Oil and Gas Business Mergers: Issues to Consider

The U.S. energy market is booming and showing no signs of slowing down anytime soon. In today's economy, oil and gas companies are looking to leverage current momentum through mergers that will increase their capacity and firmly establish their position in the energy sector.

Recent data support analysts' and investors' forecasts about the accelerated pace at which oil and gas business mergers are expected to occur. A 2014 report issued by the U.S. Energy Information Administration (EIA) highlights the rise in the country's oil production and the surge in natural gas output, which gained by 49% and 28.5%, respectively, from the lows they experienced in the mid-2000s through 2013. This rise in oil production and gas output means that companies such as those that specialize in pipeline and storage ability will likely expand. The combination of these facts and expectations coupled with the current low price of oil by the barrel are expected to spur oil and gas business mergers in 2015 (and even beyond) as energy companies consolidate to better ensure their profitability.

Yet important issues unquestionably loom even during this period of heightened consolidation. For example, companies involved in oil and gas business mergers need to develop effective and enforceable indemnity agreements that protect all parties. Companies should also carefully consider what type of indemnity agreement is best in specific circumstances. In addition, these kinds of mergers are subject to a myriad of unique tax issues, including those that particularly affect upstream assets (that is, those assets for energy exploration and production purposes) and midstream assets (that is, those assets for energy transportation purposes). As a result, negotiating and drafting the tax provisions of oil and gas business mergers requires careful attention to tax due diligence matters. An experienced attorney who specializes in oil and gas law can provide the guidance and counsel necessary for these transactions.

In some instances, a matter of intellectual property ownership surfaces during oil and gas business mergers, raising questions that can be difficult to answer and doubts about which company possesses which rights. At other times, the boards of directors of either an oil or gas company involved in a merger are called upon to exercise their fiduciary duties, particularly when the transaction is highly intricate or challenging. And with the ongoing globalization of business, oil and gas business mergers are more frequently involving the Committee on Foreign Investments in the United States (CIFUS) when transactions that concern U.S. assets and companies are transnational. Each of these scenarios points to the critical need for an attorney who can offer sound legal advice before and after companies merge.

The laws that affect oil and gas business mergers are as complex as they are subject to change according to federal regulations. Oil and gas business mergers require an expertise and skill set that only an attorney with extensive knowledge of the energy sector possesses. A company planning this type of transaction would require this kind of specialized advice to avoid the pitfalls it might otherwise encounter if not well prepared for the legalities of a merger.