Transportation Services Agreements At Risk in Chapter 11 Proceedings

The second quarter of 2020 saw no fewer than 18 new Chapter 11 filings among such companies, the most since 2016, when the industry faced historic struggles. One of these second quarter filers was Extraction Oil and Gas Inc., on June 14, in the U.S.  Bankruptcy Court for the District of Delaware (Case No. 20-11548). Extraction, an energy exploration and development company, focuses on the production of crude oil and natural gas in Colorado, where it is based. Crucial to its chain of operations are transportation services agreements, or TSAs — also commonly known as "gathering agreements" or "gathering and processing agreements" — between Extraction, as the producer, and midstream companies, which provide the physical and capital infrastructure necessary for the transportation and processing of the upstream producer's gas. Product valued in the billions of dollars flows into this midstream infrastructure, providing for storage, piping and transport. Thus, producers such as Extraction must carefully and comprehensively negotiate these midstream TSAs, as they frequently represent the only means to maintain control over the product once it leaves their facilities.

In a Chapter 11 proceeding, TSAs are at risk of being rejected as an "executory contract" under Section 365 of the Bankruptcy Code, as has occurred in a series of cases following the landmark Sabine decision in 2015. The findings in In re Sabine Oil & Gas, 550 B.R. 59, 69 (Bankr. S.D.N.Y. 2016), aff'd, 567 B.R. 869 (S.D.N.Y. 2017), aff'd, 734 Fed. Appx. 64 (2d Cir. 2018), appeared to establish a basis to allow a debtor counterparty under a TSA to effectively walk away from its contractual obligations. However, in 2019, two subsequent decisions, In re Alta Mesa Resources, 613 B.R. 90 (Bankr. S.D. Tex. 2019) and In re Badlands Energy, 608 B.R. 854 (Bankr. D. Colo. 2019), interpreting Texas and Utah law, respectively, denied requests to reject similar contracts, on the grounds that the agreements in question created covenants running with the land and, by their nature, equitable interests not subject to rejection.