Transfer Of Operatorship Of Oil And Gas Assets Upon Insolvency

Operating agreements for oil and gas assets typically contemplate the immediate replacement of the operator by another working interest owner in the event of the operator's insolvency. However, these provisions often become practically unenforceable because, once proceedings are commenced under either the Companies Creditors' Arrangement Act, RSC 1970, c C-25 [CCAA] or the Bankruptcy and Insolvency Act, RSC 1985, c B-3 [BIA], stays are imposed that prevent creditors from exercising any remedies against the insolvent operator, including these "immediate replacement" provisions.

The recent decision in Bank of Montreal v Bumper Development Corporation Ltd, 2016 ABQB 363 [Bumper] indicates that immediate replacement clauses may be given effect in proceedings under the BIA, although, as discussed below, whether immediate replacement clauses will be given effect in CCAA proceedings remains uncertain.

Background

Eagle and Bumper were parties to a Joint Operating Agreement (JOA) relating to approximately 28 wells and to a Construction, Ownership and Operation Agreement in respect of a battery facility. The JOA incorporated the 2007 Canadian Association of Petroleum Landmen operating procedure. The agreements gave Eagle the right to replace Bumper as operator upon the latter's insolvency.

In February 2016, a Receiver/Manager was appointed for Bumper under the BIA in order to protect and realize upon Bumper's assets and distribute the proceeds. As is typically the case, the receivership order stayed the exercise of all rights and remedies against Bumper.

Bumper's Receiver/Manager conducted a sale of the Assets. Both Eagle and Forent submitted bids. In the interim, Eagle notified the Receiver/Manager that it intended to assume operatorship and those parties met regarding the terms of the sale. Prior to a bid being accepted, the Receiver agreed with Eagle that the Receiver would not entertain any offer purporting to convey operatorship of Bumper's assets to anyone other than Eagle. The Receiver later indicated to the Court that operatorship would not be part of any sale.

Forent was the successful bidder. The Court approved the Receiver/Manager's application for sale and vesting of the assets subject to later determination of Eagle's application to assume operatorship, which Forent opposed.

The Court appointed Eagle operator of the assets.

Decision

In holding for Eagle, the Court reached the following conclusions.

Eagle had not slept on its rights. Had...