Plugging and abandonment and bankruptcy

Plugging and Abandonment (P&A) obligations are the decommissioning obligations to plug unproductive wells, remove facilities from the site, and otherwise decommission the site as required by statutes and regulations to protect the public health and safety.  In Texas, Section 89.011 of the Texas Natural Resources Code creates this obligation which is enforced by the Texas Railroad Commission, particularly Statewide Rule 14. In Louisiana, the Department of Natural Resources requires such decommissioning.Lessees are primarily responsible for these P&A obligations. Where the lessee is unable to meet these obligations, regulatory agencies have the authority to hold predecessors-in-interest and co-lessees liable.[1]   This may occur, regardless of any indemnification or other agreements between the lessee and co-lessees. Simply put, if the party responsible is unable to pay, the responsibility falls to a party who can.The bankruptcy filing of a lessee or otherwise obligated party, may mean another non-debtor party becomes responsible for the P&A costs.  Typically, the goal of bankruptcy is to give an honest but unfortunate debtor a fresh start.  This is usually accomplished by the Court approving the debtor’s rejection of certain burdensome contracts, discharge certain debts, and/or abandonment of certain property.  Sometimes these actions may conflict with the goal of environmental regulations, which aims to protect the public health, safety, and welfare.[2]  The result of this conflict often leaves the co-lessees or predecessors-in-interest to the debtor-lessee holding the proverbial bag.  Co-lessees could suddenly find themselves obligated to either make payments to the applicable regulatory body in the tens of millions of dollars for the decommissioning of wells, or carry out the decommissioning at its own expense and then seek reimbursement from the debtor. P&A costs can range widely and, in some cases, rise quickly. In the ATP Oil & Gas Corporation bankruptcy case, the impact resulted in a $100 million liability for the predecessor-in-title from a decade prior, Anadarko, because the Debtor could not pay the  $100 million P&A liability.[3]  In another case, as a result of hurricane damages, costs rose from $5 million to $200 million.[4]The determination of the time of accrual of the P&A obligations is significant as to the ability of the responsible party to recover any of the amounts paid from the debtor’s estate.  Courts differ in how they determine the time of accrual of the obligations. Some courts focus on when the obligation was paid: whether pre- or post-petition, while others primarily focus on when the liability accrued: typically when the well was first drilled.  A determination that a P&A obligation paid by a co-lessee arose pre-petition is just another unsecured claim, which may receive pennies on the dollar or be discharged entirely.  On the other hand, if deemed a post-petition claim, the P&A obligations are considered administrative expense claims and receive priority status. However, this too does not ensure that a co-lessee will be reimbursed for its payment, but it puts the co-lessee in a significantly better position.  In the ATP case discussed above, Anadarko was required to bear $100 million in P&A costs but eventually only recovered about 1% of those costs even though the obligation was deemed an administrative expense claim.In July 2016, the Bureau of Ocean Energy Management issued a Notice to Lessees that it intends to require companies to post supplemental surety bonds or other collateral to insure 100% of future P&A costs for outer continental shelf oil and gas properties.  This changes the previous arrangement where companies that show financial strength are exempt from posting a surety requirement.  It greatly increases the cost of doing business for oil and gas producers in the off-shore drilling business, but it also could potentially address some of the concerns and risks for predecessors and co-lessees raised in this article.  It remains to be seen how this new regulation will impact the landscape. [1] 30 C.F.R §250.1701; LSA-R.S. 30.93.[2]See, e.g., 30 C.F.R. §250.17 (providing that operator conducting oil and gas operations in the Outer Continental Shelf must “protect health, safety, property and the environment” through compliance with various general safety requirements). [3]See In re ATP Oil & Gas Corp., 2013 WL 3157567 (Bankr. S.D. Tex. June 19, 2013). [4]See Mariner Energy, Inc. Devon Energy Production Co., 690 F.Supp. 2d 558 (S.D. Tex. 2010). Thompson & Knight LLPAyo Shittu, Steven Levitt, and Conrad Hester *Photo courtesy of emagic.