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Midstream agreements in a stressed environment
A POST-SABINE ANALYSIS
PHILIP JORDAN, GRAY REED & MCGRAW, DALLAS
JONATHAN HYMAN, GRAY REED & MCGRAW, HOUSTON
COVENANTS RUNNING with the land or executory contracts?
A mere two years ago, few pondered the legal characterization
of gas dedications contained in the thousands of gathering,
processing and transportation contracts between oil and gas
producers and their midstream counterparties. Today this issue
is of profound importance to the US energy industry. Since the
beginning of 2015, more than 85 US oil and gas producers have
sought bankruptcy protection in the wake of plummeting
commodity prices. At the forefront of these bankruptcy proceedings—most notably in the legal cases of Sabine Oil & Gas
Corp. and Quicksilver Resources Inc. —producers and midstream companies have squared off over whether the dedications
in gathering and processing agreements are real property interests, and therefore immune from the reach of the bankruptcy
court, or executory contracts that may be jettisoned through
the restructuring process.
The domestic shale boom has resulted in markedly increased
domestic oil and gas production and a surge in the associated
oil and gas infrastructure. Over the last decade and a half,
midstream companies have collectively invested billions of
dollars in developing the infrastructure necessary to gather,
process and transport domestic oil and gas. In exchange, these
midstream companies contract with producers for a promise
of payment based on the volume of oil and gas gathered, pro-
cessed or transported, and dedications of the underlying oil
and gas interests/mineral interests and associated acreage. The
fees charged to producers under the gathering and processing
contracts are designed to provide midstream companies, over
a period of time, a return of and on their capital investment.
From the midstream perspective, gas dedications operate
as security by burdening the oil and gas interests, thereby binding
all successors to the terms of the original bargain. Midstream
companies have historically undertaken the large capital investments, and their lenders have financed these midstream
projects, with the understanding that these dedications are real
property interests that bind successors to the mineral interests.
That is, regardless of any change to the leasehold ownership,
any hydrocarbons produced from the subject acreage remain
