Lexin claims AER violated the company’s charter rights

Diana Daunheimer
Lexin will fail with their Charter claim.

In Ernst v. the Alberta Energy Regulator, the SCC upheld the AER’s immunity, even for Charter violations.

Douglas Morck · Calgary, Alberta
They certainly should fail in this charter claim or no rules and regulations will apply. It IS a regulated industry. What a horrible precedent if successful!

[So far, the courts appear to be ruling in favour of Charter rights of corporations but not civil Canadians harmed by the oil and gas industry and it’s mega law-violating enabler, the AER. The courts appear to be in favour of protecting investors/banks/creditors and not public health or the environment and are contradicting themselves: In the Ernst lawsuit, Alberta Court of Queen’s Bench and Court of Appeal, and the Supreme Court of Canada ruled that provincial Alberta law trumps federal law, even Canada’s top law – the Charter. In Redwater, the Alberta Court of Queen’s Bench and Court of Appeal ruled the opposite, that federal law trumps Alberta provincial law.  The courts at all levels are not even trying to hide their bias.]

Lexin claims oil and gas law violates charter rights by Reid Southwick, April 24, 2017, Calgary Herald

A beleaguered oil and gas company forced into receivership by Alberta’s energy watchdog is striking back with claims the regulator invoked provincial legislation that violates charter rights.

Lexin Resources Ltd. is attempting to fend off the receivership and other litigation brought by the Alberta Energy Regulator after the junior natural gas producer allegedly failed to look after its assets safely and responsibly.

In its statement of defence, the company claims the litigation is “just the latest in a series of steps taken by the AER that are malicious, (beyond) its authority and designed to destroy Lexin.”

But Lexin’s claim that the energy regulator has applied legislation that is “unconstitutional” in its enforcement against the company appears to be without merit, according to a natural resources law researcher at the University of Calgary.

Lexin operated a gas processing plant in Mazeppa northeast of High River and 1,400 wells across Alberta before it ran afoul of the energy regulator for allegedly failing to comply with a series of orders, including demands to clean up spills.

The regulator suspended all of Lexin’s licenses — effectively shutting it down —  and later forced the company into receivership after losing confidence in its ability to look after it assets.

In its statement of defence, Lexin largely blames the regulator for its financial problems, which the company claims have affected its ability to pay creditors and comply with the regulator’s orders.

The company also alleges the energy watchdog invoked legislation that violates charter rights when it took action against Lexin for its alleged misdeeds.

In January, as part of its enforcement against Lexin, the regulator publicly named three company directors it said were in direct or indirect control of the firm: Michael Smith, Jasmina Cezek and Rob Jennings.

According to the regulator, the naming-and-shaming manoeuvre was meant as an incentive for Lexin to address the problems, such as cleaning up a spill and paying a $1-million debt in regulator fees. It was also meant to deter the three directors from engaging in more breaches while deterring others from doing the same.

Lexin doesn’t see it that way.

“It is a serious, potentially career-ending issuance and can have a severe, negative impact on the named individual and the ability of the licensee to carry on business,” Lexin writes in its statement of defence.

The court document claims the declarations are punitive and should trigger “constitutional protections, such as the right to be presumed innocent, a right that is not protected” in provincial legislation.

It claims provisions of Alberta’s Oil and Gas Conservation Act that allowed the regulator to take this step are consequently unconstitutional.

The company further alleges the law “gravely interferes” with a named individual to make a living and, as a result, violates their charter rights to life, liberty and security of the person.

“The reduced security of the person, which this legislation engenders, is not accomplished in a fashion that comports with the principles of fundamental justice and, in the circumstances, is a denial of the rule of law and contrary to the charter,” Lexin claims.

The regulator declined to comment while the courts deal with judicial reviews and regulatory appeals into the declarations which the company and two directors, Smith and Jennings, had applied for.

Martin Olszynski, an assistant professor at the University of Calgary, raised doubts Lexin would be successful in its charter claims. He said the charter rarely applies to cases where Canadians are involved in a regulated industry, such as the oil and gas sector, which he added is considered a privilege, not a right.

