How bankruptcy lets oil and gas companies evade cleanup rules
In a bankruptcy court in southern Texas
a dispute over who is liable for cleaning up hundreds of oil and gas rigs in the Gulf of Mexico is being discreetly waged. Fieldwood Energy, an offshore drilling company attempting to offload more than $7 billion in environmental cleanup responsibilities, a group of oil majors including Chevron, Marathon Oil, and BP, and the Department of the Interior are the players in this game of fossil fuel infrastructure.
A court is now evaluating Fieldwood’s proposal to divide its assets, shifting older legacy wells and drilling rigs that are costly to clean up into two corporations while forming a new firm — suitably dubbed NewCo — to buy the more lucrative assets. Fieldwood has filed for bankruptcy. The fourth bucket of assets, which the business plans to completely abandon, includes more than 1,170 wells, 280 pipelines, and 270 drilling platforms. The environment and public safety are in danger from a number of factors, including oil and gas spills and explosions, from aging wells and drilling platforms.
Due to a loophole in offshore drilling laws
the Interior Department is able to hold corporations that had previously used Fieldwood leases responsible for the cleaning. The agency is in charge of safeguarding public lands, including those offshore as well as those on land, and it grants leases for more than 12 million acres of the seabed, including those in the Gulf. One lease may include many wells, and many of the leases that Fieldwood wants to “restore” to their predecessor businesses might eventually fall under the control of large oil giants like Chevron and BP. Naturally, both businesses have vehemently opposed the company’s bankruptcy strategy.
The Interior Department has been objecting to Fieldwood’s plan to transfer leases to other companies and abandon wells, claiming that its environmental obligations are “nondischargeable” and that leases cannot be sold or transferred without approval from the federal government. This is happening while the oil companies try to avoid responsibility for cleanup.
Over 260 oil and gas businesses have declared bankruptcy in the last six years, including Fieldwood. Over the last year, operators have found it difficult to remain afloat due to low prices and limited demand for oil and gas. In an effort to discharge their debts, rearrange their assets, and, in some circumstances, unload their environmental commitments, many people have been resorting to bankruptcy. These businesses are using a playbook devised by coal corporations to get rid of their environmental and labor responsibilities by taking advantage of bankruptcy law’s restrictions and loopholes.
According to Robert Schuwerk, executive director of the financial think tank Carbon Tracker, “[Fieldwood is] not the first company with offshore assets to go bankrupt, but it’s the size that’s becoming uncomfortable for other companies to absorb,” noting that the threat of the government requiring cleanup of these wells has made the distressed assets downright toxic for all parties involved. People are paying attention to this case, and it will create new precedents.
Insolvency “for profit”
There are two major options accessible to businesses when they declare bankruptcy: liquidation or restructuring. Chapters 7 and 11, respectively, are known as bankruptcy chapters and provide businesses with two very distinct ways to get out from under their obligations. In the former, the assets of the firm are approved for sale by a bankruptcy court, and the revenues are divided among creditors. The firm no longer exists after the conclusion of the procedure. With the latter, the business attempts to remain afloat by reorganizing its assets and obligations. It may sell some of its assets or give them to creditors in return for debt forgiveness. The business finally comes out of bankruptcy and keeps going.
Fieldwood has decided to reorganize and reappear under the ambiguously named NewCo.
One often used bankruptcy tactic is to spin off risky assets into firms that are short on cash and about to become insolvent; in Fieldwood’s instance, those assets include wells that are nearing the end of their useful lifetimes. Government agencies, and eventually taxpayers, are positioned last in the payment line under bankruptcy law’s priority system because environmental commitments are given a lesser priority than other creditors. The bankruptcy rule also permits businesses to get rid of “burdensome” assets, which fossil fuel firms have tried to utilize to get rid of low-yielding wells that have reached the end of their useful life.
State and federal regulators are in charge of making sure that operators plug wells by pouring cement down their boreholes, removing any equipment on the surface, and generally restoring the land or seabed to how it was before drilling — but they frequently have little clout in bankruptcy court to obtain funds for environmental cleanup. A corporation has accumulated a significant amount of debt by the time it files for bankruptcy, and a lengthy line of creditors are vying for what little money may still be in the company’s estate. Regulators may be fortunate to get any funding for cleaning at all.
