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Asset Retirement Obligations in Bankruptcy: The Conflict Between Bankruptcy Law and Environmental Law


Presented to the Faculty of the College of Law

University of Tulsa



Bradley Parkes FCSI, P.Geo



In many ways environmental law is about property rights, both private and common property. However, bankruptcy law often conflicts with goals of environmental law; while bankruptcy law aims to give companies a new start by discharging obligations and liabilities, environmental law focuses on protecting society through imposing obligations on companies. How these liabilities are treated in bankruptcy dictate whether the polluter, the creditor or the taxpayer pays for environmental liabilities.


  1. Abstract

  2. Introduction

  3. Background

    1. The Polluter Pays Principle

  4. Issue

    1. Priority vs Super-Priority

    2. Environmental Liabilities in The Process of Stay

    3. Federal Paramountcy

  5. Case Analysis

    1. Monetary or Regulatory Liabilities

      1. Panamericana de Bienes y Servicio v. Northern Badger Oil & Gas Ltd

      2. Newfoundland and Labrador v AbitibiBowater Inc.

      3. Orphan Well Association v Grant Thornton Ltd

  6. Discussion

    1. The Consequences of a Too Lenient Policy

      1. PricewaterhouseCoopers v Perpetual Energy Inc. and Riddell-Rose

    2. The Consequences of a Too Strict Policy

      1. Lamford Forestry Products

  7. Potential Solutions

    1. Legislative Amendments

    2. New Legislation

    3. Bonding

    4. Monetize Common Assets

    5. Reclamation Trust

  8. Conclusion

  9. Bibliography


Environmental law often contrasts with other areas of law, such as bankruptcy law.  The conflict between these different branches of law are primarily the result of their differing aims. The goal of bankruptcy law is to reduce financial obligations and offer a fresh start, whereas environmental law imposes obligations to protect the health and safety of society (Dalton & Kerringan Jr., 1990).

On the one hand, the federally created bankruptcy policy requires that the assets of a debtor be preserved and protected, so that in time they may be equitably distributed to all creditors without unfair preference. On the other hand, the environmental policies…require those within its jurisdiction to preserve and protect natural resources and to rectify damage to the environment which they have caused. (Dalton & Kerringan Jr., 1990. P. 2)

Environmental liabilities are obligations owed in the form of remediation or reclamation. Under the Bankruptcy and Insolvency Act of Canada[1] (“BIA”) environmental liabilities are considered a monetary liability while under provincial environmental statutes they are defined as non-monetary, regulatory obligations. The courts, however, have treated them as both monetary and regulatory non-monetary liabilities. How the courts interpret environmental liabilities will affect the manner in which oil and gas companies deal with their Asset Retirement Obligations (“ARO”). AROs are the upstream oil and gas sectors major environmental liability (Rogers & Atkins, 2015). Estimates to remediate AROs in the province of Alberta range from CDN$8 billion (Dachis & Shaffer, 2017) to $70 billion (Bakx, 2019, April 8). As society transitions to renewable energy sources this figure will continue to increase and have the potential to create a burden on taxpayers and the environment.

Should regulations become too strict it will create the unintended consequences of bankruptcies, transfers in bad faith and a move from the polluter pays principle to one where the creditor or taxpayer pays.

If the policy is too lenient more environmental liabilities will be created than industry has the ability to remediate. Leniency can create incentives to attempt to discharge and transfer environmental liabilities prior to bankruptcy to protect creditors and shift the burden from polluter pays to taxpayer pays.

This is an important issue because both a too strict or a too lenient policy have the potential to disrupt the polluter pays principle and transfer the liability to the taxpayer.


The possibility that environmental liabilities from the resource sector become the responsibility of the state is not a new phenomenon. Mining boom towns, such as Uranium City in northern Saskatchewan produced uranium for the Manhattan Project but left abandoned uranium mines scattered across the region. These mines are now being remediated by the government with taxpayer funds (Drinkwater, 2017, May 15.) These mines date from prior to the development of environmental statutes and when it was a common occurrence for industrial projects to be abandoned in bankruptcy. In many ways environmental law is about the protection property rights, both private, but more importantly common property (Centemeri, 2009).

As of 2017, there were over 440,000 oil and gas wells in Alberta (Cryderman, 2017, Nov. 12). The number of inactive wells in Alberta has increased at six per cent annual growth rate from around 40,000 in 2002 to around 90,000 in 2017 (Shauer, 2018, Oct. 10). Of these inactive wells approximately 5,000 are orphan wells that have no owner (Alberta Government).

As the world transitions to renewable energy producing oil and gas assets will become liabilities, potentially increasing the number of orphan wells. Idle and suspended wells represent an opportunity cost towards the use of land as well as a risk to the environment. They carry the risk of leaking methane, they interfere with productivity of groundwater wells (Dachis & Shaffer, 2017) and have the potential to contaminate aquifers with uranium, lead, salt, radon and sulfates (Muehlenbachs, 2009).

The most extreme example of an orphaned well in Canada that contaminated the surrounding environment involves the Peace River Oil Company Well No. 1. This well was spudded in 1916 and flowed natural gas and salt water into the Peace River for almost 90 years (Nazaruk, 2005, Nov).   It took five million dollars and 87 years to end the wells discharge into the Peace River (Jaremko, 2013). This type of disaster is rare, but fugitive methane releases are a common occurrence and contribute to increases in atmospheric methane.

A University of Guelph study conducted on the mobility of natural gas from shale wells found potential for concern with respect to contaminated aquifers and fugitive methane gas releases (Cahill – Parker, 2017). Thousands of idle natural gas wells could continue to contribute to emissions even after they become inactive should remediation efforts not be prompt and effective.

