CHAPTER 6 COLLATERAL SECURITY FOR OIL AND GAS FINANCING TRANSACTIONS: BEYOND THE BASICS
| Jurisdiction | United States |
COLLATERAL SECURITY FOR OIL AND GAS FINANCING TRANSACTIONS: BEYOND THE BASICS
Simpson Thacher & Bartlett LLP
Houston, TX
[Page 6-1]
CAMERON BETTIS' land career began in 2007, and for the first six years, ranged from running title in the Eagle Ford to managing lease plays in the Powder River Basin. The next six years (and counting) have consisted of managing collateral due diligence for upstream and midstream oil and gas financing transactions nationwide. In 2015, he joined the international firm of Simpson, Thatcher & Bartlett LLP where he works as a landman alongside the attorneys representing financial institutions and investment firms, specializing in mortgage and title diligence and related issues and documentation. Cameron received his CPL designation in January 2020. Cameron is married to Amy, and they live near Houston with their four children.
A guide for both lenders and lender's counsel in approaching the task, and for borrowers and borrower's counsel in understanding what should be expected.
Title Diligence – Critical Elements
As with any investment or loan, the party providing the funds must know what he is buying or lending against is owned by his seller or his borrower and that his seller or borrower has the ability to convey title to him or grant him a valid mortgage lien.
This knowledge requires the ability to identify the relevant risk, quantify the relevant risk and address how to ameliorate or allocate the risk back to the seller or borrower or a third party.
In the world of conventional real estate, buyers and lenders can rest with the confidence of having title policies and a thorough vetting process of the borrower's ownership in the collateral and other restrictions on transfer. In these cases, the title company largely assumes the risk of the buyer or borrower's title and outlines limitations on the transfer or encumbrance to achieve an acceptable level of risk allocation among the parties.
Such is not the case with oil and gas land ownership, where a borrower's interest in the oil and gas asset can be indirect, complicated and shrouded in industry specific terminology and subject to many limitations on transfer, both contractual and statutory.
This review will be focused on the mortgage and title diligence process as it pertains to secured financial transactions concerning upstream oil and gas properties, although the concepts apply equally to acquisition title diligence. In that regard, it is important to remember that no two deals are completely the same, and the title review process is not a "one size fits all" model or a rigid formula. Indeed, the risk assessment is a spectrum and title risk for a four well development program is not the same as that for a four thousand well portfolio with a long history of production.
These differences play a large role in the risk analysis and dictate the scope of the title review. A deal could be 800 wells on 15 large federal leases and units, or 800 wells on 10,000 tiny suburban leases in north Texas or Ohio or 4 wells on the Outer Continental Shelf in the Gulf of Mexico. In certain instances, most or all of the value to hundreds or thousands of wells could rest in just a handful of massive tribal leases in North Dakota or elsewhere in the west. Similarly, this portfolio may have no single well with any material value. Title to a handful of federal leases (be they onshore BLM/Bureau of Land Management or offshore BOEM/Bureau of Ocean Energy Management) will be far simpler than 10,000 private suburban lots, but the concentration of value is more extreme.
Asset age and ownership history should also...
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