Risk Management: Legal Issues Permian Investors Should Know

Five years have passed since commodity prices cratered and the energy industry faced an onslaught of producer bankruptcies. For almost as long, producers and midstream companies have squared off over whether dedications in gathering and processing agreements are real property interests—and therefore immune from the reach of the bankruptcy court—or executory contracts that may be shed by a debtor through the restructuring process.

The Permian Basin continues to be an attractive investment opportunity, thanks in no small part to its vast reserves of stacked, oil-bearing formations located within Texas—a state that has traditionally been pro-business and pro-development. Texas has also developed a body of statutory, regulatory and court-made oil and gas law giving investors and operators the certainty necessary to understand and account for the legal risks associated with oil and gas development. However, even in the Permian Basin, oil and gas development has always been a risky venture, and that is as true today as it was during the heyday of conventional development, if not more so. Permian Basin development poses certain legal risks that nonoperating investors in particular should be aware of.

Unconventional development through horizontal drilling is different in many aspects from conventional development, including the amount of land required for development, the way that wells are drilled and the way that gathering and processing facilities are located and built. And even those basic aspects of oil and gas development that are largely the same for unconventional as for conventional development, such as oil and gas leases and joint operating arrangements (JOAs), can create new layers of legal risk based on the differences between the two types of development. All of these factors combined have created both new legal issues and new twists on established oil and gas legal principles that Texas courts have not yet addressed, adding a layer of complexity and developmental risk not always present in conventional exploration and development.