Bankruptcy Advisory: What Can Oil Pipelines Do As Shipper Bankruptcy Risk Increases?

By Filiberto Agusti, Caroline H.B. Gaudet, and Steven Reed, Steptoe & Johnson LLP

The expansion of North American petroleum production in the past 15 years triggered the construction of many pipelines. Construction was financed largely through long-term Transportation Services Agreements (TSAs) whereby shippers committed to transport minimum volumes on the pipelines at specified tariff rates or make shortfall payments. The recent sharp drop in the world price of crude oil has led to bankruptcies. This article reviews whether, in shipper reorganizations, bankruptcy courts have jurisdiction to approve the rejection of TSAs for which the Federal Energy Regulatory Commission (“FERC”) has approved the tariff rate structure.

No court has yet addressed this question, but there is guidance from cases addressing rejection of FERC-jurisdictional electric power agreements. The Fifth Circuit found that bankruptcy courts have jurisdiction to approve rejection where the reorganized debtor’s business purpose is to abandon the FERC-approved service altogether. In dicta, however, the Court noted that the bankruptcy court would have lacked jurisdiction to approve assumption of a modified contract without prior FERC approval of the modification. And in In re Calpine, the Bankruptcy Court for the Southern District of New York held that it lacked jurisdiction to approve rejection of a FERC-jurisdictional electric power agreement if the business purpose of the rejection was to obtain more favorable pricing for the estate. From a FERC standpoint, it is unclear whether a pipeline and a debtor shipper can modify a TSA to reduce pricing as a requirement for assumption.

The linchpin of FERC’s acceptance of specified TSA rates is that those rates must be offered through an “open season” to all potential shippers. A FERC proceeding may be necessary to clarify whether a pipeline has discretion to modify the TSA of a debtor shipper or if a post-open season modification reducing the shipper’s specified TSA rates would violate FERC’s non-discrimination requirements.

The full article is available here.