Alexandria, Va. — Courts are in uncharted waters with respect to offshore leasing given that there exists no federal statutory or federal common law that provides for the characterizations of the nature of an oil-and-gas lease interest, according to an article in the September ABI Journal. “Exploration and production (E&P) companies and other parties involved in offshore drilling face uncertainty in bankruptcy,” Camisha L. Simmons of Simmons Legal PLLC (Dallas) writes in her article “Offshore Oil and Gas Leases: The Unanswered Question.” “Courts have yet to determine whether an offshore oil-and-gas lease may be assumed or rejected in bankruptcy.”

Simmons writes that if an oil-and-gas lease is not considered a true lease or executory contract that might be assumed under § 365 (a section of the Bankruptcy Code that is generally applicable to offshore oil-and-gas leases), then, unless it terminates by its own terms during bankruptcy, the lease simply passes through bankruptcy unaffected. “A bankruptcy court has not yet determined whether an offshore oil-and-gas lease is an executory contract and/or unexpired lease that might be assumed or rejected in bankruptcy.”

To determine the nature of the offshore oil-and-gas interest, the Outer Continental Shelf Lands Act (OCSLA) provides that a court is allowed to apply the law of the state that is adjacent to the offshore leasing area, but only to the extent that the state law is not inconsistent with federal statutory and federal common law. “Parties may look to federal common law authority to determine the nature of interests involving the leasing of non-offshore federal lands, but they cannot do so for offshore lease interests,” Simmons writes.

Simmons suggests three ways that Congress could resolve the ambiguity surrounding the characterization of oil-and-gas leases in bankruptcy. One option would be amending OCSLA to provide a specific provision addressing the characterization of offshore leases. “The new provision under OCSLA could reflect the Department of Interior’s position that offshore oil-and-gas leases are both true real property leases (rental agreements to use real property) and executory contracts,” she writes.

Simmons said another option is that Congress could add a provision to the OCSLA that simply states that the law of the state adjacent to the offshore area is applicable to the determination of the proper characterizations of the lease. “This option will likely create a lack of uniformity,” she writes.

“Lastly, alternatively, Congress can simply fail to act and leave resolution of the issue to the judiciary,” Simmons writes.

To read “Offshore Oil and Gas Leases: The Unanswered Question” from the September edition of the ABI Journal, please click here. To arrange interviews with the article’s author, please contact ABI Public Affairs Manager John Hartgen at 703-894-5935 or [email protected].

Get a better understanding of what happens when an oil, gas or other natural resources company goes bankrupt with ABI's revised and expanded When Gushers Go Dry: The Essentials of Oil & Gas Bankruptcy, Second Edition.

###

ABI is the largest multi-disciplinary, nonpartisan organization dedicated to research and education on matters related to insolvency. ABI was founded in 1982 to provide Congress and the public with unbiased analysis of bankruptcy issues. The ABI membership includes more than 12,000 attorneys, accountants, bankers, judges, professors, lenders, turnaround specialists and other bankruptcy professionals, providing a forum for the exchange of ideas and information. For additional information on ABI, visit www.abiworld.org. For additional conference information, visit http://www.abi.org/education-events.