What the AbitibiBowater decision could mean for future oil sands remediation

Industry shouldn't expect big changes to how much it pays into Alberta mine security program

March 11, 2013

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Grand Falls-Windsor, Newfoundland and Labrador, was built to be an industrial town. Situated inland and more than 400 kilometers northwest of St. John’s on the island, construction of the town’s pulp and paper mill was completed in 1909. For the next 100 years, the mill was one of the town’s largest employers before shuttering operations in 2009. It then became one of the province’s largest environmental problems.

The bankrupt AbitibiBowater plant in Newfoundland and Labrador draws a crowd

AbitibiBowater Inc., the mill’s last owner, was the third largest pulp and paper manufacturer in Canada and one of the world’s largest suppliers of newsprint. The Montreal-based company filed for financial protection in 2009 under the Companies’ Creditors Arrangement Act. Two years later the public company emerged from creditor protection and now operates as Resolute Forest Products.

In the meantime, Newfoundland’s provincial government seized the struggling company’s timber and water rights. The Grand Falls-Windsor mill was part of the package. The province then took AbitibiBowater to court to recoup between $50 million and $100 million to cover environmental remediation at five sites in the province. The case made it all the way to the Supreme Court of Canada.

“The result certainly heartened the creditor community and disheartened the regulator community.”

In December 2012, the country’s high court dismissed the case and ruled against Newfoundland’s government. The Supreme Court did recognize previous “polluter pays” rulings but decided those principles did not circumvent tax laws. Essentially, the province would have to wait in line with the rest of AbitibiBowater’s creditors to try and recover any money.

“This decision was followed very closely by both the insolvency community and the lending community,” says Karen Fellowes, a bankruptcy lawyer in Davis LLP’s Calgary office. “The result certainly heartened the creditor community and disheartened the regulator community.”

The court case was also watched closely by several resource-rich provinces, including Alberta, which acted as an intervener in the case. The provincial government was trying to ensure that the financial obligations of companies under Alberta’s Mine Financial Security Program (MFSP) would not be displaced by federal insolvency law in the case of a bankrupt company. This is no small issue in Alberta. The MFSP requires coal and oil sands companies to perform reclamation and remediation work at mine sites, processing plants and any related infrastructure that disturbs land during the extraction of the resource. With several large oil sands mines operating that will require substantial remediation and cleanup in the coming decades – work that will cost billions of dollars to complete – the Supreme Court ruling in the AbitibiBowater case raises an important question: what if that happens in Alberta?

Under the MFSP program, producers make deposits to the MFSP at various stages of development, including $30 million on approval of an oil sands mine and $60 million on approval of an oil sands mine with an upgrader. The province sets standards for the environmental work that will be completed and companies must show they are setting aside enough money to carry out remediation and reclamation work.

The Supreme Court ruling in the AbitibiBowater case came three weeks before Christmas in 2012. About a month later, Alberta Environment and Sustainable Resource Development, which manages the MFSP, declined to comment on whether the court’s decision would spur any changes to the program.

The province did revise the program in March 2011 and one of the new requirements was for companies to have full financial security for environmental work in place six years prior to the end of the operation.

Michael Styczen, an oil and gas lawyer in Davis LLP’s Calgary office, doesn’t expect the province to make major alterations to the MFSP following the ruling against Newfoundland, given the program’s recent changes. But he does think it might force the government to evaluate whether the mine security program and licensee liability rating will sufficiently fund the responsibilities of insolvent producers.

“They may want to review if the funds are going to be sufficient, but I don’t think this decision would come as a surprise to the government that these sorts of liabilities aren’t going to survive,” Styczen says. “If this was an unexpected result, I could imagine that the province would be going back to the drawing board and saying, ‘Holy crap, we’re going to have to find a way to fund this.’ But I don’t think that’s the case.”

Endorsement of the MFSP’s current fiscal state is not universal, however, and some might interpret the Supreme Court’s decision as an ominous warning sign for the province. Andrew Leach, associate professor at the University of Alberta’s School of Business, wrote in a column in the June 2011 edition of Alberta Oil that the MFSP puts the environmental risk of resource development unfairly on Albertans and not the companies.

AbitibiBowater Inc., the mill’s last owner, was the third largest pulp and paper manufacturer in Canada and one of the world’s largest suppliers of newsprint. The Montreal-based company filed for financial protectionHe referenced a Pembina Institute report that estimated the province’s liability was $15 billion. The government meanwhile estimated the reclamation liability of existing mining projects at the time was $5 billion, with security deposits totaling $920 million. Leach acknowledges that oil sands projects are capital intensive and deferral of liability payments will improve cash flow, but he also asks the AbitibiBowater-foreshadowed question: What happens if the holder of the liability is not around or sufficiently solvent to cover the costs when the time comes?

Illustration Joel Kimmel

Jason Hale, the MLA for Strathmore-Brooks and the energy critic for the Wild Rose Party, says the MFSP “seems to be sufficient,” but there is always room for improvement. “We always have to continue to keep tweaking it to make sure that the security that they put down is going to be enough to cover the environmental costs,” Hale says.

Good regulations are not a hindrance to oil sands development, Hales says, as he thinks most companies see the MFSP as a cost of doing business. “A lot of the companies that I talk to are great companies; they are as concerned with the environment as the average everyday Albertan is,” says Hale, who used to work as a consultant in the oil and gas industry.

Jason Unger, staff counsel at the Environmental Law Centre, doesn’t think changes to the MFSP will be forthcoming, but expects the province to keep a closer eye on company financials in light of the AbitibiBowater ruling. “It might spur a more efficient or timely response in terms of issuing orders, particularly if there is an issue where the financial health of company might be at risk,” he says.

“There is a fair amount of leniency that is provided these days. Regulations are slipping and sliding as current permits are being provided.”

The main concern of the Edmonton-based organization is the deferral of the security payment until a project has 15 years of reserves left. “We would argue that taking the full needed security up front would be preferable,” Unger says.

Davis’s Fellowes says the Supreme Court’s decision was welcome news in the insolvency community. “People have been proceeding on the basis that the insolvency regime is there to address these sorts of issues as they come up,” she says. “The beauty of the insolvency regime that we have now is it gives certainty to creditors who lend into this industry.”

Fellowes says if the federal government tweaks the Companies’ Creditors Arrangement Act to give priority to environmental obligations, “it will be many years in the making.

“They may try to tweak the existing regulations,” Fellowes says. “But I don’t think this is going to cause a major rethink of how they operate.”

Friends of the Earth also acted as an intervener in the Supreme Court case between Newfoundland and Labrador and AbitibiBowater. The Ottawa-based environmental group’s chief executive Beatrice Olivastri says rather than focus on the financial aspect, she would like to see stricter timelines for completing reclamation work. She notes the Alberta Energy Resources Conservation Board’s Directive 74 regarding tailings ponds requirements was a start, but more needs to be done. “There is a fair amount of leniency that is provided these days,” Olivastri says. “Regulations are slipping and sliding as current permits are being provided.”

She says there are many lessons to take from the environmental bill that will ultimately be paid by Newfoundland’s taxpayers, but the biggest one is to avoid the province’s mistake and begin to enforce environmental remediation sooner. She says the court’s decision emphasizes the importance of dealing with contamination and pollution in real time. “To me, that’s the critical one, and real time is today or one to five years,” Olivastri says, “not 10, 20 and 100 years.”

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