CALGARY—When energy companies go bankrupt, the cleanup of their old oil and gas wells must take priority over paying off creditors, the Supreme Court of Canada ruled Thursday.

Though centred in Alberta, the 5-2 decision sets a precedent across Canada, empowering provincial governments to stop defunct companies from off-loading their messes onto other companies or the public. The judgment is expected to resonate across the western provinces, where the number of companies walking away from old wells has skyrocketed amid low oil prices.

“Bankruptcy is not a licence to ignore rules,” wrote Chief Justice Richard Wagner in the court’s decision.

Though the Alberta government, the province’s energy regulator and environmental groups hailed the court’s decision as a victory, critics noted the underlying problems that led to the Redwater case remain. In some bases, a company’s assets may not be enough to cover cleanup costs.

“The fact of the matter is that when these companies go bankrupt, they have very little resources left,” said Daryl Bennett, director of Action Surface Rights, a group that helps farmers with inactive wells on their land. Such wells can cause safety issues and contamination for the people living around them, Bennett added.

“We still have a huge problem ... with the energy regulator not holding companies to account, not requiring companies to post security deposits.”

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If the court had gone the other way, the Alberta Energy Regulator might have had to look at introducing harsher measures — such as up-front bonding requirements — to ensure there’s enough money set aside for cleanup, said Nigel Bankes, a professor and chair of natural resources law at the University of Calgary. Though this outcome allows already-struggling oil and gas producers to avoid those costs, it may also affect their ability to get loans, Bankes added.

“Creditors should be a little more risk-averse,” he said. “It will have some implications in the future for how much money a company will be able to borrow.”

Speaking in Calgary, Alberta Energy Minister Margaret McCuaig-Boyd blamed the previous Progressive Conservative government for failing to act on the problem sooner. Though she previously said her government is looking at imposing cleanup deadlines on old wells, McCuaig-Boyd declined Thursday to say if it will happen before the provincial election this spring.

“Working families across this province, as well as all of Canada, should not have to pay for the financial and environmental liabilities left behind when companies walk away from their obligations,” she said, noting that the province has accelerated its cleanup of orphaned sites.

“I want to be clear that the vast majority of companies are responsible ... they as well need to be protected from the bad actors in the system.”

United Conservative Party Leader Jason Kenney said Thursday that he wasn’t aware of the court’s decision, but would review the implications for policy in Alberta. Alberta Party Leader Stephen Mandel called on the NDP government to take immediate action, while Alberta Liberal Party Leader David Khan praised the Supreme Court’s findings.

The case revolved around the failure of Redwater Energy, a small, Calgary-based oil and gas company that went bankrupt in 2015 amid the global oil price collapse. The dispute was between the Alberta Energy Regulator (AER) and accounting firm Grant Thornton, which is Redwater’s receiver — a bankruptcy trustee appointed to liquidate a failing business.

When Redwater became insolvent, it owed $5 million to provincially owned ATB Financial. Very few of the company’s wells were producing and profitable, while the rest were in need of expensive, legally required cleanup processes.

The receiver wanted to sell Redwater’s profitable wells to pay off the company’s debts and leave the nonproducing ones to Alberta’s industry-funded Orphan Well Association (OWA), a group which handles the cleanup of sites whose owners have gone bankrupt.

Under Alberta law, the move wouldn’t be allowed — money from the sale of Redwater’s assets should be used to return the company’s well sites to a natural state, the AER argued. However, federal bankruptcy law gives priority in such cases to lenders.

Two lower courts found the federal law took priority over the provincial one and sided with the receiver. The Supreme Court heard the appeal, led by the AER, in February 2018.

In the end, the court decided the AER is not a creditor and therefore, there’s no conflict between the two laws. The federal law doesn’t allow trustees of a bankrupt business to walk away from the company’s environmental responsibilities, the decision said.

Grant Thornton must now obey an order from the AER requiring it to use money from the sale of Redwater’s assets to properly plug the company’s wells and return the land to a natural state.

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The case attracted national attention and input from a wide variety of intervenors, third-parties who the court allows to make arguments in a case. The list included provinces concerned about the implications — Saskatchewan, British Columbia, and Ontario — as well as environmental groups, Alberta farmers concerned about wells on their land, and the Canadian Association of Petroleum Producers (CAPP).

In its filings, ATB Financial suggested the fault lies with Alberta’s regulatory system, which unlike other jurisdictions, doesn’t require up-front bonds to cover cleanup costs. At the time it went bankrupt, the AER hadn’t required Redwater to post any financial security.

The reversal of the lower court decision could also drive away investment in the already-struggling energy sector, ATB Financial argued.

However, the AER argued that the impact of dismissing its appeal would be “catastrophic,” potentially putting the public on the hook for “billions of dollars in environmental costs.” Not only would it undermine a long-standing system, the regulator said, it could drive up the number of orphan wells, encouraging lenders to place companies into insolvency and dump weak assets.

CAPP also sided with the regulator, saying a dismissal of the appeal would unfairly push the financial burden onto responsible companies.

In November, a joint investigation involving the Star found the cost of cleaning up Alberta’s oil and gas wells could reach $100 billion. So far, the AER has collected $200 million in security.

With the help of a $235-million loan from the Alberta government, the OWA is already struggling to work through its current inventory of more than 3,000 wells, up from 700 in 2015. It may take a generation to complete the cleanup of the association’s current backlog, the Supreme Court’s decision notes.

In a statement, the OWA said it’s “encouraged” by the court’s decision. It plans to decommission 700 wells in its current fiscal year and increase its activity thanks to a boost in industry funding in 2019.

“The vast majority of sites in our inventory are considered low-risk and therefore do not require immediate closure,” the statement read.

The number of orphan sites in B.C. has also grown substantially in recent years — from 45 in 2016 to 326 as of early November 2018. According to the B.C. Oil and Gas Commission, the increase was largely due low commodity prices and the bankruptcy of both Terra Energy and Quattro Exploration.

So far, at least 16 orphan sites have been restored and another four are expected to be completed by March, the commission says on its website.

In Saskatchewan, the government is handling nearly 650 orphan wells, according to a 2017-18 report.

Cleanup in both provinces is industry-funded.

Bennett said governments are currently facing a catch-22 situation: if they start requiring companies to put up more money before they go out of business, some won’t be able to afford it. However, either the public or industry will eventually have to pay for the cleanup process, and neither the governing NDP or the Opposition UCP have shown willingness to take action, he said.

“They have to address these issues before the problem gets so big it’s unsolvable.”

With files from Ainslie Cruickshank and Amy Tucker

Emma McIntosh is an environment, justice and investigative reporter with StarMetro Calgary. Follow her on Twitter at @EmmaMci

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