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On May 3, 2016, New York bankruptcy Judge Shelley Chapman issued a judgment in the Sabine Oil & Gas Corp. case that could dramatically shift the balance of power in favor of distressed energy and production (E&P) companies renegotiating gas gathering and treatment contracts with midstream companies. Midstream companies would be well advised to explore restructuring and redrafting their contracts going forward.
Judge Chapman ruled that the dedication of hydrocarbons from specified mineral leases and associated acreage to midstream pipeline companies in gas gathering and treatment contracts at issue are not covenants running with the land under Texas law, despite the parties' agreement otherwise. Previously on March 8, 2016, Judge Chapman had ruled that the debtor, Sabine Oil and Gas Corp, could reject, or breach, its gas treatment and gathering contracts with two midstream companies. Together, these decisions mean that Sabine has been released from the contracts, and the midstream companies are left with unsecured claims for breach of contract.
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