Environmental liabilities are legal obligations that result from statutes that are designed to protect health and the environment (Rogers & Atkins, 2015). They differ from other liabilities in that there is no cash delivered to satisfy the debt. Although no cash is delivered, they represent negative cash outlays at the end of the asset life when it no longer generates any revenue (Rogers & Atkins, 2015). Unlike more commonly encountered liabilities, environmental liabilities are non-contingent and have no counter party for the debtor (Rogers & Atkins, 2015). However, counter party risk still exists for the taxpayer in that the debtor may be unable to fulfil their obligations. In addition, environmental liabilities have no principal or interest rate established at the creation which incentivizes the delay in reclamation (Rogers & Atkins, 2015). However, since there is no monetary cap on the size of the liability and there is uncertainty about the timing of the outlay, accurate estimates about AROs are difficult (Rogers & Atkins, 2015). These features emphasize the non-monetary and regulatory nature of environmental liabilities. The importance of environmental liabilities being considered regulatory and non-monetary is that non-monetary liabilities cannot be discharged in bankruptcy.

Even though environmental liabilities have the characteristics of a non-monetary liability, exploration and production companies must account for them on their financial statements. A survey of oil company balance sheets determined that the environmental liabilities related to plugging wells and abandoning wells and reclaiming the affected land represent almost half of all liabilities outstanding (Rogers & Atkins, 2015).  This is a significant amount of eventual cashflow, but as liability with no interest accrual they are treated as low priority, especially in challenging price environments where producing assets become closer to being uneconomic. Companies delay abandoning wells for various reasons. The two most common include:

1) A plan for future reactivation when commodity price increases or technology improves the reservoir recovery factor and;

2) To delay realization of remediation costs.

A University of Calgary study found that the choice to reactivate a well does not increase proportionally with an increase in price or recoverable reserves due to advances in technology (Muehlenbachs, 2009). The study found that only 12 per cent of inactive wells are ever reactivated even in environments of improving prices and technology (Muehlenbachs, 2019). This refutes the common argument that a well is being left idle until a future reactivation date and suggests that remediation costs dominate the decision process.

The longer a well remains inactive the more likely the well will become an orphan (Muehlenbachs, 2009) and as the outstanding liabilities in the sector increase any self regulatory efforts such as the Orphan Well Association (“OWA”) will be stretched financially.  The OWA is an industry funded organization that absorbs the costs of plugging and abandoning orphan wells. It receives its funding through a levy on oil gas producers. However, the present amount raised by the levy could end up being insufficient should the number of orphan wells expand dramatically. This depicts the trade off between the polluter pays, creditor pays or taxpayer pays models.

If AROs are monetary liabilities that can be discharged in bankruptcy then there are two potential outcomes. The first is that the levy to fund the OWA will have to increase and the polluter pays model is transferred to one where private industry pays. This would be a shift of liability to responsible and prudent operators from those who where less vigilant. The second outcome is that the levy is not increased and the OWA does not have the funds to meet all inherited ARO’s and the polluter pays model becomes a taxpayer model. Neither is a desired outcome.

In the opposing view, if bankruptcy courts treat environmental liabilities as regulatory orders that are non-monetary and benefit from super-priority it will have an impact on policy and the behaviour of creditors. TD Securities noted the potential effect on the cost of capital for oil and gas companies:

[T]he Supreme Court of Canada released its decision in which it will not allow receivers and trustees to disclaim unprofitable assets…From a public and environmental perspective, this decision is indisputably favourable, while the ramifications on public companies…are complex.

Could this limit access to capital, or increase borrowing costs? If the assets to be acquired have environmental obligations of higher priority than the lender, then the lender will need to be adequately compensated. (Keaney, Jarrah, Hulshof, Bilkoski & Besaw, 2019)       


Increasing the cost of capital will not alleviate already created environmental liabilities. In the long run it may have an effect in reducing or suspending marginal projects, but for already incurred Asset Retirement Obligations, an increase in the cost to do business further weakens existing operators and puts their financial condition closer to insolvency. This would also shift the polluter pays model to one where the creditor pays.

If tighter credit markets lead to operators selling assets another risk arises. In PricewaterhouseCoopers (“PwC”) vs Perpetual Energy Inc.[2], the trustee sued Perpetual Energy Inc. in an attempt to unwind a 2016 asset sale between Perpetual and Sequoia Resources. The case rests, in PwC’s own words, on elements of the transaction that show a lack of good faith.  PwC cites Tronox Inc. et al v Kerr McGee Corp.[3], a US bankruptcy case that involved the transfer of distressed assets with significant environmental liabilities for a nominal sum. In both cases the acquirer filed for bankruptcy shortly after the acquisition (Gowlings, 2019).


The Alberta Energy Regulator (‘AER”) describes the series of steps that lead to Sequoia’s bankruptcy as:

Corporate transactions can result… in licences changing hands…this can be used by some companies to avoid their responsibility, potentially leaving millions of dollars of liability for the Orphan Well Association.

This is what happened after a corporate transaction between Sequoia and Perpetual Energy (Perpetual), allowing Perpetual to pass licences, and all liability, for many unprofitable and unwanted assets to Sequoia.

Sequoia has since claimed bankruptcy…The trustee has raised concerns that Sequoia took on significant liabilities that were not in the best interest of the company or its stakeholders. If these allegations are proven in court, it is most concerning. (Alberta Energy Regulator, 2019. Para 6-8)

This case may be an extreme situation where a company is accused of transferring assets to a smaller company for the purposes discharging liabilities. It raises the question that if a company cannot sell its’ assets and faces a higher credit risk, will creditors retreat from lending to the sector? If so, when secured creditors remove their capital there will be fewer assets left in the estate of a bankrupt entity to cover already created environmental liabilities. After creditors are gone and transferring of assets in good faith becomes challenging, there is only one place left to transfer environmental liabilities and that is to the taxpayer.

The Polluter Pays Principle

Canada’s environmental liability regime is legislated in the Canadian Environmental Protection Act[4] (“EPA”), and is based on the polluter pays principle. The polluter pays principle is based on the idea that the cost to remediate should be borne by the entity that created the environmental liability (London School of Economics, 2018, May 11).

Prior to Anadarko Canada Corporation v. Canadian Natural Resources Limited[5] (“CNRL”), the common view was that remediation costs traveled with the land in any sale (Oran & Reiner, 2016).  In 1995, CNRL purchased assets from Norcen Energy Resources Ltd. Norcen was ultimately acquired by Anadarko.  The purchase included lands where an oil battery had been reclaimed in 1968 and a reclamation certificate had been issued. When the lands were sold the licence of the battery was not transferred as the facility had been reclaimed and no surface license existed.  In 1998, Anadarko received notice from the Alberta Environmental Protection Agency to remediate the site due to salt water damage. Although CNRL had indemnified Anadarko in the purchase, the court determined that indemnity only applies to matters that occurred after the sale date. The Anadarko decision promotes the desired goal of polluter pays.

The process of bankruptcy in Canada is governed by the BIA and the Companies' Creditors Arrangement Act[6] (“CCAA”).  With in the BIA, section 40(1)[7]  allows the estate to abandon any property that is burdensome and inconsequential of value. This allows the trustee to abandon worthless or negative value properties and shift the cost of remediation to the taxpayer. This section of the BIA appears to contradict the goal of polluter pays. This is how bankruptcy law and environmental law conflict.

In certain circumstances the courts have decided there are limits to these actions. This seems to be a good outcome, but it subverts the polluter pays principle and creates a creditor pays system. It also appears to conflict with other federal legislation. This decision goes against the federal legislation mandating that the polluter pays, as the burden to pay for plugging and abandoning wells is placed on the creditor and secondly, it created a super-priority of debts, which makes the BIA subservient to provincial regulation.

This is why society needs policies that do not restrict capital but encourages a reasonable time frame towards remediation. This policy should balance the interests of the public while still incentivizing the production of oil and that will be required during the transition to renewable energy.


Priority vs. Super-Priority

Section 14.06 of the BIA was enacted to limit the liability of trustees for environmental claims, permit trustees to renounce or disclaim properties affected by environmental conditions or damage and provide a priority scheme for the costs associated with regulatory and financial orders from provincial regulatory authorities (Canada, House of Commons, 35th Parliament, 2nd Session, Minutes of Proceedings, 11 June 1996). This section treats environmental liabilities as a monetary liability by allowing their discharge during the bankruptcy process.

Three sections of the BIA set out the basic steps for a for bankruptcy proceeding. Section 71 of the BIA states that when a bankruptcy proceeding is begun the debtor’s assets become vested in a trustee. The duty of the trustee is to unwind the business and liquidate the assets with the intent to distribute the proceeds to creditors. Section 136 sets out the priorities granted generally to creditors and section 141 provides that all proven claims in a bankruptcy shall be paid rateably. The priority for the rateable disbursement of proceeds from the liquidation of the debtor’s assets has secured creditors ranked first followed by preferred claims, including costs of administration, with the balance, if any, distributed to unsecured creditors.

If environmental liabilities are monetary claims, they can be discharged and are subject to section 136. If environmental liabilities are treated as non-monetary liabilities and regulatory orders, there is potential for a regulator to have super-priority over secured creditors. The issue of super-priority, beyond that it conflicts with federal statute, is that it appears to establish a third party pay system circumventing the polluter pays principle (Wellstead, Rayner & Howlett, 2016). Stating this more succinctly,

Super-priority for the Regulator is seen as transferring the cost of remediation from the debtor to the creditors. (Girgis, 2019, Mar 1.  p.7).

Further, the potential for super-priority allows a regulator to avoid the process of stay.

Environmental Liabilities in the Process of Stay

Environmental liabilities in the form of monetary debts that are owed to a regulatory agency do not hold a special rank in the bankruptcy process (Chaput, 2012).  These debts are considered unsecured claims unless the regulatory body holds a contractual security, such as surety bond (Chaput, 2012).  The lack of clarification on whether an environmental liability is a monetary liability or a regulatory obligation has an impact on the process of stay.  

Section 14.06(5) of the BIA allows the court to grant a stay “for such period as the court deems necessary for the purpose of enabling the trustee to assess the economic viability of complying with the order”[8]. This process works that when a company files for bankruptcy protection the trustee is given time to efficiently wind down the liabilities of the estate by delaying the request for repayment of debts until a liquidation of assets can be completed. This process allows the trustee to determine the amount of funds that can be rateably disbursed according the priority ranking of creditors.

If environmental liabilities are monetary, they are subject to stay of proceedings. If the liabilities are non-monetary, the stay of proceedings should not have any effect on the statutory duties of a regulator. In this case the obligations owed to the regulator enjoy a form of super-priority.  This creates an incentive for regulators to disguise monetary debts as regulatory orders.

The US Bankruptcy Code[9], allows certain proceedings that are incompatible with the stay of proceedings to be stayed. By using the pecuniary purpose test, courts can determine legitimate regulatory orders from monetary liabilities disguised as orders to evade the priority of creditors in bankruptcy (Chaput, 2012).

The pecuniary purpose test allows the courts to focus on whether the regulatory proceeding relates to the protection of the government's pecuniary interest in the debtor's property, and not to matters of public safety. Proceedings relating to public safety are exempted from stay. However, the pecuniary purpose test has not been formally adopted by Canadian courts (Chaput, 2012) and this lack of a formal test to determine the nature of an environmental liability has contributed to the conflict between bankruptcy law and environmental law in Canada.         

Federal Paramountcy

The doctrine of federal paramountcy stipulates that provincial law and regulation ranks below federal law and is described as that when there is an inconsistency between enacted federal and provincial legislation the federal law takes primacy (Mastrangelo. 2016, Jan 2. Para 2).

Both the issue of stay and priority are sub-issues of federal paramountcy. Provincial legislation treats environmental liabilities as statutory and regulatory, making them non-monetary liabilities. Federal bankruptcy statutes describe environmental liabilities as provable claims, making them monetary liabilities and subject to stay and priority. The definition is found in Section 14.06(8) of the BIA (Lubben & Ben-Ishai, 2011):

[A] claim against the debtor company for the costs of remedying any environmental conditions or environmental damage affecting real property or an immovable of the debtor shall be a provable claim, regardless of whether the condition arose or the damage occurred before or after the date of the filing under which proceedings were commenced under both of those Acts. (Lubben & Ben-Ishai, 2011. P.10)

This should dictate that environmental liabilities are monetary in the bankruptcy process. This conflict is important because if environmental liabilities are treated as a non-monetary liability the duty to plug and abandon and honour environmental commitments is a regulatory duty and the trustee would have to expend the capital prior to the disbursement of the proceeds. Regulatory orders are not subject to stay and gain a form of super-priority.