Olszynski, who specializes in natural resources law and policy, said the charter’s “security of the person” provision does not generally protect Canadians from a loss of income.

“You don’t have a right to an income, generally, and you don’t have a right to participate in a regulated activity like the oil and gas sector,” he said.

Olszynski also raised doubts Lexin’s directors would be afforded the right to be presumed innocent. Unlike in criminal cases where the accused face the threat of imprisonment, the stakes are much lower in regulatory cases like Lexin’s, which means it’s far more difficult to claim similar rights, Olszynski said.

Lexin’s central argument is that the regulator is largely to blame for the company’s financial problems. Among other claims, it alleges the regulator “miscalculated” the company’s liabilities, driving up the amount of funds it must set aside to cover future cleanup costs.

After Lexin didn’t pay, the regulator garnished funds from Lexin suppliers, which it said materially affected its ability to run its business.

The energy regulator, however, said calculations of company liabilities are done the same way across the oil and gas industry. [Emphasis added]

‘Get lined up’: Alberta gas producer’s demise leaves long list of creditors and costly messesWho will have to pay to clean up after Lexin Resources? by Tracy Johnson, April 25, 2017, CBC News

Maureen and Wendell Strong started hearing the rumours early in 2016: Alberta landowners with Lexin Resources natural gas wells on their property weren’t getting paid.

The Strongs, who had two Lexin wells on their land south of High River, and decades of experience dealing with the energy industry, waited anxiously to see if they’d receive their money.

In Alberta, most landowners don’t own the mineral rights below their land and are required to allow access to energy companies that want to drill wells. Landowners like the Strongs are paid an annual lease rate that typically totals a few thousand dollars.

“We were on the alert, watching,” Maureen said, “and when the time went past, that’s when we got the name of the guy at Lexin and phoned him. Nice guy but he said, ‘Just get lined up, we’ve had 700 calls on this.'”

In March, Lexin Resources was forced into bankruptcy by the Alberta Energy Regulator (AER) — an order the company is fighting in court. Documents from the case show landowners like the Strongs have plenty of company on the list of creditors seeking payment from Lexin.

They range from a small scaffolding company to Baker Hughes, one of the largest oil services companies in the world. The Alberta government is also looking for unpaid royalties, rural municipalities are claiming unpaid taxes, and there are former workers who are looking for vacation pay and severance and are concerned about their pension plan.

The province’s taxpayers will be paying the surface lease cash owed to the Strongs and other landowners until Lexin’s wells are either sold to other companies or plugged and cleared from their land.

Taxpayers could also be on the hook for some of that costly cleanup, which includes a list of hundreds of wells, pipelines and related facilities the company no longer operates.

Discomfort at head office

2016 was a dark time for the energy sector. Energy prices bottomed out in the winter, and there was no light at the end of the tunnel. Layoffs were mounting and bankruptcies were becoming more common. Money was tight across the industry.

CBC News spoke with a former Lexin Resources executive who described how the company’s financial problems quickly escalated. CBC has agreed not to use his real name because he says he’s still owed money from his time at the company and is concerned about legal repercussions. He will be referred to here as Peter Jones.

He says the company stopped paying its creditors in late 2015. At that point, Lexin was known under its previous name, MFC Energy, which would officially change to Lexin Resources in February 2016. In court documents, Lexin said that month was approximately when its cash-flow difficulties intensified to the point where it couldn’t pay creditors.

In its statement of defence against the receivership case launched by the AER, Lexin argued that a dispute with the AER escalated to the point where the regulator was garnishing funds that would have been paid to Lexin from some of its commercial partners. It said that because of the regulator’s actions, its cash flow dried up and it couldn’t pay creditors.
Mazeppa Gas Plant

“It was across the board, no royalties to owners, no rentals to mineral owners, no rentals to surface owners,” said Jones, who noted the company continued to pay employees and bills related to health and safety.

He says the situation became awkward at head office.

“I had 12 staff working for me,” he said. “The girls just stopped answering their phones. I was in a meeting when the first guy showed up at the front. The receptionist came back and said, ‘Someone is here to see you, he’s owed some money.’ I was walking down the hall saying, ‘Why am I in this situation?’

Frustrated mineral rights holders

The long list of creditors also includes Mary Esposito, an 86-year-old retiree who owns mineral rights south of Calgary. The rights are held in a family trust that Esposito manages. The payments from Lexin were erratic in 2015, she says, but she did receive them.

But in 2016, she received a bill from the provincial government saying Lexin hadn’t paid the mineral tax and that Esposito was responsible. If she didn’t pay, she’d lose her mineral rights.

Esposito wasn’t as lucky as the Strongs, who are backstopped by the provincial government. After receiving her tax bill, Esposito wrote a letter to the provincial government. She was informed that in the case of private mineral rights, it was a business relationship between her and Lexin, and if the company didn’t pay its share of mineral taxes, she was responsible.

“There was no money left in the kitty because I had distributed the money, except for maybe $10, so I had to pay this out of my own funds, which I did,” Esposito said.

Employees want severance

Workers like recently retired Larry Nagle are also on the list. He spent his career working at the now-closed Mazeppa Gas Plant, which was part of the Lexin group of companies. He says many former workers are looking for severance pay.

“A company like that should not be allowed to get away with treating people like they did,” he said. “They broke union contracts, they let people go with no notice and they still owe those people money.”

In the receiver’s report, the accounting firm Grant Thornton listed former employees as creditors, saying some are claiming unpaid wages, holiday time and severance. It has also heard from Alberta Treasury Branches about a pension shortfall, which might affect retired employees such as Nagle.

Well cleanup

The biggest cost will be the cleanup of Lexin’s on-the-ground operations.

It operated 1,380 wells, 81 facilities, such as the Mazeppa plant, 201 pipelines and was responsible for a further 145 abandoned well sites. When the AER pulled the plug on the company in February 2017, it said Lexin owed it more than $70 million in deposits to cover the reclamation of its wells and other sites. If the receivership order stands, the regulator will sell what it can to raise money for the cleanup of the infrastructure it fails to sell.

Right now, the wells are the responsibility of the Orphan Well Association, which is already overwhelmed because of the oil price downturn. It has a list of more than 1,400 wells to clean up, excluding the Lexin properties.

The Mazeppa Gas Plant is under the control of the AER, and it’s not clear whether the plant can be sold off and restarted. The pipelines that fed the plant were purged and shut down by the AER in the spring of 2016, pending repairs.

Nagle, who worked at Mazeppa for decades, questions whether the plant can start up again.

“The gas plant is not safe,” he said. “You could not just walk in there now and start it. There’s lots to be done.”

Lexin Resources and the dark side of Alberta’s downturn, Were Albertans put at risk as a natural gas producer unravelled in 2016? by Tracy Johnson & Kyle Bakx, April 24, 2016, CBC News

It was nearly a year ago when Allan MacRae got a call from a friend and former colleague warning of trouble brewing at a small Alberta natural gas producer.

Lexin Resources wasn’t on the radar of most Albertans last spring, but it was under scrutiny from the Alberta Energy Regulator (AER), and some of its own employees had become concerned about safety.

Lexin operated more than 1,300 natural gas wells in the province and the 30-year-old Mazeppa Processing Plant south of Calgary, which processed sour gas — a natural gas that contains hydrogen sulphide and is deadly to humans and animals, even in small concentrations.

It needs to be managed very carefully.

And that’s why what MacRae learned shocked him. His contact at Lexin said that because of financial difficulties, the company wasn’t maintaining the plant as well as it could and didn’t have access to many of its sour gas wells because it hadn’t made lease payments to landowners. More importantly, his source was concerned the company wasn’t doing enough to maintain the pipelines that carried sour gas to the plant.

Alberta shuts down Lexin, leaving big mess to clean up

Lexin Resources, target of largest ever suspension by AER

MacRae, a professional engineer who’d been the General Manager of Engineering for Canadian Occidental when it owned the Mazeppa Plant in the 1990s, did his own research and came to an alarming conclusion.

“Worst-case scenario would look like this,” MacRae told CBC News. “You have a major [pipeline] blowout with sour gas with a southeasterly or easterly wind and it carries over a number of southeast and east Calgary subdivisions.

“Nothing from earthworms and up would survive.”

MacRae wrote to the AER about his concerns in late May. The regulator had been monitoring Lexin for months at that point, and in mid-June it ordered that the pipeline system be shut-in until repairs were done. About six weeks later, Lexin told the AER it could no longer respond to an emergency at Mazeppa and that the sour gas leak monitoring system wasn’t working. Days later, the regulator ordered the plant to be shut down.

That intensified a series of disputes between the company and the regulator that led to the AER ultimately suspending Lexin’s operations entirely this past February and taking the unprecedented step of forcing the company into receivership so that its assets could be sold off to pay to clean up its financial and environmental mess.

The Mazeppa plant and the sour gas wells are now under the control of the AER. The wells, pipelines and plant have been safely suspended, so the risk has been abated. But the question remains as to how much risk were Albertans in the southern part of the province facing in late 2015 and 2016?

Behind the scenes at Lexin

For the first time, MacRae’s original source at Lexin, a former executive, has agreed to talk to media about what he saw as the company unravelled.

CBC News has agreed not to use his real name because he claims he’s still owed money from his time at the company and is concerned about legal repercussions. He will be referred to here as Peter Jones.

CBC News has also spoken to other former managers at the company, along with employees, landowners and mineral rights holders who had dealings with Lexin.

Jones said that in the fall of 2015, a farmer called the plant to report what he thought was a sour gas leak.

“A sour gas leak is extremely dangerous, the stuff can kill you in a heartbeat,” Jones said. “One or two per cent [hydrogen sulphide] will kill you. We were dealing with sour gas up to 40 per cent.”

Jones said the company fixed the leak and then conducted an interior inspection of the pipeline system to find other spots where the metal may have corroded.

Another former Lexin executive told CBC News the Mazeppa plant was in reasonably good shape at that time, having recently gone through what’s called a maintenance turnaround, where the plant is taken off-line for a refresh. But the pipeline system was a concern, especially because of its proximity to hundreds of landowners, not to mention Calgary.

After the pipeline inspection was complete, staff at the plant suggested anti-corrosive chemicals be injected into the pipeline system to ward off further corrosion. According to sources, Lexin’s leadership didn’t follow that recommendation because of the cost.

Lexin’s response

In a memo to CBC News, Michael Smith, a director at Lexin, said the inspection of the pipelines in October 2015 found several areas where there was corrosion. He said the main north-south supply line, which runs along Alberta’s Highway 2, was subsequently repaired.

Smith said lateral pipelines, which feed the main line, were assessed and shut in, until the company could decide if it was worth fixing them.

Smith said the company looked at the risk, the repair costs of the pipelines and the production losses from the gas fields that were feeding the lateral pipeline system. He said the high cost of the anti-corrosion chemicals was a key factor in deciding what to do with the pipelines, but not the main consideration.

But Lexin’s pipeline problems weren’t finished.

There would be another gas leak in April 2016, which the AER described as medium consequence, meaning it could have a moderate impact on people and wildlife.

After the leak was reported to the AER, the regulator directed Lexin to shut down the main north-south pipeline until repair digs at multiple sites could be completed. The pipeline system was never reopened.

Keeping Mazeppa safe

Workers at the plant said 2016 was a challenging year for them.

Larry Nagle started working at Mazeppa in 1986 and retired after it was shut down by the AER.

“We were limping along, in some cases, which is not a good situation with a sour gas plant,” he said. “You make sure that everything is operating in a proper way.”

He offered the following example to highlight just how bad the company’s financial situation had become: “They quit buying potable water for the plant in the spring of 2016. The company that was supplying water said, ‘We’re not bringing any more water because you haven’t paid us.'”

