Alexandria, Va. — An article in the May ABI Journal presents legal tools and strategies to help oil and gas owners and working interest operators mitigate the risks of nonpayment and manage the distressed environment. Energy bankruptcies are up 111 percent to date in 2016. “Still-plummeting energy prices have wreaked havoc on a multitude of fallen and falling exploration and production companies,” write ABI Journal Executive Editor Risa Lynn Wolf-Smith and Elizabeth Spencer of Holland & Hart LLP (Denver) in “Protections for Oil and Gas Operators and Working Interest Owners in a Bust Cycle.”
Wolf-Smith and Spencer suggest the following tools and strategies for distressed oil and gas operators and working interest owners struggling to maintain their businesses:
- Setoff: “An operator or working interest owner that is owed money by another owner may net or offset the debt owed by that owner against obligations to be paid, and this remains true even if the mutual obligations are owed on unrelated wells, properties or projects.”
- Recoupment: “More powerful than setoff, the doctrine of recoupment – a kissing cousin to setoff – permits the offset of pre- and post-petition debt without the need to obtain stay relief. In order to apply the doctrine of recoupment, though, the creditor must show that the mutual obligations owed to and from the debtor arise from the ‘same transaction.’”
- Oil and Gas Lien Statutes: “A creditor’s best protection against an insolvent or bankrupt debtor is a lien on the debtor’s assets. Most states have enacted statutes that create liens in oil and gas property for suppliers of goods and services.”
- Force-Pooling: “In a force-pooled area, an operator can drill a well without the consent and financial participation of other working interest owners and may deduct drilling and production costs from these non-consenting owners’ share of production.”
While there are many legal tools available to operators and owners, Wolf-Smith and Spencer caution that these tools must be affirmatively deployed in order to provide protection against a counterparty’s bankruptcy. “A bankruptcy practitioner should advise oil and gas owners and operators that risk mitigation requires more than just an understanding of the available remedies; it requires action before the bankruptcy of a debtor to ensure the fullest protection afforded by law,” they write.
To obtain a copy of “Protections for Oil and Gas Operators and Working Interest Owners in a Bust Cycle,” published in the May issue of the ABI Journal, please contact ABI Public Affairs Manager John Hartgen at jhartgen@abiworld.org or 703-894-5935.
For further analysis of oil and gas bankruptcy, ABI's Bookstore is now shipping the revised and expanded When Gushers Go Dry: The Essentials of Oil & Gas Bankruptcy, Second Edition. Click here for more information and to order.
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