Oil and gas operators run the risk of losing their property leases during restructuring processes, as the continuation of these leases is often contingent on continuous production. A lease’s habendum clause sets lease continuation requirements based on the ongoing commencement and profitability of operations, and operators that fail to meet these terms risk the automatic termination of their leases due to nonproduction.
A company’s regulatory obligations to plug and abandon (P&A) nonproducing wells may also complicate restructuring efforts and represent an extremely significant consideration for offshore companies, which are subject to the governance of the Bureau of Ocean Energy Management. Companies must fulfill certain financial bonding requirements for their P&A obligations, which may include the provision of audited financial documents, a minimum net worth, and debt-to-equity ratio limitations, and these obligations may take priority during restructuring proceedings.
Liens granted to contractors for the provision of equipment or services also represent a key consideration for restructuring operators because they may include pipelines, wells, and other fixtures related to the leasehold estate. While state laws vary in the scope of their rights for secured creditors in oil and gas operations, they generally allow lienholders to foreclose on a company’s assets in instances of nonpayment.
Similarly, an operator should also consider its financial obligations to oil and gas interests, including working interest and royalty owners. Some states automatically grant liens to these parties as well, which may attach to oil and gas production activities and the proceeds thereof.