Archives for September 2010

New Rights of Oil and Gas Lessors when the Lessee is Bankrupt

In a recent decision from the Federal Bankruptcy Court of Western Michigan, a decision opposed by members of the oil and gas industry, a Debtor oil and gas producer which filed for bankruptcy protection under Chapter 7 of the Bankruptcy Code and which owed lessors for unpaid royalties, has the duty to make an election under section 365 of the Code to either ratify existing leases and pay the lessors of those ratified leases all of the outstanding unpaid royalties OR reject the leases and have the unpaid royalties included among other unsecured debts. The industry position appeared to be that the debtor did not have no make such an election, that it could treat the unpaid royalties as merely unsecured debts to be paid only a fraction of their face amounts and that the debtor could, in the future, continue to operate under terms of the lease and could sell or assign that lease to another operator.  If, on the other hand, consistent with the court’s reasoning, a debtor is forced to reject an existing lease that is the basis for current operations and production of oil or gas, facially, the lessor should thereafter be free to negotiate a new lease with another operator without the same constraints as existed when the initial lease was negotiated.

In view of the complexity of the oil and gas industry and the potential impact on the multiple other parties with whom the Debtor may have had agreements including investors and working interest owners, an appeal would be expected.

What has Changed in the Oil Patch?

There has been a dramatic change in the enthusiasm among oil and gas landmen in leasing the oil and gas rights of landowners in Lower Michigan’s northern counties. The excitement that may have engendered the very high and unprecedented bid prices at the State’s Auction of May 4, 2010, followed on the heels of the news of a deep well into the Utica /Collingwood shale by Encana. Since then, the news regarding that well has been reserved, at best, as production does not appear to be as high as initially forecast. In the meantime, many leases that had been negotiated by landmen with landowners were not only, allegedly, not paid, but also many were also rejected by the very companies whose landmen had negotiated them. It is not clear what is actually going on since, at least among industry insiders, there is still a reasonable potential for a very big play in the Lower Michigan counties. Currently, additional wells are being drilled in an effort to establish the parameters for future exploration and it is important for landowners who may be within the play area who have not, as yet, become Lessors under accepted leases and received the “Bonus” sums agreed to, to keep informed on what is going on.

The State has scheduled another auction for October 26-28 and industry representatives have nominated more than 450,000 mineral acres to be considered at that auction, of which, reportedly, more than 120,000 acres are in Roscommon County. The total acreage, reportedly, would be the third all time in size acreage offering for a single lease auction. At this time one can only speculate as to whether the prices at the next auction would approach or even exceed those of the May 4 auction where the average amount received by the State was $1,507