Category Archives: Oil & Gas

The Sequoia Bankruptcy Part 1: The Motion to Strike and the Interveners

PDF Version: The Sequoia Bankruptcy Part 1: The Motion to Strike and the Interveners

Cases Commented on: PricewaterhouseCoopers Inc v Perpetual Energy Inc, 2020 ABQB 6 (CanLII) and PricewaterhouseCoopers Inc v Perpetual Energy Inc, 2020 ABCA 417 (CanLII)

The Orphan Well Association (OWA) was back in court on December 10, 2020 for the appeal of PricewaterhouseCoopers Inc v Perpetual Energy Inc, 2020 ABQB 6 (CanLII). The OWA is concerned about the interpretation of the Supreme Court’s decision in Orphan Well Association v Grant Thornton Ltd, 2019 SCC 5 (CanLII) (Redwater), and specifically whether the finding that abandonment and reclamation obligations (ARO) are not “provable claims” in bankruptcy implies that ARO are not “liabilities” for the purposes of determining the financial situation of a corporation and hence whether a corporation is solvent.

The Redwater decision concluded that a trustee for a bankrupt oil and gas company had to use the bankrupt estate’s assets to pay for the ARO of non-producing wells, and could not “disclaim” them. Redwater started as a bankruptcy case under the name Redwater Energy Corporation (Re), 2016 ABQB 278 (CanLII). (I recommend Nigel Bankes’ earlier posts on the Queen’s Bench decision and the Court of Appeal decision in Redwater, and Jassmine Girgis’s post on the Supreme Court decision for a complete background.)

Continue reading →

Court of Appeal (England and Wales) Confirms High Court Decision on the Relationship Between a Farmout Agreement and an Operating Agreement

By: Nigel Bankes

PDF Version: Court of Appeal (England and Wales) Confirms High Court Decision on the Relationship Between a Farmout Agreement and an Operating Agreement

Decision Commented On: Apache North Sea Limited v Euroil Exploration Limited and Edison SPA, [2020] EWCA Civ 1397

In this decision, the Court of Appeal of England and Wales confirmed Judge Pelling’s decision in the High Court with respect to the drilling costs Apache was entitled to recover from Euroil under the terms of a farmout agreement (FOA) and its related joint operating agreement (JOA). I commented on Judge Pelling’s decision here and I refer readers to that earlier post for a more detailed statement of the facts, as well as references to Canadian decisions dealing with the relationship between an FOA and the JOA.

In that earlier post I suggested that the FOA at issue here would likely be denominated as a “farmout and participation agreement” in a Canadian context insofar as the drilling obligation was not a sole risk obligation of the farmee (Euroil) but rather was a shared risk operation for which Euroil was to cover only a percentage of the costs. The farmor, Apache, was to carry out the drilling operation as operator and was also responsible for a percentage of the costs.

Continue reading →

A Legal Regime for the Development of Geothermal Resources in Alberta

By: Nigel Bankes

PDF Version: A Legal Regime for the Development of Geothermal Resources in Alberta

Bill Commented On: Bill 36, Geothermal Resources Development Act, 2nd Sess, 30th Leg, Alberta, 2020 (first reading 20 October 2020)

The recognition of a “new” resource, whether that be the use of pore space for sequestering carbon dioxide or in this case the exploitation of geothermal energy (for a primer on geothermal energy see David Roberts, “Geothermal Energy Poised for a Big Breakout” Vox (21 October 2020)), often requires the creation of new legal and regulatory instruments (or adaptation of existing ones) to provide legal certainty for investors and to protect the public interest. Although the issues may vary for different “new” resources, such instruments will typically need to address the following types of questions: (1) who owns the resource in question and how may a developer acquire rights to the resource?; (2) what regulatory regime needs to be put in place to protect the public interest, including the environment? and; (3) what liability regime should we put in place to provide compensation in the event that third parties suffer harm and to ensure fulfillment of reclamation and abandonment obligations?

With the introduction of Bill 36, the Government of Alberta proposes to put in place a legal regime that will address these questions. In large part, the Bill addresses the second and third issues by drawing extensively on the Oil and Gas Conservation Act, RSA 2000 c O-6 as a model. I will not say much about that model in this post, but one well-known flaw of this model is that it has proven to be far too permissive. What I mean by permissive is that the model gives the Alberta Energy Regulator (AER) the power to make a lot of rules (e.g. rules for suspension and timely abandonment of wells) but it does not actually require that such rules be put in place. As a result, those rules may never be promulgated and the public interest not fully protected. See “Bill 12: A Small Step Forward in Managing Orphan Liabilities in Alberta”.

Continue reading →

Another Manitoba Oil and Gas Lease Termination Decision

By: Nigel Bankes

PDF Version: Another Manitoba Oil and Gas Lease Termination Decision

Case Commented On: Fire Sky Energy Inc. v EverGro Energy Corporation, 2020 MBQB 133 (CanLII)

I am not sure what’s going on downstream of us these days, but we now have a third oil and gas lease termination case this year from “Friendly Manitoba.” I posted on the two earlier decisions here in April.

This one is fairly straightforward. EverGro held under a CAPL 88 MAN lease form with a three-year primary term commencing January 22, 2013 and filed a caveat to protect its interest. Fire Sky top leased the property on February 9, 2017 having formed the view that EverGro’s lease had expired.

Continue reading →

The 2020/2021 Orphan Fund Levy and the Missing Consultation on Environmental Liability Management Reform

By: Drew Yewchuk

PDF Version: The 2020/2021 Orphan Fund Levy and the Missing Consultation on Environmental Liability Management Reform

Document Commented On: 2020/2021 Orphan Fund Levy Bulletin, Alberta Energy Regulator, September 10 2020

The Orphan Fund Levy is a levy imposed by the Alberta Energy Regulator (AER) on all holders of licensees or approvals issued by the AER. The levy is authorized by sections 72 to 75 of the Oil and Gas Conservation Act, RSA 2000, c O-6. The levy funds the work of the Orphan Well Association cleaning up oil and gas assets that have no solvent owners and no financial security set aside for their clean-up . The AER released a bulletin setting the 2020/2021 Orphan Fund Levy on September 10, 2020. The prescribed levy is $65 million for 2020/2021, up from $60 million in 2019/2020, $45 million in 2018/2019, and $30 million in 2017/2018 (when it was still collected in two parts).

The good news is that the Orphan Fund Levy is going up, which should help cover the substantial costs of cleaning up Alberta’s growing orphaned well inventory. The bad news is that in $3.4 million of the levy was not received in 2019 due to the insolvency of some operators (Orphan Well Association Annual Report, 2019). The ugly news is that, despite Alberta’s commitment to implement new regulations to significantly reduce the prospect of a growing inventory of orphan wells (see the announcement of April 17, 2020), and the provincial government’s press release of July 30, 2020 about of the new framework to manage oil and gas liabilities, there have yet to be any public details or public consultation on the design of the new liability management system. Alberta is drifting along with the old system despite acknowledging its massive problems.

Continue reading →