There is increasing concern among oil and gas producers that the market disruption caused by the Russian-Saudi price feud and the COVID-19 outbreak could lead to circumstances where production cannot be sold, transported, or stored. Regulators in Texas are already considering imposing production limitations, and midstream providers and producers are seeing signs that pipeline and storage volumes are nearing capacity. In these circumstances, producers may be forced into curtailing production. Many of our clients are starting to consider their options.
Before shutting in wells, producers should carefully evaluate the potential contractual and regulatory ramifications, including:
- The consequences of shutting in wells under the producer’s oil and gas leases and development agreements, if any
- The potential impact that shutting in wells may have on a producer’s reserve engineering and borrowing base
- The impact of reduced production on midstream and marketing agreements and obligations
- Potential force majeure and commercial impracticability/impossibility defenses
- Potential regulatory rules affecting shut in wells
There is no easy answer to any one of these issues. A comprehensive risk assessment requires reviewing and understanding the terms of each applicable lease, contract and regulatory requirement.
