A Chapter 11 bankruptcy filing of an oil and gas company will likely have broad implications for a wide range of parties. Certain pervasive agreements in today’s oil and gas industry generate substantial, high-dollar controversies in an oil and gas company reorganization.
Because a debtor can assume or reject an unexpired lease or executory contract under §365(a) of the Bankruptcy Code, subject to a few exceptions and court approval, issues arise as to whether particular sorts of routine agreements in the oil and gas industry qualify as executory contracts as opposed to a vested property right. Once the executoriness of an agreement has been established, however, the decision to assume or reject an executory contract is left to the business judgment of the debtor. Mirant Corp. v. Potomac Electric Power Co. (In re Mirant Corp.), 378 F.3d 511, 524, n.5 (5th Cir. 2004). Counterparties to contracts with at-risk companies should plan ahead for what a debtor may do with their contract rights. In the oil and gas arena, contract type and governing law produce wildly different outcomes in a reorganization proceeding. We outline the bankruptcy implications for typical agreements in the oil and gas industry below.
Oil & Gas Leases
Joint Operating Agreements
Understanding the foregoing Bankruptcy Code provisions and their likely application by courts can foster strategic planning useful in the event of the bankruptcy filing of a contractual counterparty. Taking proactive steps to determine the potential consequence of a bankruptcy filing in light of applicable law, and in particular, whether any revisions or adjustments should be made, may reduce exposure and yield a better end result in the bankruptcy proceedings. Such planning may well reveal itself later to be a stitch in time that saved nine.