According to Joshua Macey, a University of Chicago law professor who specializes in environmental law and bankruptcy, “the crucial feature of these fossil bankruptcies — where fossil companies are using bankruptcy to get out of environmental obligations — is that a company can’t pay all of its debts.” The only solution, according to the expert, is to demand that the company do cleaning prior to bankruptcy, either concurrently or with a promise that there would be enough assets available to do so.
Taxpayers bear the price when state regulators fail to make that guarantee. Such was the situation with Colorado-based Petro share, which declared bankruptcy in 2019. The state of Colorado obliged Petro share, which controlled more than 150 wells there, to put aside $325,000 in bonds as a reserve in case the firm went bankrupt and couldn’t pay its cleaning commitments. Although Megan Castle, a spokeswoman for the Colorado Oil and Gas Conservation Commission, which regulates the state’s oil and gas industry, called the claim “typical” and “very much disputed by the State,” Petro share and its creditors claimed during the bankruptcy that the money was a part of the bankruptcy estate and should be distributed among the creditors.
As a result, the state is forced to bargain for a guarantee that it was intended to get prior to the firm going out of business. In the Colorado case, the state waived its right to prosecute Petro’s share for $726,000 in penalties for breaking several state environmental regulations in return for obtaining the $325,000 bond that it was already owed. The corporation had inappropriately disposed of drilling debris, dug without erecting fences around the site for the protection of the public, and did not sufficiently regulate stormwater flow in the years before the bankruptcy.
Providence Wattenberg, the creditor that bought Petroshare’s wells, was also given permission by the state to abandon any wells that it did not want to run. Despite the bankruptcy court’s approval of a plan to liquidate Petro share in May 2020, Providence has already abandoned 53 wells, and the state has yet to pay out the $325,000 bond amount. As of right now, the agency is “going through the procedure to claim the revenues,” according to Castle. She said that while the department has not calculated the cost of cleaning up the 53 wells, the average cost to recover an orphan wells in the state is $82,500. Therefore, the total cost of clearing things up might exceed $4 million, which is more than 12 times the amount of the bond that was intended to ensure cleanup would be paid for.
Megan Milliken Biven, a consultant who formerly held the position of program analyst with the Bureau of Ocean Energy Management, a government organization under the Interior Department in charge of regulating offshore leasing, said: “It’s simply bankruptcy for profit.” “They’re basically stealing what’s left and leaving us to deal with the economic and environmental consequences.”
The Petro share and Fieldwood examples show how bigger businesses transfer underperforming wells to smaller, financially precarious firms that then leave them. Environmentalists claim that this tendency is widespread in the oil and gas sector and that it will gain momentum as the United States switches to renewable energy sources and as climate rules reduce the value of fossil fuel assets. The tendency is shown by a glance at the top methane producers in the country. The largest methane emitters in the country are now smaller, privately-held businesses because oil and gas goliaths like Exxon and ConocoPhillips have sold off their environmentally damaging operations to satisfy carbon limits. For instance, Fieldwood acquired older wells from Apache and Chevron, two significant Gulf of Mexico companies.
According to Biven, focusing on the situation’s final stages misses the whole series of circumstances that led to it as well as the hazards that it increased.
Good and terrible assets
Riverstone Holdings, a New York-based private equity firm, invested $600 million in Fieldwood Energy before it was created in late 2012. Since then, the corporation has engaged in several spending binges. One of the top oil explorers in the nation, Apache, sold it $3.75 billion worth of wells, platforms, and other assets scattered over 1.9 million acres in the Gulf of Mexico. Additionally, it bought offshore properties from Noble Energy for $710 million. But last year, the indebted business announced its second bankruptcy filing since 2018, as a result of a pandemic-caused decline in pricing and a surplus of oil supplies.