This seems to conflict with federal legislation, which treats environmental liabilities as a monetary claim, in this interpretation the regulator does not hold special priority in the bankruptcy process and the environmental liabilities become an administrative expense and subject to stay. Under Canadian federalism, resources are the domain of the provinces and this outcome reduces the effectiveness of provincial environmental legislation but would not conflict with federal paramountcy.


“Not all orders issued by regulatory bodies are monetary in nature and thus provable claims in an insolvency proceeding, but some may be, even if the amounts are not quantified at the outset of the proceeding.”[10]


The inconsistent treatment of environmental liabilities is seen in the different outcomes of the most significant cases, Northern Badger, Abitibi and Redwater.

If asset retirement obligations and other environmental liabilities are non-monetary and a regulatory order, the regulatory body can be considered in benefiting from super-priority and a paramountcy to federal legislation.  If the regulator does not act as a “detached regulator or public enforcer issuing [an] order for the public good”[11], and for example pursues political aims, monetary claims can be disguised as regulatory orders. This would shift the costs of remediation from the polluter to creditors and create a third party pay principle in place of the polluter pay principle (Bankes, 2016, June 17). This could impact financial markets and affect Canadian federalism.  If AROs are monetary liabilities they can be discharged in bankruptcy, the polluter pays principle is shifted to taxpayer pays. This could weaken provincial environmental regulation and interfere with provincial administration of resources in their territory. Lacking a formally adopted pecuniary purpose test the courts in Northern Badger and Abitibi created tests to determine if the environmental liabilities were monetary or non-monetary leading to opposite outcomes.

Panamericana de Bienes y Servicio v. Northern Badger Oil & Gas Ltd

“I do not agree… that the public officer or public authority given the duty of enforcing a public law thereby becomes a “creditor” of the person bound to obey it.”[12]


Northern Badger Oil and Gas Ltd. operated a number of oil wells in the province of Alberta. The Energy Resources and Conservation Board, who was a predecessor regulator to AER, issued an order requiring Northern Badger to abandon several non-producing wells in accordance with environmental regulations. Subsequently, Northern Badger filed for bankruptcy and a receiver was appointed. It was determined that the assets owned by Northern Badger were insufficient to pay Panamericana’s secured claim as well as the abandonment and remediation costs. The courts choice was between creditor pays and taxpayer pays.

In the case before the Alberta Court of Queens Bench it was held that the regulatory order requiring the abandonment of the well sites at the expense of the secured creditor's was beyond the province's constitutional powers and directed the receiver to not to comply with the order.[13] It was decided that the regulator was a creditor and that the BIA provided direction on the distribution of proceeds from the liquidation. Federal legislation prevails over provincial regulation was the decision.[14]

The decision was overturned in the Alberta Court of Appeals. The Appeals Court decided that the receiver was obligated to pay for the well abandonment at the detriment of the secured creditor[15] and there was no operational conflict between provincial and federal law.[16]

In the test applied by the Appeals Court it was noted that a provable claim in bankruptcy proceedings has two features.[17] The first feature is that the bankrupt must have been subject to a liability. This first feature was present because the day the wells were spudded, Northern Badger was liable for their abandonment.[18] The second feature is that the liability must be owed to the party with a provable claim. The court determined that the abandonment liability was not owed to the regulator, but to the public. This made the second feature not present and the liability could not be a provable claim under the test.[19]

Northern Badger established the precedent that an obligation of a trustee in the bankruptcy process is to comply with health, public safety or environmental standards statutes prior to honouring bankruptcy priority. Estate assets must be expended to satisfy the regulatory liability even if it leads to prejudice against the creditors. By enforcing the authority of its mandate, the regulator does not become a creditor.[20] Instead the regulatory order created a statutory duty that binds the receiver’s actions in situations related to health and safety.[21] The result is that a regulator, validly operating under its mandate and acting as a disinterested regulator, may enforce orders requiring a cash outlay at the expense of secured creditors. This action does not make the regulator a creditor and does not conflict with federal bankruptcy priority schemes (Thompson, 1992).

Although the result of this case appears to be consistent with a positive outcome of avoiding the discharge of environmental liabilities in bankruptcy, the unintended consequence of legislating super-priority is a transfer from polluter pays to creditor pays. This shift in liability could lead to creditors to remove capital from the industry. Resource extraction is a capital-intensive business and should lenders fear the courts will find them responsible for environmental liabilities due to regulator super-priority, capital will be removed prior to any weakening of the financial state of borrowers.

For already created environmental liabilities, the removal of capital will leave firms less able to meet their obligations as the value of their assets decline without a subsequent reduction in liabilities. This could ultimately lead to a transfer from creditor pays to a system of taxpayer pays.

Newfoundland and Labrador v AbitibiBowater Inc.

“Monetary claims disguised as regulatory orders issued in relation to pre-filing activities on lands which are no longer in control of a debtor… are reducible to money”[22]


AbitibiBowater was a forestry company operating across Canada. In 2009, Abitibi declared bankruptcy and the Quebec Superior Court issued an initial order pursuant to CCAA and granted stay. After the stay was granted the Province of Newfoundland argued that Abitibi was responsible for the remediation costs for alleged environmental contamination of a mine located in Newfoundland. Supporting the court in Newfoundland, the Province of Quebec served a Motion for a Declaration regarding orders issued pursuant to the Environmental Protection Act[23] stating that the claims procedure shall not extinguish the environmental liability in bankruptcy. “EPA orders are not financial or a monetary fine”[24] and do not qualify as claims in bankruptcy, stated the Quebec court. Abitibi’s counsel argued that this would give the province a position of super-priority. The decision was appealed in the Quebec Supreme Court.

