Category Archives: Bankruptcies

Update on Land Lease Delinquencies

restart-unlikely-for-most-inactive-wells-study9-2-17-ej

oilpatch-woes-fuel-landowner-disputes10-1-17-ej

abandoned-oil-gas-well-inventory-growing28-12-16-ej

Back in July, we highlighted a growing concern among farmers who were not receiving lease payments on a timely basis from oil and gas explorers in exchange for access to rural properties. Alberta’s Surface Rights Board adjudicates between farmers and the oil and gas community. As the tables below illustrate, this board handles thousands of cases every year.  The Board is a creature of Provincial Legislature under the Surface Rights Act  a relatively small statute consisting of 41 sections (32 pages). Predecessor statutes include the  1947  Right of Entry Arbitration Act, The Right of Entry Arbitration Act, 1952, the 1972 Surface Rights Act,   the 1942 Water, Gas, Electric and Telephone Companies Act,  the 1961 Expropriation Procedure Act, and the 1974 Expropriation Act.  Related Acts include the Water, Gas and Electric Companies Act , the Pipeline Act,  and Hydro and Electric Energy Act.

The complex interplay of these statutes, whose provenance goes back to the early economic developments transforming the province in the first half of the 20th century, requires significant legal expertise in adjudicating often hostile claims. Key definitions in the Act include terms such as minerals, owner, occupant,  operator, right of entry, and right of entry order,  and surface lease.  The Act prevails over “any grant, conveyance, lease, licence or other instrument, whether made before or after the coming into force of this Act, with respect to right of entry in respect of the surface of any land incidental to any operations concerning mining, drilling, pipelines, power transmission lines or telephone lines.”  The Board members, responsible for administering the Act and General Regulation, are appointed by the provincial Cabinet. The Act therefore is at the “leading edge” of conflict between the rights of agricultural producers and the energy and pipeline industry.

Under sub-section 8(3) of the Act, the Surface Rights Board (SRB) has extensive powers and:

(a) is not bound by the rules of law concerning evidence;
(b) may enter on and inspect, or authorize any person to enter on and inspect, any land, building, works or other property; and
(c) has the rights, powers and immunities conferred on a commissioner under the Public Inquiries Act.

The Board is not required to hold oral hearings but, “subject to the principles of natural justice” may make decisions based on written submissions.

Under the Surface Rights Act, the right of entry by an operator for any purpose requires the consent of the owner and occupant of the land, or by order of the SRB.  Various sections of the Act detail ancillary rights of access for roads through other properties. Section 13 spells out the considerable access rights of an operator to “conserve” the value of its wells including for re-pressuring the petroleum reservoir; storage of a petroleum product; or the storage and disposal of water or “any other substance produced from or to be injected in an underground formation.”

A recent amendment to the Act allows operators or successors to operators to enter land for the purposes of  enabling reclamation .  In 2010, the Act was amended to enable a right of entry to facilitate the injection of captured carbon dioxide into the underground formation. Section 18 of the Act stipulates the payment of a fee for entry which is the “lesser of (a) $5000, or  (b) $500 per acre granted to the operator, or a proportionate
amount, not to be less than $250, where the land granted to the operator is less than one acre.”  These fees do not apply to leases entered into prior to 4 July 1983 and are separate and a part from other compensation payable to the owners for the access to the land in question.

The Act also spells out the factors for the Board to consider in adjudicating compensation claims by the operator or owner. These include: the market value of the lease(s) held by the operator; the loss of use by the owner or occupant of the area granted to the operator; the value of the adverse impact on the remaining land of the owner or occupant caused by any “nuisance, inconvenience and noise”  caused by operator;  or value of damage to the land caused by the operations of the operator.

As with most administrative tribunals, the parties affected by a Compensation Order of the SRB may appeal the decision to the Court of Queen’s Bench. The Board may also make an order terminating the right of entry if the operator has not commenced to use or
has ceased to use the surface of the land or any part of it, and the operator, the owner or the occupant requests the Board for an order terminating the right of entry.

