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The Supreme Court of Canada building is seen in this file photo

Sean Kilpatrick/The Globe and Mail

The Supreme Court of Canada will hear an appeal from Alberta's energy regulator that seeks to overturn a ruling that could allow bankrupt energy companies to walk away from cleaning up abandoned oil wells.

The decision could affect industrial sites across the country.

The question is whether a cleanup order from a provincial body is a legal obligation or a financial liability, says Nigel Bankes, dean of natural resources law at the University of Calgary.

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"When a provincial regulator issues someone a cleanup order, under what circumstances is that just re-emphasizing an existing obligation or is it actually amounting to a provable claim in bankruptcy?" he said Thursday.

In May 2016, an Alberta Queen's Bench judge ruled in favour of the bankruptcy trustee for Redwater Energy Corp. The decision said proceeds from the sale of assets from bankrupt energy companies should go first to creditors and not toward the cost of cleaning up the mess from a company's operations.

Redwater's trustee and its lender wanted to sell off the company's remaining producing wells to pay creditors, and argued that a bankruptcy trustee is free to choose from among the company's assets and disclaim unproductive oil and gas wells.

Disclaimed wells would be abandoned and left to be cleaned up by Alberta's Orphan Well Association, an industry-funded and government-backed group.

In a split decision last April, Alberta's Appeal Court backed the original judge. The court said federal bankruptcy law takes precedence over provincial environmental rules.

Previous case law has simply asked if the liability was a debt incurred before the bankruptcy with a monetary value attached to it. If the answer was yes, the liability was considered a "provable claim" – an unsecured debt settled out of what's left after secured creditors are paid off.

The Supreme Court agreeing to hear the case suggests it may be reconsidering that test, said Bankes.

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"Should we be forcing provinces to deal with these issues in a bankruptcy context?" he asked.

"Or should we be simply saying these are the general rules for doing business in the province – you've known about them from day one. Your secured creditors knew about them from day one. You should just ante up now that the time has come to abandon this well.

"I think the court is going to be looking at that, and that is good news for taxpayers and .. for solvent players in the sector."

The Alberta Energy Regulator also welcomed the court's decision.

"We are looking forward to presenting our arguments and are optimistic we may convince the Supreme Court to reverse the lower courts' decisions," said regulator head Jim Ellis.

"All Canadians are impacted by the Redwater decision. It allows owners of industrial facilities to walk away from their environmental responsibilities."

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The governments of Alberta, British Columbia and Saskatchewan all support the regulator, as does Alberta's farmers advocate office and the Dene Tha' First Nation.

Since the original ruling was handed down, receivers have cut loose about 1,600 licensed oil and gas sites with estimated liabilities of more than $100-million.

As usual, the Supreme Court gave no reasons for agreeing to hear the appeal.

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