Bankruptcy-Midstream Contracts | Russell T. Rudy Energy LLC
“Rigzone” reports that New York bankruptcy judge, Shelley Chapman, recently ruled that distressed exploration and production (E&P) companies can renegotiate their contracts for transportation and treatment services with midstream companies. This is a departure from what has been accepted industry practice.
Previously, contracts between E&P operators and midstream companies to transport and process hydrocarbons from a specified mineral interest were considered a “covenant running with the land”. As such, these agreements were binding on whoever acquired an interest in the mineral rights, and were not negotiable, even when filing for bankruptcy.
In this case, Sabine Oil and Gas Corp. filed for bankruptcy and maintained that it needed to renegotiate its contracts with two midstream companies in order to continue operations. The Bankruptcy Code does permit a debtor to breach an “executory contract” if it is burdensome and approved by the court. An “executory contract” had been considered one in which both parties have an ongoing obligation to perform after the bankruptcy filing. However, agreements considered as “covenants running with the land” have been excluded from the category of “executory contracts”. Historically, contracts between E&P companies and midstream transporters and processors had been considered so tied to the mineral rights and acreage involved that they have been recorded in the real property records.
According to Judge Chapman, these contracts do not constitute “covenants running with the land” as they did not reserve an interest in real property. Rather, they were agreements for transporting and treating services for severed hydrocarbons.
Judge Chapman’s ruling is not binding on any other courts, but it could have a significant and immediate impact. While the decision is based on Texas law, it has implications for other jurisdictions as it is based on common law principles shared by other states.
Obviously this strengthens the hand of distressed E&P operators in their efforts to renegotiate contracts with midstream companies.
To read the article in its entirety, please go to http://www.rigzone.com/news/article.asp?hpf=1&a_id=144531&utm .
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