Rejection of Oil Pipeline Executory Contracts in Bankruptcy

NERA participated in a series of four rapid-fire bankruptcy proceedings regarding contract shippers on regulated interstate pipelines after the oil price collapse in early 2020. One of those cases involved an oil pipeline regulated under the Interstate Commerce Act (ICA) by the Federal Energy Regulatory Commission (FERC). As it did in all of those bankruptcies, NERA provided evidence on the effect of rejection of a pipeline contract in bankruptcy on competition in oil markets—where public interest issues are more limited than for FERC’s regulation of natural gas or electricity matters.

NERA was retained by Extraction Oil and Gas to provide an independent analysis of the effects of its motion to reject its oil pipeline transportation service agreements with two pipelines in its 2020 bankruptcy. NERA analyzed the US oil market and FERC’s role in entry of pipelines in the interstate transportation of oil. A key part of NERA’s analysis was to compare the role of FERC in natural gas and oil pipelines as the economic context of the regulation of those markets reflects differing historical and political motivations as well as markedly different public interest concerns. NERA also examined the impact on capital formation for the interstate pipeline sector generally, finding no impact.

NERA concluded that Extraction’s rejection of its transportation services agreements would not have a material effect on the oil market and that the rejection of the contract would be in the public interest. Judge Christopher Sontchi of the US Bankruptcy Court for the District of Delaware agreed and approved rejection of the contract in November 2020. To support the reasonableness of rejection, Judge Sontchi quoted from Jeff D. Makholm’s written and oral testimony extensively, including his summary of rejection issues: “the competitive market for fuel, which was the impetus, and the practice of applying the Interstate Commerce Act to oil pipelines both by the Interstate Commerce Commission and by the FERC is unaffected by rejection.”