In a proposal presented to the bankruptcy court, Fieldwood suggests transferring more than 380 wells spread over 50 leases to NewCo, the new business is established. These leases represent the company’s “revenue-generating” assets, according to Chevron and other oil and gas corporations who are opposing Fieldwood’s intentions. They are also transferring the second group of assets they label as “dirty” onto a different group of recently established businesses that opponents claim lack the funding to enable them to satisfy their environmental duties. Finally, the business is suggesting terminating or returning 187 other leases to “predecessor companies” that had operated them, without stating whose companies they would be handed to.
Multiple efforts for a response from Fieldwood Energy’s attorneys and representatives went unanswered.
The wells and other equipment on the 44 leases Fieldwood is proposing to leave would cost upwards of $500 million to clean up, according to Chevron, which disclosed that it had sold stakes in those leases. BP found 14 leases and said the cleanup would cost more than $422 million.
Chevron objected to Fieldwood’s proposal, calling it “really unprecedented,” “fundamentally defective,” and a “liquidation of Debtors’ assets disguised as a “reorganization”” in a 51-page document. It tries to “foist billions of dollars in safety and environmental liabilities onto the U.S. government, taxpayers, and others,” according to Chevron’s legal team.
Environmental offenses have been committed often in Fieldwood. Fieldwood has received nearly 1,800 “shut-in incidents of noncompliance,” which is an enforcement measure used when a violation is serious or endangers human health or safety, according to federal records from the Bureau of Safety and Environmental Enforcement, an organization under the purview of the Interior Department. Along with Chevron, Shell, Exxon, and Apache, the corporation is among the top 10 with the most violation notifications after receiving an extra 2,000 “warning” letters for breaking federal laws. One Fieldwood employee was charged by the Department of Justice earlier this year with intentionally discharging oil into the Gulf of Mexico, neglecting to disclose it, and fabricating a report. A second worker was charged with a carelessness that caused a leak and willful disregard for safety measures so that oil production could continue.
Chevron objected to Fieldwood’s bankruptcy plan, stating that “these indictments raise severe questions regarding the status of [Fieldwood’s] other assets.”
Spin-off attempts for problematic assets are nothing new. The approach was invented by the St. Louis-based coal behemoth Peabody Energy and another business when they transferred more than $2 billion in retirement and environmental responsibilities onto Patriot Coal, a subsidiary that would subsequently go bankrupt, according to Joshua Macey of the University of Chicago.
Technically, it is unlawful. According to the “fraudulent conveyance statute,” a component of bankruptcy law, it is illegal to transfer funds to third parties so that creditors cannot obtain them before or during bankruptcy. But according to Macey, there is a tight deadline and a heavy burden of proof for fraudulent transfers.
According to Macey, “by splitting up into several organizations, corporations have made sure that the money they have available may be utilized to pay shareholders and to maintain continuing operations and not to settle environmental claims of coal mines or gas wellheads that are no longer viable.”
Laws governing bankruptcy also provide businesses a way to get rid of assets with little or no financial worth. This group includes oil and gas wells that are reaching the end of their useful lives. The U.S. Supreme Court determined that a firm could not leave the land because it was breaking New Jersey environmental rules in a 1986 case where the company sought to avoid its duty to clean up the property where it had kept 70,000 gallons of oil in leaking containers. A bankruptcy court could not approve abandonment, the Court decided, “without adopting criteria that would appropriately preserve the public’s health and safety.” The legislation created a more stringent requirement for abandonment: Businesses cannot leave the property if they are breaking regulations that safeguard public health or safety from “imminent and recognizable damage.”
“The battle is constantly about whether or not this problem has the potential to be very destructive to people in the near future,” said Schuwerk of Carbon Tracker.
Even the fear of abandonment may cause authorities to hold off on imposing penalties or take other enforcement action to pressure a business to clean up its behavior, regardless of whether corporations seek to abandon wells during bankruptcy or not. A regulator pressuring a corporation to plug wells or clean up sites might force it into bankruptcy in cases when the company looks to be on the verge of going bankrupt.
Steven Feit, an attorney with the Center for International Environmental Law, a nonprofit organization with offices in Washington, D.C., and Switzerland, said, “You wind up having this very bizarre perverse incentive.” The agency must choose between shutting the well responsibly and acting responsibly or hoping for the best and receiving the money in the future.