Baytex Energy Ltd. v Sterling Eagle Petroleum Corporation, 2012 ABQB 539

Court of Queen ’ s Bench of Alberta Citation: Baytex Energy Ltd. v Sterling Eagle Petroleum Corporation, 2012 ABQB 539 Date: 20120829 Docket: 1101 01011 Registry: Calgary Between: Baytex Energy Ltd. Applicant - and - MNP Ltd. as Receiver and Manager of Sterling Eagle Petroleum Corporation Respondent _______________________________________________________ Memorandum of Decision of the Honourable Madam Justice J. Strekaf _______________________________________________________ 1.

Introduction [ 1 ] Baytex Energy Ltd applied to lift the stay of proceedings in the receivership of Sterling Eagle Petroleum Corporation so that it could apply for an order compelling MNP Ltd, in its capacity as Receiver and Manager of Sterling, to accept the transfer of certain wells in the Darwin area of Alberta. MNP does not oppose the lifting of the stay effective May 18, 2012 for the purpose of the bringing of this application and that order was granted by me at the outset of the hearing of the application. 2.

Relevant Facts [ 2 ] Baytex and Sterling were parties to two agreements (a Farm-in and Option Agreement dated October 11, 1995 and a Pooling Farm-out and Participation Agreement dated February 26, 1996), both of which incorporated the CAPL Operating Procedure. Baytex

was the operator of the lands governed by the two agreements. Baytex and Sterling each had a 50 percent working interest in various producing wells and in four non-producing wells that had been drilled pursuant to the said agreements. [ 3 ] Sterling was placed into receivership pursuant to a Consent Receivership Order dated June 27, 2011, which appointed MNP as the Receiver and Manager. The Receivership Order contained the usual terms including a provision that all rights and remedies against Sterling were stayed and suspended except with the written consent of the Receiver or leave of the Court. [ 4 ] The Receivership Order was brought to the attention of Baytex on August 31, 2011. [ 5 ]

Article XII of the CAPL Operating Procedure sets out the procedure for the abandonment of wells. It states in part: 1201 PROCEDURE FOR ABANDONMENT - If a party proposes to abandon a well on the joint lands ... it shall give notice of the proposed abandonment to the other parties. Within thirty (30) days of receipt of the notice, each of the other parties shall elect, by notice to the other parties, whether it wishes to take over the well.

Failure by a party to respond to such notice shall be deemed to be an election by that party to take over, or participate in the takeover, of the well. [ 6 ] On January 24, 2012 Baytex delivered to MNP four notices of proposed abandonment of the four wells pursuant to the two agreements which were addressed to Sterling care of MNP. Attached to each Abandonment Notice were authorizations for expenditures (AFEs) setting out the costs of abandonment.

The AFEs indicated that the total funds required from each of Baytex and Sterling to abandon the four wells was $145,479. [ 7 ] Baytex received an inquiry regarding the Abandonment Notices from a representative of the Receiver on February 14, 2012. [ 8 ] On February 29, 2012, Baytex sent letters to Sterling care of MNP advising that the failure to respond to the Abandonment Notices with the 30 day period set forth in the CAPL Operating Procedure was deemed an election to take over the wells. [ 9 ] On March 6, 2012, the Receiver sent a letter to Baytex advising that the Receivership Order restrained parties from taking proceedings against Sterling or from exercising any contractual or other rights or remedies and refused to accept the transfer of the wells. [ 10 ] In addition to the wells for which Abandonment Notices were delivered, there are five producing wells on the lands governed by the 1996 Agreement which have been producing gas and generating revenues which were paid to the Receiver prior to and since the issuance of the Abandonment Notices. [ 11 ] On May 1, 2012, a notice was sent by counsel for MNP as Receiver and Manager to Baytex’s counsel advising that the Receiver would consent to the lifting of the stay in the Receivership Order so that Baytex could proceed to issue Abandonment Notices under the CAPL Operating Procedure with respect to the four wells. 3.

Issues [ 12 ] The principle issue to be determined on this application is whether Baytex was restrained from issuing the Notices of Abandonment by virtue of the Receivership Order. If not, is the Receiver entitled to relief from forfeiture, or should the Court direct the Receiver to accept transfer of the wells effective February 29, 2012. 4. Positions of the Parties

[ 13 ] Baytex argues that a Receiver is obliged to adopt or disclaim executory contracts of a debtor company within a reasonable period of time. As seven months had passed since the Receiver was appointed during which time the Receiver received and accepted monies from wells produced under the 1996 Agreement and took no steps to disclaim either agreement, the Receiver elected to affirm the agreements and, as such, was subject to the provisions of the Agreements when the Notices of Abandonment were received.

