Originally posted 28 February 2019
At the Supreme Court Hearing on 15 February 2018, there were two significant interventions which, in hindsight, revealed where the Court was to land. These interventions were by Madame Justice Suzanne Côté and Madame Justice Rosalie Silberman Abella.
The central question of course was whether the “polluter pay” principle would be overridden by the federal insolvency and bankruptcy law as two lower courts had held.
For me the most compelling argument to support the polluter-pay principle was the knowledge of creditors, investors and corporate officials that a receipt of a license from the Alberta Energy Regulator required the to remediate the spent oilfield infrastructure. The exchange between Justice Russell Brown and OWA Counsel Lenz is instructive:
Justice Brown: I mean aside from sort of anecdotal evidence or anecdotal statements, is it clear on the record that the lenders in Alberta know about these conditions?
Mr. Lenz: Well there is some evidence that ATB had it in its lending guidelines in this particular case. But in addition, it has been the law of Alberta for 25 years set down by the Court of Appeal. That decision has been considered 30 times.
It seems though that industry officials and creditors’ counsel made the dangerous assumption that the regulator would not enforce the obligation. This in turn led to an industry practice whereby the sale of low production wells became a form of speculation in fluctuating oil and natural gas prices. Whether the Regulator “got religion” shortly after the NDP government began to understand the resource it was managing, is obviously speculative.
The argument made to the Court by AER counsel Ms. Keely Cameron that Alberta had enacted a sophisticated “cradle-to-grave” was cited earlier on in Chief Justice Wagner’s majority opinion (at para 1). More importantly was Cameron’s submission that the AER was not acting as a creditor:
Counsel AER
Source: Canadian Lawyermag.com
Ms. Keely Cameron: this is not a case where the regulator is trying to obtain a personal gain here. They are not trying to get access to this property, it’s not their property they’re trying to get cleaned up, this truly is a disinterested regulator trying to enforce safety obligations, which is what abandonment obligations are, the requirements to ensure a well is properly plugged and the equipment is dismantled to ensure that no environmental conditions arise and no release occurs that could create public safety and environmental issues.
This was one of the elements that differentiated this case from the AbitibiBowater. In the Redwater case there was no certainty these wells would ever be cleaned up whereas in Abitibi the clean-up had been completed by the time the case was finally adjudicated.
Suzanne Côté
In Justice Suzanne Côté and Justice Moldaver’s dissent, considerable attention is focussed on the capacity of the Trustee in Bankruptcy to disclaim assets (paras. 190-223). In their questioning of OWA and other counsel for the appellant, Coté focussed on the capacity of the capacity of the Trustee to disclaim assets.
Côté
Source: SCC
Justice Suzanne Côté: Mr. Lenz going back again to the practical consequences, you are talking about personal liability, what would be the interest of a secured creditor to petition in bankruptcy the debtor if that secured creditor cannot have an expectation of getting back his money? Because bankruptcy does not happen automatically in the country, …If a secured creditor has no interest of petition in bankruptcy because he is not going to recover his money, so the insolvent company won’t be able to continue the business and all the well, producing and non-producing will become orphans. Do you think that, in light of the policy considerations that you have described before, that it will be a good thing on a good consequence for the industry in Alberta?
Justice Côté also pursued the issue of the personal liability of the Trustee with Counsel for the Respondents. Justice Côté placed considerable emphasis on an early letter from the AER that said a claim might be advanced. A key exchange then followed when Justice Abella appeared to challenge her colleague about the evidentiary quality of a letter written by the regulator versus an affidavit.
Justice Rosalie Silberman Abella
Justice Abella focussed her initial questioning on the Respondent’s counsel Kelly Bourassa representing Grant Thornton LLP. Her question took up Bourassa’s soft criticism of opposing Counsel who claimed there might be some threat to public safety.
Source: SCC
Justice Abella. Where do we put that (threat to public safety) in the analysis?
Ms. Bourassa:. Justice Abella, it doesn’t go to whether or not the power exists or not, it’s really brought forward because there are allegations and assertions that this appeal, if dismissed, will have catastrophic results. And the point is that the evidence is clear that that assertion is not supported.
Justice Abella: I guess my question really goes to whether or not you are proposing a legal test that suggests that the extent to which balancing can go on between federal and provincial legislation where the environment is concerned you have to look at the degree of seriousness of the potential harm. And that seems to me to be a new concept, so I’m trying to figure out how I should be thinking about that submission, whether it’s really serious, whether it’s imminently serious, whether it’s long-term serious. I just don’t know where that figures into the discussion.
Source: Blakes
Ms Bourassa: We are not proposing a new test. The respondent’s position is that the law is clear and has been set out by this Court and we are not proposing anything new.
The following question was whether the economic environment under which the oil industry operated could be a factor in determining regulatory policies.
