Who Is Responsible For Decommissioning Costs For Oil And Gas Assets Abandoned Or Sold In Bankruptcy?

Lower oil prices have led to an increase in the number of energy companies seeking to sell or abandon interests in oil and gas assets in bankruptcy proceedings. Whether companies are seeking to sell assets or abandon them, concerns regarding the costs of plugging and abandoning or decommissioning those assets arise not just for the debtor and potential purchasers of the assets but also for the debtor's lessors, joint-interest holders, and predecessors in interest. Each of these parties bears potential liability for decommissioning costs that are not paid by the debtor's estate or assumed by a buyer of the debtor's interests.

A debtor's lessors, joint-interest holders, and predecessors in interest faced with potential abandonment will need to learn certain facts to allow them to assess the likelihood that they will have to pay any decommissioning or abandonment costs. What do the relevant lease, operating agreement, or assignment provisions say about such costs? Have decommissioning obligations already arisen, and if not, when are they likely to arise? Are there multiple options for accomplishing decommissioning and what are the costs of each? Are there bonds, trust funds, letters of credit, or escrowed funds set aside to pay for decommissioning, and if so, are those funds sufficient? What is the likelihood that the debtor's estate will have assets sufficient to pay any unfunded decommissioning costs? The answers to these questions, along with various business concerns, will drive decisions about how to proceed when faced with the possibility of having to cover a debtor's share of unfunded decommissioning costs.

There are a number of other legal issues that would also be relevant to anyone advising a company in this situation. A thorough examination of all these issues is beyond the scope of this article, but the following is an introduction to two legal questions often faced by lessors, joint-interest holders, and predecessors in interest confronted with abandonment.

Can the Debtor Abandon the Assets and Leave Unfunded Decommissioning Obligations?

A debtor seeking a discharge from liability for decommissioning costs in bankruptcy may seek to abandon those assets and reject any related executory contracts from which the decommissioning obligations arise. Section 554 of the U.S. Bankruptcy Code allows a debtor or trustee, subject to court approval, to abandon any property "that is burdensome to the estate or that is of inconsequential value and benefit to the estate." 11 U.S.C. § 554(a). Section 365 allows the debtor or trustee to "reject any executory contract or unexpired lease of the debtor." 11 U.S.C. § 365(a). Together, these provisions can allow a debtor to give up oil and gas interests that are no longer sufficiently valuable to cover expected decommissioning costs and to receive a discharge of any liability for those...