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Energy & the Law

How to Manage Credit and Collect Unpaid Bills in Today’s Oil Patch

Posted in Contract Disputes, Litigation

chasing moneyCo-authors Preston Kamin and Joe Virene

Everybody from the well site to the board room has an opinion about when oil prices will “rebound”. Rather than an opinion, we have a question:  How do I collect my money while we’re waiting?

This post is a refresher for service companies and suppliers looking for money from operators, and for operators looking to non-operators.  There are many steps you can take to minimize credit risk and maximize leverage in the event extra efforts become necessary to collect.

Getting to Know You:  Dot the I’s and Cross the T’s at the Beginning

Vendors: Larger operators typically require master service agreements prior to the vendor doing work. Many of those agreements contain lien releases precluding the vendor’s ability to file a lien, or impose stringent limitations on the customer’s liability. When not negotiated, such agreements can leave the vendor vulnerable to liability. For example, indemnities and warranties can be one-sided, and warrant careful review to ensure they are fair and equitable.

Operators: Do you insist on a memorandum of operating agreement to be executed and filed in the public record so that your JOA-imposed operator’s lien can be given priority?

Of equal importance, especially with smaller customers, is investigating a potential customer’s credit.

What to Do When Things go Wrong

If the customer/non-op fails to pay, there are options prior to filing suit. For example:

  • Whatever you do, do it now. The longer you delay, the more likely the debtor will run out of money or someone will get to him first;
  • File a lien. There are time limits, and he is likely to ask you not to so that he can continue to do business unencumbered by questions of solvency.
  • Propose a payout agreement secured by an agreed judgment.
  • If the customer needs additional goods or services and you are willing to provide them, require payment before delivery;
  • If you have the leverage, negotiate for an overriding royalty.

This summary is from a longer article presented in this month’s TIPRO Target.

BB King RIP (music starts at 1:35).