To determine if the liabilities were legitimate regulatory orders or monetary debts disguised as orders, the Supreme Court of Quebec applied the BIA as a test. The test involved determining three issues. The first was whether there is a debt to a creditor. The second involved whether that the debt was incurred before bankruptcy and the final condition was if it is possible to attach a monetary value to the debt. [25] If the test could be satisfied the liability was monetary and could be discharged in bankruptcy.

The court concluded that the environmental liabilities should be treated as monetary claims.  It was argued that if the obligations to remediate property are to be complied with by the trustee, the regulator will be given a position super-priority which is not provided for in section 14.06 of the BIA.[26] This would create a third party pay principle and replace the polluter pay principle with a creditor pays outcome. The court stated the Province of Newfoundland had taken steps to make itself a creditor[27] and would benefit financially from the remediation and determined the orders were unenforceable and of a monetary nature.[28] The court decision resulted in shifting the liability from polluter pays to taxpayer pays.

Orphan Well Association v Grant Thornton Ltd

“Bankruptcy is not a license to ignore rules”[29]

The most recent case and the one that is the most relevant towards the potential orphan well crisis is that of Redwater Energy. Redwater was an oil and gas company with over 100 wells that went bankrupt in 2015. While in receivership the trustee attempted to sell the profitable wells to satisfy the secured creditors while abandoning the unprofitable wells. The AER and OWA sued the trustee, Grant Thornton and Redwater, first in the Alberta Court of Queens Bench and then in the Alberta Court of Appeals, losing both times. The decision of the lower courts was that the trustee could abandon the non-productive wells under the BIA and that the doctrine of federal paramountcy applied.[30] The court considered the two parts of the paramountcy test previously established by the Supreme Court of Canada (“SCC”)[31],

  1. Whether it is possible to apply the provincial law while complying with the federal law and;

  2. Whether the provincial legislation is incompatible with or frustrates the purpose of the federal legislation.

In considering the paramountcy test the court determined that neither question could be answered in the affirmative and that federal law prevailed over provincial law, allowing for the trustee to abandon the unprofitable wells.

The dissent in the lower court challenged the decision by relying on the decision in Northern Badger and held that the conditions set out in Abitibi could not be satisfied. The dissent wrote that provincial environmental legislation that regulates well abandonment, site reclamation and license transfer is an ongoing obligation that continues past bankruptcy and does not constitute a monetary claim. The AbitibiBowater test could not be satisfied (Buckingham, Gaston & Paplawski, 2016, May 19). The decision was appealed.

The Supreme Court of Canada was the final arbiter of the Redwater case. The SCC overturned the lower courts decision that the liability was monetary in nature. Ultimately, the SCC determined that the abandonment costs were not dischargeable as the AER did not assert a provable claim and therefore was not a creditor.[32] The determination resulted in finding no inconsistency between the provincial regulatory order and the federal bankruptcy legislation.[33] The decision sets the precedent of creditor pays. This seemingly positive outcome will have unintended consequences.


The outcome of the Supreme Court of Canada’s decision in the Redwater case will have an effect on bankruptcy law in Canada. The decision of the Court appears to protect the taxpayer from the costs of orphan wells but may contribute to increasing them. In a legal note to clients Borden Ladner Gervais LLP (BLG) listed the potential impacts as the following:

1. More Orphan Wells – In light of Redwater, trustees are likely to be prevented from disclaiming uneconomic assets and selling economic ones. Instead, trustees will now be required to sell assets in "bundles" (good and bad assets together), or alternatively, perform abandonment and reclamation obligations as conditions of selling economic assets…. The net result is likely to be that both good and bad assets will be designated as orphans.

2. Less Financing – We also expect a chill on lending and investment in the oil and gas industry, and other industries where environmental liabilities feature prominently, such as the mining sector... Consequently, credit for all businesses in the affected industries will be more expensive and less accessible, stunting economic growth and causing more financial distress and failures.

3. Fewer Insolvency Proceedings – Redwater creates disincentives for secured lenders to commence insolvency proceedings…owners and management of insolvent corporations with significant environmental obligations may look to hand the keys over to secured creditors, which will leave the insolvent estate in limbo with no responsible person managing environmentally sensitive (or even dangerous) assets. (Krüger, Gurofsky, Maslen, & Cameron, 2019. Para 15-20)

The BLG legal note does a good job of summarizing the effects should regulations not change. However, if policy becomes too lenient or too strict in reaction, both outcomes lead to a greater number of orphan wells and increased burden on the taxpayer.

The Consequences of a Too Lenient Policy: Taxpayer Pays

The consequences of a too lenient policy towards Asset Retirement Obligations is that the polluter pays principle is shifted to taxpayer pays. This happens when environmental liabilities are considered monetary liabilities and they can be discharged in bankruptcy or treated as administrative costs and pushed down the rank in priority.

In this scenario, too many wells get drilled and more companies take on environmental liabilities than are able to service them. A consequence is that companies who have assets near the end of their life will look for ways to rid themselves of those liabilities through transfer or sale.

PricewaterhouseCoopers v Perpetual Energy Inc. and Riddell-Rose

"An informed buyer and an informed seller, dealing with each other in their own self-interest and at arm's-length.”[34]


The outcome of this case is not consistent with the polluter pays principle and depicts what can happen if environmental liabilities are treated as monetary obligations, regardless of whether the transaction was arms length or not. In PricewaterhouseCoopers (“PwC”) v Perpetual Energy Inc, Perpetual was accused of selling assets with attached environmental liabilities to a smaller company, Sequoia Resources, for a nominal sum. The smaller company declared bankruptcy shortly after.

In 2016, Sequoia bought thousands of aging gas wells and assumed over $130 million in environmental liabilities as part of the transaction. By early 2018, Sequoia notified the AER that it would be ceasing operations immediately and leaving close to 3000 wells to the Orphan Well Association to plug and abandon. These wells represented a remediation cost of $225 million and included the assets purchased from Perpetual Energy Inc. The trustee filed suit against Perpetual.