In addition to concerns about working conditions, the union representing Mazeppa workers contacted the AER with a list of problems at the plant, including widespread corrosion and Lexin’s refusal to test contaminated water in its ponds.

Nagle was one of only a few employees left at the plant in the spring and summer of 2016. He stayed on until late July, just before Lexin wrote to the AER saying it could no longer be responsible for Mazeppa.

“We were basically security guards, but we were only one man per shift,” he said. “That is not a safe way to run anything. Anything can happen when you are walking around. You could fall, trip and there is no one to help you.”

Lexin and the AER

Lexin and the AER are currently fighting in court over unpaid fees and the regulator’s move to force Lexin into receivership back in March. Lexin is appealing the receivership order and largely blames the regulator for its problems.

Many of the court documents are very technical, but they do show the AER’s growing frustration with Lexin.

Alberta recession one of the most severe ever: Report

Grappling with Calgary’s ‘new normal’

For example, the regulator lists all the safety orders and directions it issued to the company beginning in February 2016, including a notice of non-compliance for its failure to install a dilution gas meter at a sour gas facility.

It also ordered Lexin to clean up a hydrocarbon spill at the Mazeppa plant, and to prove that it still had access to some of its wells after not paying surface leases. The regulator told CBC News it made 276 inspections at Lexin sites in 2016.

In his memo to CBC News, Smith said “we are convinced that no pipeline was operated in unsafe condition. The monitoring systems were in place and backed up by increased frequency operator inspections.”

Smith said pipelines that were identified as a risk were de-pressurized and purged to be put in a safe state.

In July 2016, Lexin wrote to the AER saying that because it had laid off nearly all its staff, it could no longer respond to an emergency at the plant or its related infrastructure.

In letters to the AER in January 2017, Lexin said it wouldn’t be able to provide health and safety measures for its sour gas wells after February 15, and that it believed the situation created serious health and safety concerns for all concerned.

On February 14, the AER suspended Lexin’s operations, in March the company was forced into receivership.

A mess to clean up

The company may have been shut down but its problems remain.

Many of Lexin’s natural gas wells will need to be reclaimed, others will be sold. They are now the responsibility of the Orphan Well Association, which is funded by the energy industry but has also received public money in the past.

The list of creditors is long and there are also questions about whether the Mazeppa plant will be sold or decommissioned.

Both the AER and Lexin acknowledge there were health and safety concerns at the company’s sour gas operations. The AER is managing those issues now, but it’s unclear who exactly will be ultimately responsible for the cleanup, once this has played out in the courts.

You can read more about the AER’s claims against Lexin Resources here.

Lexin’s statement of defence is here.

[Refer also to:

2017 04 05: Lexin & AER, Both a Disgusting Mess. Ralph Klein’s multibillion dollar liability is about to blow up in Alberta’s face. Or did it years ago but Albertans were too greedy & selfish to care?

2017 02 16: AER shuts Lexin Resources down way too late: AER fails Albertans & oil patch workers, yet again; AER saves the day for oil patch executives, yet again; AER keeps shareholders off the hook, yet again. And AER still hasn’t criminally charged Encana for law violations, frac’ing Rosebud’s drinking water aquifers!

2016 04 30: Lexin Resources complies with safety orders after AER sounds alarm; What about the leaking methane ordered repaired? Is that fixed yet? Is the “watchdog” monitoring area aquifers and citizen water wells for methane and H2S contamination? Or not, the way it’s not at Rosebud?

2016 04 10: AER: Toothless, Legally Immune (even for acts in bad faith and gross negligence), Charter Violating, Best in the World Wonder. Why hasn’t AER shut rogue Lexin Resources Ltd. down? Why leave Albertans in danger of being killed or poisoned? “The regulator said in an order released Tuesday that if Lexin and its related company, LR Processing, fail to provide sufficient oversight, sour gas could be released into the environment with potentially dangerous effects.” ]

This entry was posted in Other Lawsuits. Bookmark the permalink.