The oil and gas industry in the United States is highly dependent upon an intricate set of agreements that allow oil and gas to be gathered from privately owned land. Historically, the dedication language in oil and gas gathering agreements—through which the rights to the oil or gas in specified land are dedicated—was viewed as being a covenant that ran with the land. That view was put to the test during the wave of oil and gas exploration company bankruptcies that began in 2014. A shockwave was sent through the oil and gas industry in 2016, when the United States Bankruptcy Court for the Southern District of New York in the In re Sabine Oil & Gas Corp.[1] bankruptcy case held that, under Texas law, the dedication language in the applicable midstream contract did not create a covenant running with the land, but instead amounted only to a right involving personal property that could be separately assumed or rejected in a bankruptcy case.
Since the Sabine decision, there has been a developing split between bankruptcy courts regarding the enforceability of gathering agreements as real property covenants. The United States Bankruptcy Court for the District of Colorado, applying Utah law, held in In re Badlands Energy, Inc.[2] that certain midstream gas gathering and processing and saltwater disposal contracts constituted covenants running with the land.[3] The Bankruptcy Court for the Southern District of Texas reached different results in two subsequent cases, holding in In re Alta Mesa Resources, Inc.[4] that certain dedications in gathering agreements created covenants that run with the land, while reaching the opposite conclusion in In re Chesapeake Energy Corp. based on the unique language in that agreement.[5] Not to be left out, the Delaware Bankruptcy Court, in Extraction Oil and Gas, Inc.,[6] determined that certain oil, gas and water gathering agreements did not create covenants running with the land under Colorado law. Most recently, on November 13, 2020, Delaware Bankruptcy Court Judge Karen B. Owens held that a certain gas gathering agreement did not create a covenant running with the land under Wyoming law. As this landscape develops, midstream companies are being required to adjust and evolve their approach to dedications in order to get the best possible treatment in the event of a producer bankruptcy.
BackgroundSouthland Royalty Company (“Southland”) is a Texas-based independent oil and gas exploration and production company focused on developing plays in Wyoming, Utah, Colorado and New Mexico. Prior to the recent collapse in energy prices, Southland planned to increase production of its natural gas assets in Wyoming through horizontal drilling. A midstream company affiliated with The Williams Companies (“Williams”) provided exclusive gathering services in connection with Southland’s Wyoming assets, and, in 2018, the parties entered a new gas gathering agreement under which Williams agreed to expand its pipeline system to accommodate the anticipated increase in volumes (the “Agreement”). Among other obligations, the Agreement included long-term minimum volume commitments requiring Southland to transport fixed quantities of gas on Williams’ pipelines or make deficiency payments. As is common in such midstream agreements, the contract contained a provision in which Southland “dedicated” its mineral interests within a specified geographic area to the performance of the Agreement.
In January 2020, Southland filed for chapter 11 protection and in March 2020, it filed an adversary proceeding against Williams seeking a ruling that the Agreement could be rejected under Section 365 of the Bankruptcy Code and that the properties could be sold free and clear of Williams’ dedication. Williams argued that, as a real property covenant, the Agreement could not be rejected and was thus binding on any subsequent purchaser.
DecisionThe Bankruptcy Court looked to Wyoming law to determine that the Agreement did not contain a real property covenant and that, even if it did, it could be rejected under the Bankruptcy Code and sold free and clear of Williams’ interests...
