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Summary Judgment Not Available in a Farmout Case

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On May 15, 2019

In Oil & Gas

By: Nigel Bankes

PDF Version: Summary Judgment Not Available in a Farmout Case

Cases commented on: (1) Teine Energy Limited v Audax Investments Ltd, unreported oral judgment delivered from the bench October 2, 2018 (Transcript of Proceedings), (2) Teine Energy Limited v Audax Investments Ltd, unreported oral judgment delivered from the bench March 21, 2019 (ABQB), and (3) Teine Energy Limited v Audax Investments Ltd, 2019 ABQB 334 (ABQB Ruling on Costs)

Teine and Audax entered into a farmout agreement on November 24, 2016. The agreement took the form of a proposal from Teine (as the farmor) to Audax as the proposed farmee, which proposal Audax accepted. The agreement contemplated that in return for drilling the commitment well (or wells), Audax would earn a 100% interest in Taine’s Saskatchewan Crown petroleum and natural gas lease, subject to a 17.5% gross overriding royalty in favour of Teine. The agreement incorporated by reference the 1997 Canadian Association of Petroleum Landmen Farmout and Royalty Procedure.

The case turns on clauses 3 and 4 of the farmout agreement:

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Bill 12: a reprise

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On May 2, 2019

In Natural Resources, Oil & Gas

By: Nigel Bankes

PDF Version: Bill 12: a reprise

Legislation Commented On: Preserving Canada’s Economic Prosperity Act, SA 2018, c P-21.5

Case Commented On: British Columbia (Attorney General) v Alberta (Attorney General), 2019 ABQB 121 (CanLII)

I commented on Preserving Canada’s Economic Prosperity Act (PCEPA) when it was first introduced in the spring of 2018: see “A Bill to Restrict the Interprovincial Movement of Hydrocarbons: a.k.a. Preserving Canada’s Economic Prosperity [Act]” (18 April, 2018). At that time, I expressed doubts as to the constitutional validity of elements of Bill 12 as it then was, especially those provisions pertaining to refined products as well as any implementation measures that might involve discrimination by destination with respect to any exports. I remain of that opinion.

What has changed since then is that PCEPA has now been proclaimed (April 30, 2019); that is to say, it now has the force of law in Alberta. Prior to proclamation, PCEPA was of no legal significance. It was that absence of legal significance that led Justice Hall in his judgment in British Columbia (Attorney General) v Alberta (Attorney General) in February of this year to dismiss British Columbia’s challenge to the legislation. Justice Hall concluded that any such attack, at least by way of a declaration as to invalidity, was premature:

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English Court of Appeal Confirms that an Operator Entitled to be “held neutral”

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On March 19, 2019

In Energy, International Law, Oil & Gas

By: Nigel Bankes

PDF Version: English Court of Appeal Confirms that an Operator Entitled to be “held neutral”

Case Commented On: Spirit Energy Resources et al Marathon Oil UK LLC, [2019] EWCA Civ 11.

In a decision that will be of interest to the energy bar in all oil and gas jurisdictions in the common law world, the English Court of Appeal, in a unanimous decision, has confirmed the principle that operations conducted by an operator under the terms of a joint operating agreement are conducted for the joint account and for the shared risk of all working interest owners and that an operator is not an insurer for those other working interest owners. The Court did so in the somewhat unusual context of a liability for unfunded defined pension benefits.

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Lessons from Redwater: Discard the AbitibiBowater Test and Legislate Super Priority for the Regulator

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On March 1, 2019

In Bankruptcy and Insolvency, Constitutional, Oil & Gas

By: Jassmine Girgis

PDF Version: Lessons from Redwater: Discard the AbitibiBowater Test and Legislate Super Priority for the Regulator

Case Commented On: Orphan Well Association v Grant Thornton Ltd, 2019 SCC 5 (CanLII)

Environmental cleanup costs are a natural consequence of operating in the oil and gas industry. Provincial regulations ensure these costs are borne by the company responsible for them, and these regulations work if that company is solvent. An insolvent company, however, cannot bear the costs of outstanding environmental orders, which leaves those costs to the company’s creditors or to the public.

