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'Operating Interests,' 'Working Interests,' 'Production Payments' and 'Overriding' Royalty Interests
The recent decline in oil prices and the historically low and stagnant natural gas prices are causing various parties in the oil and gas industries to seek bankruptcy protection. As a result, bankruptcy judges must apply specialized Bankruptcy Code provisions and varying other applicable non-bankruptcy laws to determine the rights of debtor and non-debtor parties to such agreements as those providing Overriding Royalty Interests (ORRI) and Net Operating Interests (NOI).
For guidance, the Bankruptcy Code defines certain terms such as “Farmout” (section 101(21A), “Term Overriding Royalty” (section 101(56A), and “Production Payments” ' 101(42A). However, bankruptcy courts must also resort to the application of non-bankruptcy laws that classify various interests in minerals, oil and gas as “real property,” while others deem the interests “personal property,” and yet others treat the interests as a third kind of property ' distinguished from real and personal property. For a good visual overview of the various mineral rights considerations in bankruptcy, see http://tinyurl.com/k6eezx6.
The Bankruptcy Code enumerates exceptions to the otherwise wide breath of “Property of the Debtor's Estate.” Some of the exceptions include: 1) any power that the debtor may exercise solely for the benefit of an entity other than the debtor (' 541(b)(1)); 2) any interest of the debtor as a lessee under a lease of nonresidential real property that has terminated at the expiration of the stated term of such lease before the commencement of the bankruptcy case, and ceases to include any interest of the debtor as a lessee under a lease of nonresidential real property that has terminated at the expiration of the stated term of such lease during the case (' 541(b)(2)); and 3) any interest of the debtor in liquid or gaseous hydrocarbons to the extent that ' (A) (i) the debtor has transferred or has agreed to transfer such interest pursuant to a farmout agreement or any written agreement directly related to a farmout agreement; and (ii) but for the operation of this paragraph, the estate could include the interest referred to in clause (i) only by virtue of section 365 or 544(a)(3) of this title; or (B) (i) the debtor has transferred such interest pursuant to a written conveyance of a production payment to an entity that does not participate in the operation of the property from which such production payment is transferred; and (ii) but for the operation of this paragraph, the estate could include the interest referred to in clause (i) only by virtue of section 365 or 542 of this title (emphasis added) (' 541(b)(4)).
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