PwC alleged that the 2016 transaction was a deliberate transfer of distressed assets with the purpose to rid Perpetual of AROs. The trustee asked the judge to annul the sale or award $217-million in damages to cover the remediation costs. These damages would protect the creditors of Sequoia from assuming the liabilities.

At the time of writing, all but one of the allegations against Perpetual Energy had been dismissed. The court determined that the purchaser was a knowledgeable buyer and the transaction was done at an arm’s length.

Whether in good faith and arms length or not, Perpetual was able to avoid AROs in the amount of over $130 million by selling these assets to Sequoia Resources. The subsequent bankruptcy of Sequoia transferred this liability to the OWA. If the OWA does not have the funds to cover these liabilities either the levy will have to increase and industry will end up paying or the taxpayer will. Instead of the polluter pays outcome the liability has been shifted to either industry or the taxpayer. If policy remains too lenient more transfers like this will occur.

The Consequences of a Too Strict Policy: Creditor Pays

The unintended consequences of a too strict policy towards Asset Retirement Obligations is that the polluter pays principle is shifted to creditor pays. In this scenario, environmental liabilities enjoy a form of super-priority. Due to a fear of super-priority capital will be restricted or withdrawn from the energy sector prematurely to protect creditor priority (Wellstead, Rayner & Howlett, 2016). This could risk leaving firms insolvent and lead to liabilities having to be assumed by the taxpayer. It would be a shift from polluter pays to creditor and eventually to the taxpayer.

Lamford Forestry Products

“The balancing of values…fall in favour of protecting the health and safety of society”[35]

In the early 1990’s Lamford Forest Products was served a Pollution Abatement Order by the BC Provincial Ministry of Environment.  The sawmill activities had contaminated the property with heavy metals, hydrocarbons and other toxic refuse. Shortly afterwards the company entered bankruptcy protection.

The case was eventually heard before the Supreme Court of British Columbia where it was decided that the order was not a provable claim in bankruptcy and the that the liability was statutory in nature and could not be discharged in bankruptcy to protect the creditors of Lamford.[36] The court determined that the stay of proceedings should not shield a trustee from performing obligations that constitute a duty owed to society.[37]

This decision treated the liability as non-monetary and not a provable claim in bankruptcy.  The outcome of this case shifts the polluter pays principle to a creditor pays principle and introduces a third party pays system.


Legislative Amendments

One way to rectify this conflict is that legislation is enacted to clarify whether environmental liabilities are monetary or of a statutory nature. This could be done through legislating super-priority. Parliament could amend section 14.06(7) of the BIA and section 11.8(8) of the CCAA so that a super-priority for environmental liabilities is placed on the property of the bankrupt entity (Clarkson, 2011). This would rank the liability above secured creditors. By doing so this charge would work to internalize the cost of environmental harm (Clarkson, 2011).  Internalizing environmental liabilities would give companies an incentive to make investments in environmental protection and force secured creditors to add environmental terms in their loan agreements (Clarkson, 2011). This would have the negative potential outcome of raising the cost of capital which does nothing to eliminate already created environmental liabilities and could potentially create more orphan wells.

Another amendment that could be adopted is that Canadian courts could formally recognize a version of the pecuniary purpose test adopted by US courts. This would give the courts the ability to determine whether a monetary claim is being presented as a regulatory order in cases where the regulator was not acting in a disinterested manner. This test would aid in matters of federal paramountcy and remove the conflict between federal and provincial statute.

At the provincial level, Alberta legislation could provide incentives to expedite plugging and abandoning wells by instituting strict time line on how long a well can remain inactive. Texas Administrative Code, Title 16. Part 1. Chapter, Rule §3.14[38] requires that within 1 year of the suspension of a well, reclamation must begin. Part 11 of Alberta’s Oil and Gas Conservation Act[39] and AER Directive 013 (Suspension Requirements for Wells)[40] require that wells inactive for 12 months must be suspended but Directive 20 (Well Abandonment)[41] allows for a well to remain suspended indefinitely except under limited circumstances where abandonment can be ordered.  These limited circumstances could be broadened.  The negative consequence to this legislation is that this may increase orphan wells by putting extra financial pressure on companies that are already struggling with the price environment and lack of market access.

The provincial government could amend legislation relating to the annual levy to the Orphan Well Association. Section 73 of the Oil and Gas Conservation Act, grants the AER a regulatory duty to levy fees to fund the Orphan Well Association.  The Levy formula is contained in Directive 006 and is calculated as:

Levy=A/B×$15 000 000, where:

A equals a licensee’s or deemed liabilities on February 6, 2016, for all facilities, wells, in accordance with Directive 006 (Licensee Liability Rating (LLR) Program and License Transfer Process)[42], Directive 011 (Licensee Liability Rating (LLR) Program: Updated Industry Parameters and Liability Costs)[43], and Directive 075 (Oilfield Waste Liability Program)[44]; and

B equals sum of the industry’s deemed liabilities on February 6, 2016, for all facilities, wells sites as calculated in accordance with Directive 006, Directive 011, and Directive 075. (AER – Directive 006, P.6)

The A portion of this levy formula could be increased to further cover the costs of orphaned wells. Directive 11 requires the AER to collect security deposits under the LLR program. Under this program a company must maintain a ratio of 1.0 or greater with respect to the ratio of assets to environmental liabilities. When the ratio falls below 1.0 a security deposit is required (Alberta Energy Regulator, Directive 006, page 4).  Although amendments have been made to Directive 11, the LLR calculation of abandonment expenses often falls short. An industry survey conducted by the Energy and Utilities Board (a predecessor to the AER) revealed that the costs of reclamation and abandonment were consistently higher than set out in Directive 11. The majority of responses indicated that abandonment costs were more than double the cost parameters set out in the LLR calculation (Unger, 2013).  Increasing the funding could help transfer further liability to the creditors of the stronger companies. In a way it punishes creditors who have been risk adverse and prudent and rewards those who have not.


