Practical Guidance®
Ira L. Herman
Blank Rome LLP
A Practical Guidance® Practice Note by Ira L. Herman, Blank Rome LLP
Oil and Gas Assets
This practice note discusses the economic and political forces
impacting domestic oil and gas prices and production and
how such assets are dealt with, when there exists financial
distress, under the U.S. bankruptcy laws. The price of crude
oil, like the price of virtually all commodities, moves up when
supplies are “tight” and down in times of excess capacity.
When a mismatch exists between supply and demand, the
markets are expected to self-correct. Excess supply should
result in price and production cuts, while excess demand
should be met with price and production increases.
In 2021, when we last updated this note, the price of crude
oil and natural gas were “stubbornly depressed from the
more robust prices levels seen a few short years ago.”
Now, the pendulum has swung in the opposite direction.
Instead of excess supply, there are limitations on supply and
increased demand, as economies around the globe have
reopened in the aftermath of the pandemic. Additionally,
and unsurprisingly, the war in Europe has had both a direct
and an indirect impact on domestic and international oil
and gas prices. Among the direct effects—the sanctions that
have been imposed by the Western powers and Russia’s
retaliation—restricting supply. Simply stated, hydrocarbons
are being used as an economic weapon. Indirectly, war by its
very nature is inflationary, and this war also has served to
disrupt the supply chain, including with respect to global food
distribution. Thus, the war in Europe has exacerbated the
inflationary pressures already affecting the global economy
and central banks have reacted by raising interest rates to
slow inflation, giving rise to economic uncertainty and fears
of an impending global economic recession. In previous cycles,
when prices for oil and gas have been high, the maxim was
almost always “drill baby drill” but that does not appear to be
happening in 2022, as the lessons of the past have informed
industry participants to be cautious as they are concerned
that demand will fall upon the advent of a recession.
This practice note addresses topics, including:
• Industry Background – Upstream, Midstream, and
Downstream
• Supply and Demand – Creating the Current High Price
Business Environment
• A Capital-Intensive Business
• Funding E&P Costs by Transferring an Interest
• What Happens in Bankruptcy?
For related content, see Oil and Gas Purchase Agreements
and Distressed Investing in Upstream Oil and Gas.
Industry Background –
Upstream, Midstream, and
Downstream
The oil and gas industry generally is said to be divided into
three segments: upstream, midstream, and downstream.
The upstream segment includes companies that engage
