Alberta Court Of Appeal Clarifies Application Of Redwater To Oil And Gas Assets

• Published date: 21 April 2022
• Subject Matter: Energy and Natural Resources, Insolvency/Bankruptcy/Re-structuring, Insolvency/Bankruptcy, Energy Law, Oil, Gas & Electricity
• Law Firm: Borden Ladner Gervais LLP
• Author: Mr Jack Maslen and Anthony Mersich

The Alberta Court of Appeal released its decision in Manitok Energy Inc (Re), in which the Court clarified how the principles in Redwater¹ought to be applied to insolvent oil and gas producers that become subject to regulatory enforcement orders after some of the insolvent company's assets have been sold. This important case is the first time that the Alberta Court of Appeal has considered a priority dispute between regulatory claims and secured creditors in an oil and gas insolvency since Redwater was decided in 2019.

Background

Manitok Energy Inc. (Manitok) was an oil and gas E&P company that entered receivership proceedings in 2018. Manitok held licenses for numerous oil and gas assets. Like most insolvent oil and gas companies, some of Manitok's assets were productive and valuable, while others were not.

Through Manitok's receivership proceeding, certain assets were sold to a third party, pursuant to a court-approved sale transaction (the Sale Transaction and the Purchased Assets). Under the terms of the Sale Transaction, the purchaser assumed all abandonment and reclamation obligations (ARO) of the Purchased Assets, and the Order of the Court approving the Sale Transaction provided that the sale proceeds would stand in the place and stead of the Purchased Assets with regard to any claims against Manitok's estate.

Shortly after the Sale Transaction closed, the Alberta Energy Regulator (AER) issued abandonment orders (the Orders) regarding certain of Manitok's assets. The Orders did not apply to any of the Purchased Assets. The cost of complying with the Orders exceeded the realization value of the assets to which the Orders applied. Consequently, the Receiver sought to disclaim those assets, due to their negative value.

The AER asserted that the costs associated with complying with the Orders enjoyed first priority over the proceeds from the Sale Transaction, pursuant to the Supreme Court of Canada's decision in Redwater. However, two oilfield service companies had filed builders' liens against certain of the Purchased Assets prior to Manitok's receivership, and contested the AER's position and asserted first priority over the sale proceeds.

The Chambers decision

The Chambers judge ruled in favour of the lien-holders and stated that Redwater did not apply in the circumstances. The Chambers judge reasoned that because the sale proceeds arose from the sale of the Purchased Assets, and the Orders did not apply to the Purchased Assets, the sale proceeds...