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Court Decision Threatens Midstream Sector

Court Decision Threatens Midstream Sector

A federal bankruptcy judge ruled that Sabine Oil & Gas could withdraw from its contract obligations with pipeline companies to ship a certain volume of oil and gas through their pipelines.

The court decision may seem arcane, but it could have major ramifications for both producers and midstream companies. Under the contracts, a company like Sabine Oil & Gas promises to ship a certain volume of hydrocarbons through the pipeline at a set fee. If they fail to do so, they still have to pay the pipeline company for the use of the pipeline capacity. Related: Shell Hopes To Sell $30 Billion In Assets, But Timing Is Terrible

Sabine Oil & Gas, a struggling producer, says that it can no longer ship enough volume to meet the contractual agreement and it wanted to be let out of the contract. The company went to a bankruptcy judge in Manhattan, who ruled in Sabine’s favor.

The pipeline contracts are very attractive to investors in midstream companies, who love the secure and stable revenue streams that such arrangements offer. The ruling could lead to a lot of uncertainty for the midstream sector. The Alerian MLP Index, an index fund that tracks pipeline companies, fell by more than 6 percent on March 8. Related: Will Russia End Up Controlling 73% of Global Oil Supply?

Still, the judge ruled that Texas law was not clear enough to make the ruling binding. That likely means more litigation will be forthcoming. “One could see this ruling as something favorable for producers, but it’s something that’s going to play out further in the courts,” Ed Longanecker, president of the Texas Independent Producers and Royalty Owners Association, told The Wall Street Journal.

More and more oil and gas producers are falling into bankruptcy, and even for those that avoid such a fate, meeting obligations with pipeline companies is becoming more difficult. The cloudy legality around how to get out of these contracts is creating uncertainty not just for drillers, but also for pipeline companies. The latest decision on Sabine Oil & Gas will do little to remove that uncertainty.

By Charles Kennedy of Oilprice.com

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  • Michael H on March 09 2016 said:
    Good ol' America is at it again- when things are on the upswing the system of breakable contracts and mortgages that can be walked away from helps growth but as soon as there is a problem the poor provider, taxpayer or investor is left stranded to bear the loss.
    Here in Australia people who default on mortgages must bear the debt resulting from any loss the lender is hit with say for example after the property in question is sold by the lender.
    Companies try to wiggle out of contracts by going bankrupt etc but I believe the entity is still liable for losses caused by them and they are pursued fairly vehemently.

    I believe that the culture of default without consequence and breaking of contract without the same leads the country right up to the top to see promises and contracts as valid only while it serves the signatory's interest.
    It really makes America seem like a place where one's word, contract or promise, doesn't have much value, which is sad because in my grandparent's time America seemed to have great moral equity.

    Without our word after all, what do we have and why should we be dealt with personally or professionally?
    I'm not surprised in the least that our 'big four', ( our largest four banks ), outperform foreign banks year on a year by a large margin. If you can't take a person's word on that, let the numbers speak for themselves.

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