Alexandria, Va. — The heavy flow of oil and gas company bankruptcies exposes a great deal of uncertainty for companies holding midstream pipeline contracts, according to an article in the July ABI Journal. “Oil and gas producers are using bankruptcy to reject and renegotiate ‘midstream’ pipeline, processing and gathering contracts,” writes Mark Pfeiffer of Buchanan Ingersoll & Rooney PC (Philadelphia) in “Will the Pipeline Continue to Flow After Sabine?” “This is problematic for midstream companies because their own debt service may be dependent on legacy contract revenue levels, and they could default if that revenue is curtailed.”
Pipelines and processing plants are required to convert the raw minerals to finished products and transport them from the well to market. This infrastructure is usually owned by separate midstream companies, which build the facilities based on exclusive gathering, pipeline and processing agreements with the producers, according to Pfeiffer. These agreements typically “dedicate” all of the minerals from the leases to the midstream companies’ facilities in exchange for a fee. “Debtors are trying to use rejection under § 365 to renegotiate or terminate these midstream agreements,” Pfeiffer writes. “To date, midstream companies facing rejection motions have opposed them, saying that the dedication is a covenant running with the land that cannot be rejected.”
Courts are struggling to determine the meaning of “dedications” in oil company bankruptcies. “Section 365 (a) was designed to deal with contractual rights and not property interest, and as a result, the key issue for rejections is whether a dedication creates a property interest or merely a contractual right,” Pfeiffer writes. Decisions concerning this matter in In re Sabine Oil & Gas Corp. did not resolve “anything other than to point out that rejection proceeding under §365 is probably not the appropriate method of divesting a restrictive covenant,” Pfeiffer writes. “Debtors will likely look for alternatives, and future battles may be waged in § 363(f) sales.”
“However, neither Code section clearly identifies what interests may be rejected and divested, and the Code would benefit from amendments that provide more clarity,” Pfeiffer concludes. “Until the Bankruptcy Code is amended or the law is more firmly established, parties to midstream contracts will face uncertainty concerning their rights.”
To obtain a copy of “Will the Pipeline Continue to Flow After Sabine?,” published in the July 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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