2/23/21 - Insights
Three Steps Oil and Gas Producers Should Take Now
In the wake of President Joe Biden’s executive order revoking the Keystone XL pipeline permit, oil and gas producers are bracing for additional actions. In fact, environmental and activist groups are already targeting oil and gas producers that have been embroiled in legal and regulatory actions, including Enbridge’s Line 3 and Line 5 expansion and replacement projects, Energy Transfer’s Dakota Access Pipeline, and Equitrans Midstream Corp.’s Mountain Valley pipeline.
Although energy industry players are no stranger to cyclical markets and a changing regulatory regime, this renewed focus on preventing infrastructure expansion and even shuttering pipelines altogether makes for an uncertain situation. Producers and others shipping oil and gas on potentially affected pipelines would be well served to apprise themselves of their rights and obligations as soon as possible.
Immediate steps include:
1. Review all contracts. Review the relevant transportation agreement(s) to identify any potentially applicable provisions, such as force majeure, material adverse change, impossibility, impracticability, notice provisions, time limits, and representations and warranties. The specific terms of the agreement likely control the analysis. In addition to these provisions, pay particular attention to the circumstances under which any party (producer or pipeline) may suspend performance—likely pursuant to a force majeure provision. Other areas of inquiry include:
- When may a party (producer or pipeline) suspend performance?
- How does suspended performance affect minimum volume commitments?
- How does suspended performance affect deficiency payment obligations?
- Does the agreement modify the parties’ termination rights for extended suspension of services?
- Does the agreement limit the potentially available remedies, such as prohibiting the recovery of certain types of damages?
Although transportation agreements will be the most obviously impacted, there may be other commercial relationships that should be considered. Consider whether a pipeline shut down and attendant delay or cessation in deliveries of oil and gas may impact crude oil supply contracts or other agreements.
Ultimately, producers and others should understand their existing rights, ongoing obligations, and available remedies in the event of a pipeline shutdown.
2. Evaluate alternative transportation options. Producers should consider other transportation options that may be available. While shutting in production may be an inevitable outcome in the event of a pipeline shutdown, alternate pipeline, truck, or rail transport is almost certainly preferable. Accordingly, advance planning and consideration of other potential options may yield substantial benefit. Moreover, applicable law likely mandates such conduct, as the laws of many states require parties take reasonable steps to mitigate their damages.
As noted above, contractual limitations on potential remedies should be considered when evaluating alternate transportation options. Shipping by rail or truck undoubtedly will incur additional cost. Indeed, the Congressional Research Service estimates that the cost to ship crude by rail is approximately $10 to $15/barrel versus approximately $5/barrel via pipeline.
3. Involve legal counsel. Coordinate your review and analysis with your legal department or outside counsel. Collect and preserve all relevant documents, contracts, and communications. With the aid of counsel, compile a data sheet outlining relevant contracts, timeline for contractual performance, contractual notice provisions, dispute resolution procedures, and other issues referenced above.
Taking these steps now will give oil and gas producers a stronger footing by clarifying rights, regulations, and potential remedies under the new administration, as well as helping to mitigate losses that are likely to ensue.