In the two tables that follow, the volume of orders and decisions of the SRB are shown. The Right of Entry Orders have declined significantly over the past two years due, presumably, to the decline in oil prices, and thus, the diminished incentive to seek access to drill for oil or natural gas. Compensation orders have also fallen over the past two years again because less investment has occurred in the oil patch. As the table shows total decisions have fallen by almost one-third from the levels of 2012 and 2013. However, decisions respecting recovery of rentals have increased dramatically in the past two years.

Alberta Surface Rights Board Decisions 2012-2016
Decision/Order Type 2016 2015 2014 2013 2012
Decisions (Regular) 873 1019 915 1033 1006
Right of Entry Orders 135 153 140 375 300
Compensation Orders 29 38 35 67 83
Full Termination Orders 54 244 249 162 80
Rescinding Orders 8 4 5 5 9
Amending Orders 28 86 387 707 930
Orders Determining Cost 10 30 8 20 82
Partial Termination Orders 9 7 8 10 88
Varying Orders 18 117 79 101 161
Varying & Amending Orders 5 73 55 60 141
Settlement Compensation Orders 41 47 120 128 69
Orders Confirming Compensation and Determining Cost 0 0 2 1 1
Damage Compensation Orders 2 3 6 2 10
Compensation Review Orders 36 24 36 42 65
Recovery of Rental Suspension 387 187 73 39 41
Recovery of Rental Termination 335 173 58 37 39
Direction to Pay* 187 ** ** ** **
Returning Direction to Pay* 136 ** ** ** **
Totals 2293 2205 2176 2789 3105
*Calculated as of May 2016                             **Not calculated

Section 36 of the Act addresses compensation to land owners where the operator has not  made payments under a surface lease, right of entry order, or compensation order. If the operator or successor to the operator fails to respond to a request for payment from the SRB then the Board may terminate the operator’s right of entry. If the operator fails to make payment, then the Minister may pay the money owing from the Province’s General Revenue Fund and such a payment becomes a debt owed by the operator to the Crown. The table below illustrates that most of the payments have been made by the Minister rather than by the operator. The year 2012 was an exceptional year in which industry operators paid a higher percentage.  The table records numbers not dollar amounts.

Recovery of Rental Applications
Years Paid by Minister Paid by Operator Withdrawn/other Total Per cent of Claims paid by Minister
2015 423 48 4 475 89%
2014 209 23 9 241 87%
2013 232 23 25 280 83%
2012 145 54 8 207 70%
2011 213 44 7 264 81%
2010 215 34 11 260 83%
2009 221 14 6 241 92%
2008 239 27 2 268 89%
2007 318 26 3 347 92%
2006 262 23 1 286 92%
Totals 2477 316 76 2869 86%

Albertarecessionwatch.com gratefully acknowledges the co-operation of the SRB in reviewing the first table above.

Update on personal bankruptcies

Equifax Canada, one of Canada’s largest consumer debt rating monitoring firms,  released today (18 August) information about average debt and delinquency rates by age categories, major city, and provincial breakdowns. In Calgary, the average debt level (excluding mortgages) was the highest in Canada at $28,572 up by only 1.2 per cent year-over-year.  This was, significantly, the smallest increase in Canadian cities.  Calgary’s delinquency rate at 1.1 per cent was the same as the average Canadian delinquency rate. The delinquency rate for Calgary rose by 32.2. per cent year over year, the second fastest in the country.

For Edmonton, consumer debt was the second highest in Canada, at $26,691, after Calgary. The growth of debt was only 1.7 per cent, one-half the growth rate for Canada. Edmonton’s delinquency rate of 1.4 per cent rose by an alarming 39 per cent. Edmonton’s increase is surprising because its economy, which is supported by provincial government employment and large institutional employers such as the University of Alberta, Capital Health, and various provincial agencies, is supposed to be in better shape than Calgary’s.