Ms. Bourassa: So, for example, some of the alternatives that have been suggested in some of the materials were not taken up, like up-the-chain liability whereby conveying a well would not limit the previous owner’s liability. Those were decided not to advance with and so this is the system we now have in place and it has become clear in this second significant downturn since the 80s that it doesn’t work when put up against the Bankruptcy and Insolvency Act.
Justice Abella. And so? And so?
Ms. Bourassa:. And so we have a conflict. We have a conflict both operationally and frustration of purpose in
Justice Abella: When the economy is bad, but we don’t have a conflict when the economy is good. And again, that seems to be a new constitutional principle. And who decides what good and bad means?
Ms. Bourassa: Justice Abella, I don’t think we have to look at the state of the economy when we are looking at whether there’s a conflict, we have to look at the case before the Court and there is a clear conflict. We have now seen it. We didn’t realize it earlier because we weren’t in a circumstance where this conflict arose. That’s why I raise that point.
Justice Brown. Because there were no bankruptcies? Never, ever?..I mean I have spent some time in Alberta, I know there were some.
Effect of Sequoia and Globe investigation
After the hearing in February, The Globe and Mail published a series of very damaging reports on the regulatory record of the AER. On 6 March 2018, PricewaterhouseCoopers Inc. LIT sent a letter to all creditors advising them of Sequoia’s Notice of Intention to make a proposal under the Bankruptcy and Insolvency Act. The named creditors included many oilfield operators as well as a host of municipalities The table below highlights some of the largest creditors.
| Creditor | Amount Owed ($) |
| Athabasca County | 56,668 |
| Beaver County | 700,612 |
| Camrose County | 201,414 |
| Canadian Natural Resources Limited | 150,431 |
| County of Minburn No. 27 | 758,480 |
| County of Two Hills No. 21 | 805,748 |
| Flagstaff County | 271,434 |
| Green Horizon Energy Services Inc. | 4,232,398 |
| Lamont County | 1,438,769 |
| Municipal District of Opportunity, No. 17 | 1,977,092 |
The total tally was approximately $21 million. According to a Canadian Press story of 9 March 2018, the AER confirmed the firm had over 2,300 wells, 200 facilities and nearly 700 pipeline segments. The same day, The Globe and Mail headline disclosed the company was exempt from “viability rules.” In fact, a “review of court documents” showed Sequoia sought relief “at least once” from a more stringent test. The story also noted the AER had approved 244 of 260 requests from companies seeking exemptions from toughened financial sufficiency rules introduced in June 2016.
With the cat among the pigeons, news filtered out in June 2018 that Canadian Natural Resources Limited had made objections to asset deals approved by the Regulator adding to the thousands of wells orphaned or abandoned. Additionally, CNRL contested whether the sale of assets by Pengrowth Energy, a distressed energy producer, was valid. Sequoia also purchased assets from Perpetual Energy Corp, another transaction that has also been disputed.
Later last fall, the Globe continued its investigations into abandoned and orphaned wells in the three western provinces. In a three-part series Western Canada Surge in Inactive Wells the November 23rd report found over 122 thousand inactive wells with over nine thousand wells dormant for more than 20 years. According to the investigation there were 89,217 inactive wells up from about 40 thousand in 1999. In Hustle in the Oilpatch also published on 23 November, reporters Jeff Lewis, Jeffrey Jones, Chen Wang and Renata D’Aliesio reviewed the Sequoia purchase of Perpetual Resources assets controlled by Calgary’s Riddell family. At issue in the transaction was the clean-up bill estimated at $133 million and how Sequoia would be able to pass the AER’s financial stress test known as the Liability Management Rating system (LMR). Further negative publicity came a few days later with a 26 November story documenting the practice of established companies selling aging wells and other aging facilities to financially weaker companies Oil Patch fails to clean up growing stockpile of abandoned wells. The article made plain the unfolding risk to taxpayers should the energy regulator in Alberta and other provinces fail in their duty to assure remediation would take place.
also published on 23 November, reporters Jeff Lewis, Jeffrey Jones, Chen Wang and Renata D’Aliesio reviewed the Sequoia purchase of Perpetual Resources assets controlled by Calgary’s Riddell family. At issue in the transaction was the clean-up bill estimated at $133 million and how Sequoia would be able to pass the AER’s financial stress test known as the Liability Management Rating system (LMR). Further negative publicity came a few days later with a 26 November story documenting the practice of established companies selling aging wells and other aging facilities to financially weaker companies Oil Patch fails to clean up growing stockpile of abandoned wells. The article made plain the unfolding risk to taxpayers should the energy regulator in Alberta and other provinces fail in their duty to assure remediation would take place.
While the Court was deliberating these revelations emerged alongside the National Observer’s story of the AER’s Vice-President’s presentation which offered a potential estimate of up to $260 billion in remediation costs in Alberta alone. Given this background, it seems reasonable to assume justices on the Court who might have leaned towards ruling in favour of federal paramountcy were convinced by more progressive voices on the Court to endorse a polluter-pay verdict.