Oil and Gas Assets
This practice note discusses the economic and political forces impacting domestic oil and gas prices and production and how such assets are dealt with, when there exists financial distress, under the U.S. bankruptcy laws. The price of crude oil, like the price of virtually all commodities, moves up when supplies are “tight” and down in times of excess capacity. When a mismatch exists between supply and demand, the markets are expected to self-correct. Excess supply should result in price and production cuts, while excess demand should be met with price and production increases.
In 2021, when we last updated this note, the price of crude oil and natural gas were “stubbornly depressed from the more robust prices levels seen a few short years ago.” Now, the pendulum has swung in the opposite direction. Instead of excess supply, there are limitations on supply and increased demand, as economies around the globe have reopened in the aftermath of the pandemic. Additionally, and unsurprisingly, the war in Europe has had both a direct and an indirect impact on domestic and international oil and gas prices. Among the direct effects—the sanctions that have been imposed by the Western powers and Russia’s retaliation—restricting supply. Simply stated, hydrocarbons are being used as an economic weapon. Indirectly, war by its very nature is inflationary, and this war also has served to disrupt the supply chain, including with respect to global food distribution. Thus, the war in Europe has exacerbated the inflationary pressures already affecting the global economy and central banks have reacted by raising interest rates to slow inflation, giving rise to economic uncertainty and fears of an impending global economic recession. In previous cycles, when prices for oil and gas have been high, the maxim was almost always “drill baby drill” but that does not appear to be happening in 2022, as the lessons of the past have informed industry participants to be cautious as they are concerned that demand will fall upon the advent of a recession.
This practice note addresses topics, including:
- Industry Background – Upstream, Midstream, and Downstream
- Supply and Demand – Creating the Current High Price Business Environment
- A Capital-Intensive Business
- Funding E&P Costs by Transferring an Interest
- What Happens in Bankruptcy?
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"Oil and Gas Assets," by Ira L. Herman was published on September 15, 2022 as a LexisNexis Practical Guidance® Practice Note. Reprinted with permission.