On May 25, the Second Circuit upheld the New York district court’s decision concluding that certain midstream gathering agreements were executory contracts, subject to rejection in a bankruptcy proceeding.

Oil and gas exploration and production companies negotiate complex gathering agreements with midstream providers governing the processing and transportation of oil and natural gas. In order to provide these services, the midstream providers invest significant capital to construct and maintain the required infrastructure of pipelines and treatment facilities. In consideration for this investment and to provide both parties with assurance of performance throughout the life of the contract, the gathering agreements contain dedication clauses, which may grant committed access to acreage and typically include a commitment to deliver a minimum volume of oil or gas for transportation or processing through the provider’s facilities, with a guaranteed fixed fee payment if that volume is not met. The contracts also usually state that the parties intend the agreement to be a “covenant running with the land,” meaning it will automatically extend to any party claiming an interest in the land after the covenant was created, including successors in interest, grantees, assignees and heirs.

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