety concern, there’s a farmer safety concern — it just creates a much larger headache, and greater delay and uncertainty until these wells are cleaned up. If they ever are, because the problem is if this is dumped onto the Orphan Well Association — 300,000 wells —taxpayers don’t have the money to pay, the Orphan Well Association doesn’t have the money to pay, so what’s going to happen?”

Bennett suggests the prevailing situation in Alberta with regard to landowners and abandoned or inactive oil and gas sites is serious concerns over safety and contamination.

“You have to understand as well that some wells have been abandoned for 40 years, farmers don’t even know they’re there. But a lot of the new orphans now, there’s battery sites, there’s leaky tanks, there’s oil on the ground, there’s facilities, there’s valves, are they turned off? Is there sour gas? The new breed of orphans where the company just walks away and doesn’t do anything, those are dangerous situations, and that’s what we’re really concerned about.”

Increasing bankruptcies throughout the oil and gas sector in the wake of Redwater energy, which allows companies going into bankruptcy to avoid costly clean-up liabilities, prompted the Alberta Energy Regulator to appeal the Alberta court decision. Locally, Bennett has witnessed some of the impacts the decision has had for property owners.

“Neo Exploration went bankrupt, there’s probably 50 or 60 wells around here, they’ve all been suspended now. Tuscany Energy’s gone bankrupt, there are other companies that are going bankrupt or are close — I can’t say their names, I don’t want to be sued, but they are going bankrupt — there’s hundreds of wells around here that landowners are just starting to realize. A lot of the colonies (Hutterites) are getting notices that the company is just walking away, they’re declaring bankruptcy, they’re owed lots of money. And we’re talking large sums of money, and the problem is the landowner has to apply every year, which normally the rent just comes. Now they have to make an application to the Surface Rights Board. There’s a two year delay to even get your application processed.”

When bankrupt energy companies refuse or can’t make lease payments to landowners, the trickle-down effect produces undue impacts on those individuals at the bottom of the financial food chain, asserts Bennett.

“Another impact is a lot of these landowners, the well payment doesn’t go to them, it goes to a bank that holds the mortgage on the land. It automatically goes to them, there’s a direction to pay, they never see the money. Now all of a sudden the bank is saying, ‘Um, where’s the money that’s supposed to be coming in, we didn’t get that well payment, you owe us $8,000 or $10,000’, and a lot of landowners don’t have that set aside. So that’s causing some problems as well.”

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