Drillers may have a new “get out of (pipeline) jail free” card. If you don’t like your 10-20 year pipeline contract, just file for bankruptcy and cancel the contract during the “reorganization” process, emerging from bankruptcy without the responsibility to fulfill the long-term contract you signed. That’s the option just upheld by the Second Circuit Court of Appeals (unsurprisingly located in New York). MDN has covered this issue for more than two years. In March 2016, MDN brought you the news that a NY bankrutpcy court judge had allowed Sabine Oil & Gas, going through bankruptcy, to cancel a pipeline gathering contract with Cheniere’s Nordheim Eagle Ford Gathering in Texas (see Midstream Nightmare Comes True: Judge Lets Driller Cancel Contracts). Nordheim spent $84 million building a pipeline system to Sabine’s wells. In return for laying out that kind of money, Sabine, as is almost always the case, signed a multi-year contract with Nordheim (10 years in this case), ensuring Nordheim would make a profit on its up-front investment. The judge allowed Sabine to unilaterally cancel the deal several years into the contract as part of the bankruptcy process. We asked at the time: If a driller signs a contract and that signature is no longer any good, will anyone build pipeline systems anymore? We later brought you insight from a pair of lawyers who said: “If other judges follow the analysis and conclusions reached in the Sabine Oil case, the expectations of midstream service providers in the oil and gas extraction process might be turned on their heads” (see Lawyers Warn Pipeline Case May Turn Midstreamers “On Their Heads”). Indeed. Now that the Second Circuit has upheld this disastrous lower court decision, with the only appeal option left being the U.S. Supreme Court (which likely won’t take the case), we’re holding our breath to see what happens next. It seems this is the nightmare we can’t wake up from. Will midstream companies quit building gathering systems?…
