Alexandria, Va. — Unlike most assets in a typical business bankruptcy case, wells in an oil and gas bankruptcy cannot simply be abandoned without the debtor complying with environmental obligations to state and federal regulators, according to an article in the June ABI Journal. “Oil and gas debtors must assess (prior to filing) the potential for large priority claims arising from regulations that require the plugging of unproductive or inactive wells,” write David Houston, IV and J. Patrick Warfield of Burr & Forman lLP (Nashville, Tenn.) in “A ‘Plug’ for Priority Claims in Oil and Gas Cases.”
Most states have an administrative agency charged with regulating the production of oil and gas within its borders, and there are many federal agencies that have regulatory authority over production, according to Houston and Warfield. “Both state and federal regulations require that at the end of a well’s operation, or within a certain specified time frame, the well must be plugged,” they write. “In addition, if a debtor is obligated to plug the well, state and federal governments – through their police powers and regulations – have the ability to bring enforcement actions both in and out of bankruptcy court in order to force the debtor to plug the well.”
Houston and Warfield write that certain courts have determined that when a state regulator undertakes the debtor’s pre- or post-petition to plug an oil and/or gas well, the regulator is entitled to recoup its costs as an administrative expense of the bankruptcy case. “Claims related to the plugging of oil and gas wells could potentially prevent the confirmation of the chapter 11 plan or absorb all of the distributable assets in a chapter 7 liquidation,” according to the authors.
“All parties-in-interest should be aware of these risks so that they can promote a resolution with the specific regulatory authority in order to facilitate the confirmation of a plan or the effective distribution of assets to unsecured creditors,” Houston and Warfield write.
To obtain a copy of “A ‘Plug’ for Priority Claims in Oil and Gas Cases,” published in the June 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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