By Allison McNeely and Kevin Orland

A battle over whether energy-company creditors should help pay for cleaning up thousands of abandoned oil wells may be heading to the Supreme Court of Canada.

At the centre of the dispute is Redwater Energy Corp., a small publicly traded oil producer in Alberta that filed for bankruptcy in late 2015. The receiver that’s liquidating the company argues it should be able to sell its best wells and leave the worst behind for an energy industry-funded group to clean up. The province’s regulator argues that buyers should have to take both good and bad wells, even if it means that the sale proceeds will be lower.

A court in Alberta sided with the receiver in May 2016, reducing companies’ concerns about the legal liability of walking away from some of their oil wells. Since then, the number of inactive, abandoned, or otherwise orphaned sites has more than doubled to 3,200, according to the Orphan Well Association, the cleanup group. The provincial government has given the organization an emergency loan to fund the growing costs.

The Alberta Court of Appeal upheld the lower court ruling in a 2-1 decision last April. The government-run Alberta Energy Regulator and the Orphan Well Association, who say they’re protecting regulatory and public interests, have appealed the matter to the Supreme Court of Canada.

The questions about who should bear environmental costs, combined with the importance of the lower court’s decision and the implications for the industry means the Supreme Court of Canada is likely to look at this case, said Kyle Kashuba, a lawyer in Torys LLP restructuring practice in Calgary.

“It does have ramifications for other provinces. That makes me think the Supreme Court will hear it,” he said. “It’s kind of become such a major issue.”

Typically, proceeds from liquidating assets go to pay back creditors. Any court decision that results in lenders getting less money in bankruptcies could ultimately force banks to charge more for financing, as they try to recoup lost income. But if the lower court’s ruling stands, the industry-funded Alberta Energy Regulator may have to collect more money from energy companies to help pay for the remediation, and the public may need to shoulder some of the burden.

“At the end of the day it is really a decision about where the money goes,” Kashuba said.

The problem is increasingly urgent for Alberta as more oil companies go broke. The price of crude oil plunged more than 75 per cent between June 2014 and February 2016. Even if prices have recovered somewhat since then, many drillers are not making enough revenue to keep operating.

Since the start of 2015, 250 North American oil and gas producers and services companies have filed for bankruptcy, law firm Haynes and Boone said in April reports. About 1,000 oil sites in Alberta with liabilities of more than $56 million have been renounced since the May 2016 court decision, according to the Alberta Energy Regulator.

“Disclaiming unprofitable sites allows a company to reap the benefits of producing Alberta’s natural resources while avoiding the costs to repair the land, permanently impacting the environment, the economy, and the safety of Albertans,” Ryan Bartlett, a spokesman for the Alberta Energy Regulator, said by email.

The Orphan Well Association has tripled its annual budget to $45 million for the upcoming year compared with its 2014-2015 budget, paid for by levies on companies in the industry. The group wants the corporations’ obligations to be balanced with taxpayers’ and creditors’, said Brad Herald, chairman of the association.

“We think there was a good balance there,” Herald said. “These court decisions upset that balance.”

Lenders benefit from the recent decisions because they’re protected from the liabilities of the non-producing wells, which could impact their recovery in bankruptcy, said Geoffrey Richards, New York-based head of North America debt finance and restructuring at investment bank Canaccord Genuity.

“I think that from a cost of capital perspective, had the decision gone in the other direction, you could anticipate that lenders might then begin to price that risk into new loans, which could have a different impact on the industry,” he said.

Bloomberg News