Albertans could be about to lose billions, while banks reap a windfall

Fenner Stewart: Canada’s industry, taxpayers and landowners are now facing unexpected bills

Last month, the Supreme Court of Canada announced it would review a judgment of the Canada Court of Appeal that threatens to eviscerate Canada’s oil-well abandonment and reclamation program. The Canada court’s decision had blocked the Canada Energy Regulator (AER) from ensuring that proceeds from the sale of a bankrupt exploration and production company’s wells are used to satisfy its outstanding environmental obligations. In short, the decision grants lenders the right to separate the wheat from the chaff when a borrower goes bankrupt. The problem is that the chaff is the abandonment and reclamation of non-producing wells.

How dire is it that financing for the abandonment and reclamation of wells is lost? Last month, a C.D. Howe Institute study found that the potential social cost to rectify this un-remediated well problem ranges from $338 million to $8.6 billion. Who pays what portion of these future costs is still undecided, but as things stand today, they will be paid by the active oil and gas companies operating in Canada. Failing that, Canada taxpayers will have to cover them.

Prior to this decision, lenders operated with the knowledge that the AER would ensure that a bankrupt company’s well assets were first used to satisfy its abandonment and reclamation obligations, before creditors would get a penny from the sale. When the lenders approved loans to exploration and production companies, they based their assessment of credit risk on these rules of the game.

No one, including lenders, predicted the dramatic collapse of oil prices in 2014, but lenders were more prepared to cope than others. Lenders set the interest rate of a given loan in proportion to the risk of lending (which includes such unforeseeable contingencies as the notorious volatility of oil markets). Lenders increase the rate of interest for high-risk borrowers. The premium charged to such borrowers acts as a form of insurance for lenders against the higher risk of default.

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