At the provincial level, growth in debt levels was subdued at 1.6 per cent- the lowest in Canada. This may reflect the fact that financial institutions are starting to constrain the growth of credit to Alberta residents. The delinquency rate in Alberta, at 1.4 per cent, is above the national rate of 1.1 per cent. While the growth in the delinquency rate nationally stood at 4.1 per cent, in Alberta the year-over-year increase was 40.3 per cent.

Alberta residents appear to have loaded up on debt during the upswing in energy prices after the 2007-07 financial crisis. Financial institutions operating in Alberta  are undoubtedly watching their loan arrears carefully as many of their debtors struggle to service their indebtedness.

Canadians have fewer credit cards, higher balances-report9-3-17 GM

consumer-insolvency-in-alberta-rises-26-per-cent-report-says1-2-17-ej

consumer-debt-and-delinquency-rates-on-the-rise-in-q3-equifax10-12-16-ej

Commercial

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scary-economic-climate-spurs-rise-in-calgary-business-closings12-1-17-gm

legal-notice-synodon-inc-sunmission-of-offers-in-edmonton-journal-13-12-16

Lightstream Reources and associated companies are going through the CCAA process. The main creditors are first lien holders under an amended credit agreement dated 29 May 2015, holders of senior unsecured notes and second lien secured notes issued by Lightstream maturing in 1 February 2020 and 15 June 2019 respectively. This CCAA filing follows the execution of a forbearance agreement dated 15 September 2016. The applicants to this CCAA filing (Lightstream et al) will have access to cash accounts at T-D Bank. Financial advisors appointed by the Court order include TD Securities,RBC Dominion Securities, Goodmans LLP, Evercore Capital L.L.C., and BMO Nesbitt Burns.

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canadian-borrowers-awfully-close-to-the-edge-study-warns14-9-16-ej

Transunion press release

Alberta mortgage arrears up by 52%30-8-16 GMhalf-of-albertans-live-pay-to-pay-survey9-9-16-ej

Redwater court decisions sides with lenders

Update

The Alberta Court of Appeal on 24 April upheld Justice Wittman’s judgment supporting Grant Thornton as receiver in the Redwater Resources case.

Watchdog group seeks appeal to top court over abandoned wells29-4-17 EJ

Appeal court backs decision favouring Redwater creditors26-4-17 EJ

The Redwater court decision promises to become a showdown between the capacity of lenders to realize on the security of oil wells versus the rights of the Crown, the owner of the resource and the regulator.

In a densely worded 58 page decision, Mr. Chief Justice Neil Wittman of the Alberta Court of Queen`s Bench ruled in favour of the trustee in bankruptcy of Redwater Energy Corporation, a secured creditor of Alberta Treasury Branches (ATB Financial- was owed $5.072 million). The highly anticipated decision favoured creditors`rights over environmental regulation.  According to Justice Wittman,  the judicial principal of interpreting conflicts between federal and provincial head of powers of power under the Constitution Act -the paramountcy doctrine- led him to the conclusion that the  receiver (Grant Thornton LLP) could not comply with both the provisions of provincial legislation and the federal Bankruptcy and Insolvency Act (BIA). This operational inconsistency meant that the receiver would not be able to exercise their obligations under the BIA.

The Alberta Energy Regulator (AER), under the Oil and Gas Conservation Act (OGCA) and the Pipeline Act, approves the licensing of wells and the transfer of licenses necessitated when assets are sold. In June 2015, the AER advised  Grant Thornton that it required confirmation that the Receiver had taken possession and control of all of the assets of Redwater before the AER would consider any proposal dealing with the sale of assets. The concern was that of the 84 wells that Redwater owned or had working interests in,  68 which were non-producing or non-operating.  In July,the Energy Regulator took the position that before licenses could be transferred to facilitate any sale  “these licenses pose an environmental and safety hazard. Therefore, the AER believes that the Licensed Properties should be closed and abandoned for environmental and public safety reasons.` Under the OGCA, licensees include Trustees in Bankruptcy. The AER refused to allow the Receiver to `pick and choose`which assets to manage and which assets to declaim.