New Legislation

If amendments to current legislation prove inadequate, new regulations and incentives for oil and companies to explore the possibility of turning old oil and gas wells to small scale geothermal producers (Morgan, 2016, Oct 20) or lithium brine water producers (JWN, 2019, Sept 19) could be introduced. This has the potential to turn liabilities into assets and represent new sources of energy. Canada’s tax code conflicts in how geothermal is recognized. The tax code treats geothermal power as a renewable energy but not geothermal heat (Morgan, 2016, Oct 20).  The tax code penalizes geothermal heat producers which leaves little incentive to convert old oil wells. The downside to programs like this is that it may just end up pushing liabilities out into the future and not dealing with the actual issue of accrued environmental liabilities.


If the federal government is concerned about giving regulators the privilege of super-priority a more stringent enforcement of options available to sub-national regulators in the form of surety bonds could be instituted. In Alberta upfront financial bonding is not required. Bonding is only required when environmental liabilities are determined to exceed assets under the LLR Program calculation. For example, Texas has a policy requiring surety bonding. Texas Administrative Code, Title 16 Part 1, Rule 3.78(4) states:

A person operating one or more wells may file a blanket bond, letter of credit, or cash deposit to cover all wells for which a bond, letter of credit, or cash deposit...

 A person performing multiple operations shall be required to file only one blanket bond, letter of credit, or cash deposit…

The financial security amount shall:

  1. The base amount for a person operating 10 or fewer wells or performs other operations shall be $25,000.

  2. The base amount for a person operating more than 10 but fewer than 100 wells shall be $50,000.

  3. The base amount for a person operating 100 or more wells shall be $250,000.[45]

The surety bonding system is flawed in that the requirements are not often tied to metrics that influence the cost of remediation (Andersen, Coupal & White, 2009). Bonding did not cover the cost of remediation in many recent coal company bankruptcies in the jurisdictions that required surety bonds (Rogers & Atkins, 2016).

Analysis has determined there is a strong link between drilling depth and reclamation cost (Andersen, Coupal & White, 2009).  To make surety bonds more effective Alberta could adopt a surety bond system that requires a fixed surety bond payment per well plus per metre fee. Relying solely on a bonding program has the downside in that it does not address outstanding Asset Retirement Obligations.

Monetize Common Assets

If environmental liabilities are to be treated as monetary obligations, society could monetize non-monetary assets. This would entail establishing a monetary value for the environment. This would put a market price on remediation and reclamation. One potential is that the surety bonding process could be altered to create a system where regulators issue “environmental liability bonds” to operators for their use of these common environmental goods.

This bond would be a form of secured environmental debt that is owed by the oil and gas company to the public and collected by a regulatory body with interest. The courts have considered whether a new category of claim should be recognized in the context of environmental liabilities (Marion, Massicotte & Duhn, 2015). In 66295 Manitoba Ltd. v. Imperial Oil Ltd.[46], the Court contemplated whether a claim in negligence by a current landowner could be maintained against former owners due to environmental contamination.

it is clear that … one can justify the claim being made against the former owner of property who pumps a non-natural substance onto, or places it into, his land and who sells the land and, through negligence on his part, leaves land that is contaminated with petroleum products to the extent that physical injury, injury to property and damage to the environment will be caused.[47]

This environmental bond would be a secured debt and would rank high in priority and would not affect the bankruptcy priority scheme or federal paramountcy.  The downside of monetizing common assets is that regulations need to be prescient. The European carbon credit markets are an attempt to monetize the cost of pollution. When the EU policy was first introduced too many credits were issued and this underpriced pollution lessening the effectiveness of the policy. It took many years for the policy to get the desired effect (Hodges, Krukowska, & Carr, 2018, Mar 26).

Reclamation Trust

The potential solution with the highest likelihood to succeed is that Alberta set up a regulator-industry run non-profit corporation that mimics the Troubled Asset Relief Program (“TARP”).[48] TARP was used to alleviate the stress on financial institutions during the 2008-2009 crisis. It worked by transferring illiquid assets with potential liability and uncertainty to the central bank.

A version of this entity has been described as the Alberta Reclamation Trust (“ART”) (Boychuk, 2018). This trust would create a vehicle to absorb bankrupt companies’ assets to fund reclamation. It could be modeled on the OWA and would be an independent non-profit organization with its powers delegated from the AER (Boychuk, 2018). It would be jointly run with technical talent coming from industry and oversight from government.

Unlike the OWA, it would have the ability to accept not just the liabilities of bankrupt producers, but also their licenses and mineral rights. Acquiring the licenses and mineral rights will enable the trust to operate not-yet-depleted wells to fund its ongoing reclamation work (Boychuk, 2018).

TARP worked in that it allowed banks to transfer illiquid assets to the central bank in exchange for liquid assets to improve their short-term solvency. The idea was that the state, in this case the central bank, had a longer time horizon and could withstand holding illiquid loans on their balance sheet without becoming insolvent (Samuelson, 2011, Mar 27).

The well transfer program could work by having oil and gas companies transfer wells that have reached a certain stage of their life cycle. These wells are the illiquid assets that carry uncertainty and potential significant liability for oil and gas companies, in a similar manner to how the mortgage securities threatened financial institution solvency. Once a well reached the determined threshold title would be transferred to the regulator-industry run entity. The trust would then collect the revenue on the remaining life of the well and use these proceeds to plug, abandon and remediate with any excess funds to assist in plugging and abandoning orphan wells. This program would help eliminate the issue that wells are only transferred to the state when they have no economic value and would attempt to deal with the already created environmental liabilities.


Bankruptcy law and environmental law have contrasting aims. These different goals create a challenge in dealing with Asset Retirement Obligations. Bankruptcy law is solely focused on providing a new beginning by reducing obligations and liabilities that have accrued. The focus of environmental law is broader and involves using statutory powers through legislation and regulation to impose obligations to protect common assets such as the air and water that society shares.

