In a move that releases SandRidge Energy Inc. from “significant” deficiency payments, the operator said it has settled a months-long dispute with a subsidiary of Occidental Petroleum Corp. (Oxy) over a project to remove carbon dioxide (CO2) from natural gas produced in the Pinon Field in the West Texas Overthrust (WTO).

Under the terms of the settlement, which was executed and closed last Thursday, SandRidge agreed to transfer substantially all of its exploration and production (E&P) midstream assets in the Pinon Field to the Oxy unit, plus $11 million in cash. In exchange, the Oklahoma City-based operator was released from a 30-year gas treatment agreement, which contained minimum CO2 volume commitments through 2041. It was also agreed that all pending litigation between the two sides would be dismissed.

“We are eliminating a significant liability while also improving our annual cash flows, both of which are consistent with our stated business objectives,” said SandRidge CEO James Bennett. “With significantly lower operating expenses, we can move forward with renewed attention to the development of our Midcontinent and Niobrara assets.”

According to SandRidge, the E&P assets, which were 99% natural gas, represented about 6% of its total production in 3Q2015, as well as 17% of total lease operating expenses for the quarter. The assets included about 24.6 Mmboe of proved reserves at the end of 2015, with a present-day value of approximately $13.3 million, based on pricing from the U.S. Securities and Exchange Commission (SEC).

SandRidge said the midstream assets being transferred include 370 miles of gathering lines acquired from an unidentified third party in 4Q2015, 100 miles of CO2 pipelines, and other related pipeline and processing infrastructure. The operator said the settlement also includes the transfer of seismic data for more than 1,300 square miles in the WTO region.

The settlement is expected to save SandRidge approximately $39 million in operating expenses for 2016.

In a 10-Q filing with the SEC last November, SandRidge disclosed that under its 30-year gas treatment agreement with Oxy, the company was required to deliver a total of approximately 3,200 Bcf of CO2 during the agreement period. SandRidge was obligated to pay Oxy $0.25/Mcf whenever minimum annual CO2 volume requirements were not met. Through Dec. 31, 2014, SandRidge had delivered 54.7 Bcf of CO2 to Oxy — a cumulative shortfall of 300.1 Bcf, resulting in about $75 million in penalties.

“If such under delivered volumes are not made up with commensurate over deliveries in the future, [we] will be obligated to pay Oxy $0.70/Mcf — approximately $210.1 million total — in 2041, which amount has not been accrued by [us] as a liability as [we do] not currently believe such payment is probable,” SandRidge said in its 10-Q filing.

The gas treatment agreement gave SandRidge the option, beginning in 2020, of reducing future minimum annual CO2 volume requirements if they did not “materially increase from current levels,” but SandRidge would have been required to pay Oxy an amount equal to the present value of $0.70/Mcf, multiplied by such reduced CO2 volume requirements as designated by the company. SandRidge said that, as of Sept. 30, 2015, if it elected to cease delivering natural gas for processing and made no future CO2 deliveries from that date until 2020, it would incur an aggregate shortfall penalty of about $289.1 million for contract years 2012-2019.

SandRidge would have had to pay $290.1 million in 2020 to adjust its future CO2 volume requirements through 2041 to zero, an amount that could decrease with future CO2 deliveries. The company said terminating the gas treatment agreement outright would require a termination fee of an amount equal to the present value of $0.70/Mcf multiplied by the remaining CO2 volumes required to be delivered, plus Oxy’s current net book value of the Century Plant.

Last year, SandRidge acquired Pinon Gathering Co. LLC — including 370 miles of gathering lines supporting SandRidge’s natural gas and CO2 production from the Pinon Field — from EIG Global Energy Partners for $48 million in cash and $78 million in secured notes (see Shale Daily, Oct. 5, 2015). But the company has been struggling as it navigates low commodity prices; it reported a $640 million net loss in 3Q2015 and was delisted from the New York Stock Exchange this month (see Shale Daily Jan. 7; Nov. 5, 2015).