As a result, MNP, on behalf of Sterling, elected to take over the well by failing to respond within the 30 day deadline. [ 14 ] MNP’s position is that the delivery of the Notices of Abandonment were ineffective as they were issued without leave of the Court or the consent of the Receiver and Manager and were contrary to the stay prohibiting the exercise of rights and remedies against Sterling in paragraph 9 of the Receivership Order and that it would not be appropriate for the Court to grant leave to authorize the issuance of the Notices nunc pro tunc . [ 15 ] MNP does not dispute that a receiver is required to disclaim or affirm an executory contract within a reasonable period of time and even acknowledges that it may have incurred contractual liabilities as a consequence of accepting benefits under the 1996 Agreement.

However, it submits that such implications do not have the effect of automatically overriding the express language in paragraph 9 of the Order requiring consent or leave before any rights are exercised against Sterling. 5. Analysis [ 16 ] It is the terms of the Receivership Order that govern the affairs of Sterling.

Paragraph 9 of the Receivership Order states: All rights and remedies (including, without limitation, set-off rights) against the Debtor, the Receiver, or affecting the Property, are hereby stayed and suspended except with the written consent of the Receiver of leave of this Court, provided that nothing in this paragraph shall (

i) empower the Receiver or the Debtor to carry on any business which the Debtor is not lawfully entitled to carry on, (ii) exempt the Receiver or the Debtor from compliance with statutory or regulatory provision relating to health, safety or environment, (iii) prevent the filing of any registration to preserve or perfect a security interest, or (iv) prevent the registration of a claim for lien. [ 17 ] The issue on this application is whether the delivery of a Notice of Abandonment which has the effect of triggering an obligation to respond within 30 days or be deemed to elect to takeover the well constitutes the exercise of a “right and remedy” within the meaning of paragraph 9 of the Order. [ 18 ] Baytex argues that it was not exercising a contractual right when it issued the Abandonment Notices but that it was complying with its duties as a well operator pursuant to the provision of the Oil and Gas Conservation Act , RSA 2000, c 0-6.

Section 27 states that a licensee shall abandon a well when directed by the Energy Resources Conservation Board (ERCB) or required by regulation.

Section 30 provides that the well suspension costs, abandonment costs and reclamation costs are to be paid by the working interest participants in accordance with their proportionate share in the well. The attachments to the Notices of Abandonment state that the wells were on the ERCB suspension list and that it would be more cost effective to fully abandon the welbore than to suspend. This language suggests that the decision to abandon rather than suspend was a commercial rather than a regulatory decision.

In any event, at issue is not whether the abandonment of the wells was required by the ERCB but Baytex’s purported exercise of its contractual right to compel Sterling to take over the wells by issuing a Notice Of Abandonment in accordance with the CAPL Operating Procedure. [ 19 ] The circumstances are analogous to those in Re Skyservice Airlines Inc. , 2011 ONSC 703 , 78 CBR (5 th ) 193 at paragraphs 77 - 89 where Morawetz J concluded that actions taken to terminate an aircraft lease constituted the exercise of a right that was contrary to a stay granted in a receivership action.

Similarly, delivery of the Notices of Abandonment constituted the exercise of a contractual right against Sterling. As it was done without prior consent of MNP or leave of the Court as required by the Receivership Order, it is of no effect. [ 20 ] I am further of the view that it would not be appropriate to lift the stay and grant leave nunc pro tunc to authorize the issuance of the Notices of Abandonment as of January 24, 2012.

Doing so would prejudice Sterling who would become obligated to assume Baytex’s fifty per cent share of the well abandonment costs in the amount of $145,479 as a result of a notice issued contrary to the stay. As MNP has acknowledged that it would consent to the issuance of the Notices of Abandonment, Baytex will be at liberty to reissue the same. I see no prejudice to Baytex, beyond depriving it of the ability to transfer its share of the well abandonment costs to Sterling despite its failure to comply with the requirements of the Receivership Order. There is no evidence that Baytex was prevented from

seeking consent of the MNP or Court authorization prior to issuing the Notices. The circumstances are distinguishable from those in Brookside Capital Partners Inc v RSM Richter Inc , 2006 ABQB 572 , 25 CBR (5 th ) 273. [ 21 ] In the circumstances, it is not necessary to consider the other issues raised on this application. [ 22 ] Baytex’s application is dismissed. Heard on the 18 th day of July, 2012. Dated at the City of Calgary, Alberta this 29 th day of August, 2012. J. Strekaf J.C.Q.B.A. Appearances: Josef G.A. Kruger, Q.C./Adrienne Wong for the Applicant C. Russell, Q.C. for the Respondent