A key issue in any receivership is environmental liability. Receivers do not wish to take on these duties if they are personally liable for the bankruptcy estate they are administering. This issue arose about two decades ago with the AbitibiBowater (out of Newfoundland) decision that produced changes to the BIA strictly limiting the personal liability of the receiver.

The Canadian Association of Petroleum Producers (CAPP) supported the position of the Alberta regulator. CAPP`s position is intriguing because it essentially sides with an environmental position which appears to conflict with the financial realities of an industry that consumes large amounts of both debt and equity capital to conduct its business affairs. If creditors ultimately lose at the Alberta Court of Appeal or Supreme Court level, bank financing to the oilpatch may be curtailed, further damaging an industry reeling from low oil prices.

CAPP argued that the Orphan Well Association cleans up abandoned wells that no one claims liability for.   The Association acknowledged there  “are benefits and burdens that are attached to the licence, including abandonment, remediation and reclamation.” Chief Justice Wittman noted that “CAPP adds that when funds are advanced to companies, they are lent against all of the assets including the benefits and the burdens, and which means the value in the production as well as the obligation to clean-up after production is completed.`..(and further)   “that if the Court accepts the Trustee’s argument, the whole regime around the Orphan Well fund will need to be revisited and may even collapse.”

This case pits (indirectly) two agents of the Crown in Right of Alberta: AER and ATB. ATB supported the application of the Receiver. ATB argued “that if the AER’s position is to be accepted, the distribution scheme and certainty provided to creditors under the BIA will be jeopardized. The ATB submits that the AER has nothing to gain by opposing the transfer of the retained licenses, other than as leverage to improve the priority of its claim for the posting of security.”

The judge held that the federal BIA must override provincial regulation since the Receiver could not carry out its duties under the federal statute and also comply with the requirement of the provincial regulator. Furthermore, the purpose of the BIA, that is providing a predictable process for resolving bankruptcy claims, was frustrated by the application of the provincial statute.

Two final observations might be made.  Firstly, this is really the first case where this the energy regulator has acted on behalf of the environment and thereby thwarting a creditor’s claims. This begs the question -“why had not the regulator acted in this manner before?”  One reason may be that the recent decline in oil prices have produced more bankruptcies and operators abandoning wells. Secondly, the conflict between environmental considerations and creditors’ rights reminds one of the confrontation between the provincial Social Credit government and the banks in the late 1930s.  William Aberhart’s government legislated in various creative ways to frustrate the claims of banks foreclosing on farmers and homeowners.

The AER has appealed the decision to the Alberta Court of Appeal.Stay tuned for round two!

Read as PDF – Redwater court decision sides with lenders

northern-bear-golf-course-up-for-sale28-10-16-ej

Provinces toughen deposit conditions for well clean-up

Osler LLP Analysis of Redwater

Grant Thornton LLP- Trustee in Bankruptcy- Various Links

The Entire Oilpatch is Watching this Case- Oil & Gas Investments Bulletin

Dentons LLP- Analysis of Redwater

Court rulings could have far reaching implications for abandoned wells in Alberta2-6-16 CH

RedWater Ruling Provokes Debate Over Orphan Well Costs Daily Oil Bulletin 3-6-16

Justice Wittmann’s decision in Redwater Resources

Read as PDF : 2016abqb278-Justice Wittmann’s decision in Redwater Resources

CBC.ca story on orphaned wells21-6-16

Abandoned wells could rise after Alberta ruling sides with lenders20-5-16 GM

Bondholders cry foul over Twin Butte’s planned sale8-7-16 GM

Debt in deep, Tuscany Energy joins list of failed juniors9-7-16 EJ

Tervita opts for grace period on interest16-8-16 EJ

Debt holders balking at Twin Butte deal26-8-16 GM

Indebted Tervita’s service division sold for $42.8M30-8-16 EJ

Legal notice Connacher Oil and Gas30-8-16 GM

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Moody’s press release energy companies

Twin Butte debt holders vote down Reignwood’s takeover bid30-8-16 GM