United States: Decisions In Sabine Oil & Gas And Quicksilver Resources Inc. Bankruptcy Cases Will Have Broad Impact On Midstream And Exploration & Production Companies In The Oil & Gas Industry

Executive Summary New York bankruptcy judge allows Sabine Oil & Gas to reject gathering agreements over the objections of midstream companies, finding that the covenants do not run with the land.

On March 8, 2016, the United States Bankruptcy Court for the Southern District of New York issued a bench ruling in the Sabine Oil & Gas Corporation bankruptcy (Case No. 15-11835) with wide-ranging implications for midstream and exploration & production companies. On September 30, 2015, Sabine, an oil exploration & production company, filed a motion to reject midstream agreements with two parties: gas and condensate gathering agreements with Nordheim Eagle Ford Gathering LLC, and a production, gathering, treating and processing agreement with HPIP Gonzales Holdings LLC.

The court agreed with Sabine, finding that Sabine's rejection of the midstream agreements were in the best interests of Sabine's bankruptcy estate. The court overruled objections by Nordheim and HPIP that the covenants in the midstream agreements were not subject to termination because they ran with the land. The court found, among other things, that the midstream agreements did not touch and concern Sabine's real property, and only burdened Sabine's personal property interests in already-extracted products. The court acknowledged as a procedural matter under bankruptcy law that its ruling was binding on the issue of rejecting the midstream agreements, but was not binding on the parties on the substantive issue of whether the covenants ran with the land, which would be finally adjudicated in another proceeding, such as a claim objection.

Similar issues regarding the rights of midstream companies in bankruptcy are also now front and center in the Quicksilver Resources Inc. case pending in the Bankruptcy Court for District of Delaware, where the court is expected to rule by the end of this month.

The ruling in Sabine (although technically non-binding), and the expected ruling in Quicksilver may drastically impact both exploration & production companies and midstream companies. On one hand, exploration and production companies often file bankruptcy to reorganize, and the ability of debtors to reject burdensome executory contracts and to otherwise remove encumbrances from a debtor's property are critical tools to accomplish this maneuver. Likewise, a debtor's secured lenders wish for the debtor to maximize its value by minimizing or eliminating burdensome agreements.

On the other hand, rejection of such agreements raises serious risks for midstream companies, which may result in extreme financial loss both because midstream companies may lose the benefits of their bargained-for rights under their agreements, and because rejection may allow debtors in the distressed oil and gas industry to drive down prices and shop for "better deals" in a buyers' market. Additionally, these agreements often require midstream companies to incur substantial costs building infrastructure in anticipation of recouping the costs over the life of the agreement. Rejection may result in a midstream company party to an existing agreement losing any hope of recovering its costs of investment.

Turning to the specific issues of Sabine, the Nordheim agreements contained a take-or-pay clause that obligated Sabine to deliver minimum amounts of gas and condensate to Nordheim, or to pay annual deficiency payments if the minimums were not met. Sabine determined that rejecting the Nordheim agreements would save it $35 million over the life of the agreements. Nordheim, on the other hand, argued that it spent tens, if not hundreds of millions of dollars in the short term to construct gathering systems in anticipation of long-term gains over the life of the contract and in reliance on Nordheim's covenants running with the land.

The HPIP agreements required HPIP to construct and operate gathering and disposal facilities, which HPIP had ceased construction on, and required Sabine to drill at least one well per year through 2017, or, upon failing to drill, to purchase HPIP's gathering facilities. Sabine determined that rejecting the HPIP agreements would save it between $2.5 million and $80 million over the life of the agreements. HPIP argued that, although it had not completed construction, it spent at least $80 million under the contract in anticipation of long-term gains over the life of the agreement.

Sabine argued that the agreements were merely executory service agreements and were subject to rejection like any other executory agreement. Nordheim and HPIP each objected, arguing that the terms of the gathering agreements were covenants running with the land or equitable servitudes under Texas state law, and were therefore not subject to termination or avoidance. Notably, both Nordheim and HPIP's agreements expressly provide that the contractual obligations run with the land, and both Nordheim and HPIP recorded memorandums of agreement in the real property records in the counties where Sabine's mineral interests are located, which they argued clearly evidenced the parties' mutual intent that the agreements run with the land.

The Bankruptcy Court found that the language in the midstream agreements expressly stating that the covenants ran with the land was not dispositive because the covenants did not touch and concern Sabine's real property interests.1 Among other things, the court found that the right to transport or gather produced gas is clearly not one of the five traditional "sticks" of real property interest provided for under Texas law. However, the Bankruptcy Court also noted the opinion of many that labeled the "law of covenants as an 'unspeakable quagmire.'"

A similar dispute has arisen in the Quicksilver bankruptcy case, where Quicksilver and a midstream company are litigating whether a midstream agreement may be rejected in bankruptcy. The matter is complicated in Quicksilver, however, by the fact that Quicksilver previously obtained an order permitting it to sell its assets free and clear of liens and encumbrances without any objection to such a sale being filed by the midstream company. Highlighting the importance of these issues to the midstream industry is the fact that the Gas Processors Association and Texas Pipeline Association have each filed amicus briefs in the Quicksilver case, which is an extremely rare occurrence in bankruptcy court.

Given the steep declines in the oil and gas industry and numerous pending and imminent bankruptcies of oil and gas producers, the Sabine decision (although technically not binding) and the upcoming decision in Quicksilver may have a broad impact on the oil and gas industry for both upstream oil and gas producers and midstream gathering and transportation companies. It would not be difficult to envision that even the increased risk associated with the rejection of such agreements (and the attendant risk to their investment) may increase the price midstream companies will seek from producers, dramatically increase the amount of collateral required by the transporter, and influence parties relying on revenue streams under gathering and transportation agreements to determine a midstream company's credit worthiness. Participants in the industry would be advised to monitor developments in this area as the results continue to unfold.


1. In so holding, the Bankruptcy Court distinguished the facts in Sabine from the facts in In re Energytec Inc., 739 F.3d 215, 221 (5th Cir. 2013) in which the Fifth Circuit held under Texas law that covenants in a pipeline agreement between the debtor and a midstream transportation company ran with the land. In Energytec, the original owner conveyed a pipeline to the debtor and carved out from the conveyance a transportation fee for its affiliate and the right of the affiliate to consent to further assignments of the pipeline. The Bankruptcy Court held that unlike in Energytec, Sabine's real property interests were separate and apart from the covenants in the midstream agreements, and that the agreements did not restrict Sabine's use and enjoyment of the real property. The agreements were nothing more than contractual promises by Sabine related to its personal property (i.e., the oil and gas products it had extracted from the ground).

This article is presented for informational purposes only and is not intended to constitute legal advice.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions