The New Midstream Transactions -

A recent trend in the upstream and midstream oil and gas industry is for midstream services providers to offer certain forms of additional compensation to oil and gas lessees / operators (i.e., upstream asset holders) in exchange for providing acreage dedications and entering into long term services agreements, including mainly agreements for gathering, processing, transportation and the sale and marketing of hydrocarbons, and water sourcing and disposal services. This additional compensation has taken different forms, including up-front cash payments, delayed cash payments, net profits interests, equity interests or other value premiums and, in certain cases, the creation of additional upside areas, where the upstream entity can share in growth opportunities.

The change is interesting and reflects the dramatic shift in leverage between the upstream and the midstream from the beginning of the shale-boom, where upstream providers would frequently agree to long-term, minimum payment / minimum volume arrangements in order to secure take-away capacity over a long span of years for the huge future volumes that they expected. In many cases these volumes did not flow (e.g., the Barnett Shale) and in certain cases they did, but too late for the upstream company to avoid punitive deficiency payments (e.g., the Haynesville Shale). For many oil and gas transactional attorneys, working out these long-term take-or-pay type arrangements filled the gap in M&A transactional work caused by the commodity-price downturn during 2015; and, now that the private equity–fueled workout / Permian basin M&A boom has leveled out, these new “pay-to-take” long term contract transactions, which will be discussed in this note, have added an interesting component to oil and gas commercial practice.