The conflict between these two branches of law is found primarily in whether environmental liabilities are monetary or non-monetary liabilities. The inconsistent treatment creates confusion and uncertainty for companies and regulators. It also creates an environment of creditors versus taxpayers, yet exempts the polluter and debtor. This voids the polluter pays principle and creates a third party pay principle, either the creditor pays or the taxpayer does.

One potential unintended consequence of a too strict policy is that creditors have an incentive to remove their credit and potentially create a wave of insolvencies. This could lead to environmental liabilities being transferred first from polluter to creditor and then creditor to the taxpayer when creditors decide they need to protect their capital and prematurely retreat from lending to the sector.

The potential unintended consequences of a too lenient policy present another path where liability is shifted from the polluter to the taxpayer. Under a too lenient policy liabilities get transferred to weaker entities that eventually discharge them in bankruptcy. This incentivizes the creation of environmental liabilities and socializes losses while privatizing gains.

The inconsistent treatment of environmental liabilities affects the polluter pays principle and creates a system where the creditor pays or worse the taxpayer pays. It also conflicts with Canadian federalism and punishes the responsible in favour of the less prudent. Neither are optimal outcomes for balancing the interests of industry and society. To manage this trade-off society needs an optimal policy, that is neither too lenient nor too strict. A policy that encourages oil and gas production but incentivizes remediation. A new approach needs to be developed to avoid an outcome where the polluter no longer pays.

[1] See Bankruptcy and Insolvency Act, RSC 1985, c B-3, s 14.06(8) (CanLII)
[2] See PricewaterhouseCoopers (“PwC”) vs Perpetual Energy Inc., 2018 AB QB  1801-10960
[3] See Tronox Inc. et al v Kerr McGee Corp., 503 B.R. 239 (Bankr. S.D.N.Y. 2013)
[4] See Canadian Environmental Protection Act, 1999, SC 1999, c 33 (CanLII)
[5] See Anadarko Canada Corporation v. Canadian Natural Resources Limited, 2006 ABQB 590 (CanLII)
[6] See Companies' Creditors Arrangement Act, RSC 1985, c C-36, (CanLII)
[7] See Bankruptcy and Insolvency Act, RSC 1985, c B-3, (CanLII)
[8] Bankruptcy and Insolvency Act, RSC 1985, c B-3, s 14.06(5) (CanLII)
[9] Bankruptcy Reform Act of 1978, Pub. L. 95-598, Nov. 6, 1978
[10] See Newfoundland and Labrador v. AbitibiBowater Inc., [2012] 3 SCR 443, 2012 SCC 67 (CanLII). Paragraph 3.
[11] Ibid. Paragraph 175.
[12] See PanAmericana de Bienes y Servicios v. Northern Badger Oil & Gas Limited, 1991 ABCA 181 (CanLII). Paragraph 32.
[13] See Panamericana de Bienes y Servicios SA v. Northern Badger Oil & Gas Ltd., 1989 AB QB 3232 (CanLII). Paragraph 32.
[14] Ibid. Paragraph 30.
[15] Panamericana. Supra note 12. Paragraph 64.
[16] Panamericana. Supra note 12. Paragraph 63.
[17] Panamericana. Supra note 12. Paragraph 32.
[18] Panamericana. Supra note 12. Paragraph 32.
[19] Panamericana. Supra note 12. Paragraph 33.
[20] Panamericana. Supra note 12. Paragraph 36.
[21] Panamericana. Supra note 12. Paragraph 33.
[22] See AbitibiBowater inc. (Arrangement relatif à), 2010 QCCS 1261 (CanLII). Paragraph 291.
[23] See Canadian Environmental Protection Act, 1999, SC 1999, c 33 (CanLII)
[24] Ibid. Paragraph 20.
[25] AbitibiBowater Inc. Supra note 11. Paragraph 26.
[26] AbitibiBowater Inc. Supra note 11. Paragraph 19.
[27] AbitibiBowater Inc. Supra note 11. Paragraph 58.
[28] AbitibiBowater Inc. Supra note 11. Paragraph 4.
[29] See Orphan Well Association v. Grant Thornton Ltd., 2019 SCC 5 (CanLII). Paragraph 160.
[30] See Redwater Energy Corporation (Re), 2016 ABQB 278 (CanLII). Paragraph 180.
[31] Ibid. Paragraph 96.
[32] Orphan Well Association. Supra note 29. Paragraph 122.
[33] Orphan Well Association. Supra note 29. Paragraph 284.
[34] Statement of Claim: PriceWaterhouseCoopers v Perpetual Energy Inc. and Riddell-Rose. 2018 AB QB  1801-10960. Paragraph 41.
[35] See Lamford Forest Products Ltd., Re, 1991 CanLII 8243 (BC SC). Paragraph 24.
[36] Ibid. Paragraph 18.
[37] Ibid. Paragraph 24.
[38] See Texas Administrative Code. Title 16. Part 1. Chapter, Rule §3.14
[39] See Oil and Gas Conservation Act, RSA 2000, c O-6. (CanLII)
[40] See Alberta Energy Regulator. Directive 013: Suspension Requirements for Wells (December 2018).
[41] See Alberta Energy Regulator. Directive 020: Well Abandonment (March 2016).
[42] Alberta Energy Regulator: Directive 006: Licensee Liability Rating (LLR) Program and Licence Transfer Process. (February 2017).
[43] Alberta Energy Regulator: Directive 011: Licensee Liability Rating (LLR) Program: Updated Industry Parameters and Liability Costs. (March 2015).
[44] Alberta Energy Regulator. Directive 075: Oilfield Waste Liability (OWL) Program. (April 2016).
[45] See Texas Administrative Code. Title 16 Part 1, Rule 3.78(4)
[46] See 66295 Manitoba Ltd. v. Imperial Oil Ltd., 2002 MBQB 145 (CanLII)
[47] 66295 Manitoba Ltd. Supra note 45. Paragraph 38
[48] See 110 P.L. 343, 122 Stat. 3765, 2008 Enacted H.R. 1424, 110 Enacted H.R. 1424



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