The Redwater Decision: Can Non-Producing Assets be Renounced in Bankruptcy Proceedings?

 
 
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 Background
Redwater Energy became insolvent in 2015. A receiver and trustee were appointed to sell assets to try and repay the outstanding debts.

Whenever a company wants to sell assets, the transfer of the licence must be approved by the Alberta Energy Regulator (AER). To make a decision on the licence transfer, the AER will assess how the transfer would affect the asset-to-debt ratios of the buyer and seller.

A company’s asset-to-debt ratio is captured in its Liability Management Rating (LMR). At the time of this decision, a licence transfer would not be approved unless the seller’s rating was above 1.0 and the buyer’s rating was not driven below 1.0 by the sale. When a company’s rating falls below 1.0, it must post a security deposit or undertake abandonment and reclamation activities.

Selling Redwater’s producing assets would’ve negatively affected the asset-to-debt ratio, further decreasing their rating and triggering the need to either post a security deposit or undertake abandonment and reclamation activities. Both options would have incurred a cost and reduced the amounts available to pay back creditors, so the trustee made the decision to keep the valuable assets and renounce the rest. Only 20 of the 127 sites were kept. The AER responded by issuing abandonment and reclamation orders to the trustee for the renounced properties.

The AER and OWA wanted an order from the courts to make the trustee use funds from Redwater’s estate to comply with the abandonment and reclamation orders.

Decision
The court determined that a conflict existed between the federal Bankruptcy Insolvency Act and the requirements in the provincial legislation (Oil and Gas Conservation Act and Pipeline Act). The federal legislation enabled the trustee to renounce the non-producing wells, while the provincial legislation did not provide this option. In general, federal legislation is considered paramount to provincial legislation.

Further, the courts said that the provincial legislation “frustrated” the purposes of the federal legislation by preventing the trustee from denouncing assets by creating a priority order outside of the insolvency process, and ordering security deposits or abandonment/reclamation prior to the transfer of licences.

The AER and the Orphan Well Association (OWA) have appealed the decision. An appeal does not provide a stay of the court’s decision. Since the decision was issued, the AER has increased the threshold for licence transfers to 2.0 in an attempt to prevent additional orphan wells.
 
 
 
 
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For more information about the content of this document, contact Jeana Schuurman.
This information published to the web on July 25, 2016.
Last Reviewed/Revised on August 30, 2017.