The goal should be, and fairness dictates, that the debtor always covers the cost, regardless of its solvency, but that requires amending the governing legislation, preferably to give the regulator (in this case, the Alberta Energy Regulator (Regulator), and the equivalent regulators in other provinces) a super priority. Knowing the Regulator has a super priority in a bankruptcy will compel the adjusting creditors to modify their agreements ex ante, ensuring, in turn, that companies comply with regulations and have enough capital to cover environmental costs as they arise. This solution is better than our current system, in which creditors must wait for a court to apply the three-part test from Newfoundland and Labrador v AbitibiBowater Inc, 2012 SCC 67 (CanLII) (AbitibiBowater test) to determine who has priority, potentially leaving them to deal with the consequences ex post.

On a matter this important and this costly, a matter that has notable public policy considerations and far-reaching implications for private parties, both sufficient environmental protection as well as certainty in adherence to the legislated priorities, must be the ultimate goals. The Bankruptcy and Insolvency Act, RSC 1985, c B-3 (“BIA”) does not currently provide enough environmental protection, which may compel courts to compensate through the AbitibiBowater test. It is hard to predict the outcome of the test and, depending on its application to a given set of facts, it undermines the BIA priority scheme. Throughout the proceedings of Orphan Well Association v Grant Thornton Ltd, 2019 SCC 5 (CanLII) (commonly known as the Redwater case), in three levels of court, there were five judgments. Eleven judges applied the same test and six of them ruled in favour of the Regulator, while five ruled in favor of the secured creditor. This much disagreement over one set of facts should indicate that these issues should not be handled by the courts through the application of the AbitibiBowater test. The required certainty in this area must come from Parliament by way of legislative amendment to clarify a super priority charge in favour of the Regulator in the BIA.

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Negotiated Settlements and Just and Reasonable Rates

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On January 9, 2019

In Energy, Oil & Gas

By: Nigel Bankes

PDF Version: Negotiated Settlements and Just and Reasonable Rates

Decision Commented On: National Energy Board, TransCanada Pipelines Limited (TransCanada) Application for Approval of 2018 to 2020 Mainline Tolls RH-001-2018, Reasons for Decision, December 13, 2018

This is the most recent decision in a string of decisions from the National Energy Board (NEB) over the last five years dealing with TransCanada PipeLines (TCPL) as TCPL and the NEB seek to grapple with the dramatic changes that have occurred in North American natural gas markets over this period, and more specifically how these changes pose the risk of stranded assets and as such threaten to affect the viability of one of the NEB’s most important regulated  pipelines: TCPL and TCPL’s mainline (or at least elements of that mainline). Perhaps the most dramatic of these changes is the increased availability of shale gas supplies, and specifically shale gas supplies from basins much closer to TCPL’s traditional markets than the Western Canadian Sedimentary Basin (WCSB), TCPL’s main source of gas.

What is interesting about these decisions, including this most recent decision, is the interplay or tension between the NEB’s statutory authority to establish just and reasonable rates and the market-based approaches as reflected in negotiated settlements. While the NEB and other regulators seek to encourage negotiated settlements between the regulated entity and its customers, it is plain from this decision that the regulator retains a power of review. While a regulator may be reluctant to exercise that power given that settlements typically involve some give and take, this decision demonstrates that the regulator will not always defer to the paradigm of settlement and contract if it perceives that the results of the settlement depart significantly from fundamental rate-making principles. While this decision happens to deal with TCPL and the NEB, the same interplay is apparent in any jurisdiction that allows for the possibility that a regulated utility may reach a negotiated settlement with some or all customers rather than going through an adversarial rate hearing.

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