As more oil and gas producers in the United States file or are expected to file for bankruptcy, midstream firms are preparing for a wave of upstream customers trying to get out of contracts. How a midstream agreement is set up can have major implications for how it is treated during a bankruptcy. For example, midstream gathering and processing agreements are often written as real property interests, as opposed to executory contracts. A real property interest, which is tied to the property, cannot be rejected in bankruptcy; an executory contract obligates the debtor and or another party to fulfill its terms at a later date.
Some covenants, or legal contracts, can "run with the land," mean that rights or limitations apply to not only current landowners but also to future ones. "It doesn't give the gathering company an interest in the minerals themselves ... but it does give them this covenant — sort of like an easement — that attaches itself to the mineral interest, such that when the oil and gas is produced, it's committed ... to flow through that gathering system," Melko said.
The devil is often in the details with these types of covenants. Midstream operators have had to grapple with whether they could satisfy "touch and concern" requirements, which involve demonstrating that their covenants impact how the land is used or valued, and whether covenants running with the land have been formally conveyed, or transferred. If done correctly, Melko noted, covenants running with the land are also legally recorded to back up ownership claims.