How bankruptcy lets oil and gas companies evade cleanup rules
A battle over who is responsible for cleaning up hundreds of oil and gas rigs in the Gulf of Mexico is quietly playing out in a bankruptcy court in southern Texas. The contestants in this game of fossil fuel infrastructure hot potato: 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.*
Fieldwood has declared bankruptcy, and a court is considering the company’s plan to split its assets, moving older legacy wells and drilling rigs that are expensive to clean up into two entities while creating a new company — appropriately named NewCo — to purchase the more profitable assets. The company proposes outright abandoning a fourth bucket of assets consisting of more than 1,170 wells, 280 pipelines, and 270 drilling platforms. Aging wells and drilling platforms pose multiple risks to the environment and human safety, including oil and gas leaks and explosions.
A quirk in the regulations that govern offshore drilling allows the Interior Department to hold companies that previously operated on Fieldwood leases accountable for the cleanup. The department is charged with protecting public lands — both on land and offshore — and issues leases to more than 12 million acres of seabed, including in the Gulf. A single lease can contain multiple wells, and many of the leases that Fieldwood is proposing to abandon or “return” to predecessor companies could end up the responsibility of oil majors, such as Chevron and BP. Unsurprisingly, both companies have zealously objected to the company’s bankruptcy plan.
While the oil companies attempt to dodge responsibility for cleanup, the Interior Department, has been filing objections to Fieldwood’s plan to transfer leases to other companies and abandon wells, stating that its environmental obligations are “nondischargeable” and that leases cannot be sold or transferred without sign-off from the federal government.
Fieldwood is one of more than 260 oil and gas companies that has filed for bankruptcy in the last six years. With low prices and suppressed demand for oil and gas over the last year, operators have struggled to stay afloat. Many have been turning to bankruptcy in an attempt to shed their debts, reorganize their assets, and, in some cases, offload their environmental obligations. Utilizing limitations and loopholes in bankruptcy law, these companies are employing a playbook perfected by coal companies to shed their environmental and labor liabilities.
“[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,” said Robert Schuwerk, executive director of the financial think tank Carbon Tracker, noting that the threat of the government forcing a cleanup of these wells has made the distressed assets downright toxic to all parties involved. “People are watching this case, and it’s going to be precedent-setting.”
‘Bankruptcy for profit’
When companies file for bankruptcy, there are two main avenues available to them: liquidation or reorganization. Referred to as Chapter 7 and Chapter 11 in bankruptcy parlance, respectively, they offer companies two vastly different routes to escape their debts. With the former, a bankruptcy court approves the company’s assets for sale and the proceeds are distributed among creditors. At the end of the process, the company ceases to exist. With the latter, the company reorganizes its assets and debts in an attempt to stay afloat. Some of its assets may be sold or transferred to creditors in exchange for writing off debts. The company eventually emerges from bankruptcy, and it continues to operate.
Fieldwood has chosen the second option — to restructure and re-emerge as the generically-titled NewCo.
One commonly used bankruptcy strategy is spinning off riskier assets — in Fieldwood’s case, those are wells that are at the end of their productive lives — into entities that are low on cash and likely to become insolvent down the line. Bankruptcy law’s priority scheme places environmental obligations lower in the payout queue, which puts government agencies — and ultimately taxpayers — behind other creditors. The bankruptcy code also allows companies to abandon “burdensome” properties, a provision fossil fuel companies have attempted to use to discard low-producing wells at the end of their lives.
State and federal regulators are tasked with ensuring that operators plug wells by pouring cement down their boreholes, dismantling any equipment on the surface, and generally returning the land or seabed to pre-drilling conditions — but they often have little leverage in bankruptcy court to secure money for environmental cleanup. By the time a company files for bankruptcy, it has racked up a large amount of debt and a long line of creditors are queuing up for whatever little money may remain in the company’s estate. Regulators can be lucky to secure any money at all for cleanup.
“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,” said Joshua Macey, a University of Chicago law professor specializing in environmental law and bankruptcy. “The only way to solve this is to insist that, before bankruptcy, the firm is either doing cleanup contemporaneously or has a guarantee that there will be sufficient assets to do cleanup.”
When state regulators fail to ensure that, taxpayers end up paying the price. Such was the case with Petroshare, a Colorado-based company that filed for bankruptcy in 2019. Petroshare owned more than 150 wells in Colorado, and state regulators had required it to set aside $325,000 in bonds — money that the state reserves in case the company becomes insolvent and cannot meet its cleanup obligations. But during bankruptcy, Petroshare and its creditors claimed the money was part of the bankruptcy estate and should be divvied up among the creditors, an argument that Megan Castle, a spokesperson for the Colorado Oil and Gas Conservation Commission, which oversees the oil and gas industry in the state, said is “typical” and “very much disputed by the State.”
This puts the state in the position of having to negotiate for a guarantee it was supposed to get before the company went under. In the Colorado case, in exchange for securing the $325,000 bond that it was already owed, the state relinquished its right to pursue Petroshare for $726,000 in fines for violating various state environmental laws. In the years preceding bankruptcy, the company had improperly disposed of drilling waste, excavated without building fences around the site for public safety, and did not adequately control stormwater runoff.
The state also permitted Providence Wattenberg, the creditor that purchased Petroshare’s wells, to abandon any wells that it did not wish to operate. Providence has since abandoned 53 wells, and the state has still not cashed out the $325,000 bond amount even though the bankruptcy court approved a plan to liquidate Petroshare in May 2020. Castle said the agency is “currently working through the process to claim the proceeds.” She said the agency has not estimated the cost of cleaning up the 53 wells, but that on average an orphan well in the state costs $82,500 to reclaim. That means cleaning up all of them could cost more than $4 million — more than 12 times the amount of the bond that was supposed to guarantee cleanup would be covered.
“It’s basically bankruptcy for profit,” said Megan Milliken Biven, a consultant who previously worked as a program analyst with the Bureau of Ocean Energy Management, a federal agency within the Interior Department tasked with overseeing offshore leasing. “They’re just looting what remains and leaving us with the financial and environmental fallout.”
The Petroshare and Fieldwood cases demonstrate how larger companies pass on less profitable wells to smaller, financially unstable operators that go on to abandon wells. It’s a trend that environmental advocates say is commonplace in the oil and gas industry and will accelerate as the U.S. shifts to cleaner forms of energy — and as climate regulations make fossil fuel assets less valuable. A look at the top methane emitters in the nation highlights the trend. As oil and gas giants like Exxon and ConocoPhillips shed their polluting assets to meet carbon targets, smaller, privately-held companies have become the nation’s biggest methane emitters. In Fieldwood’s case, for instance, the company hoovered up older wells from Apache and Chevron, two major players in the Gulf of Mexico.
“Looking at it only at the tail end ignores the whole chain of events that created that situation and the risks that were compounded,” said Biven.
Good and bad assets
Fieldwood Energy was founded in late 2012 by Riverstone Holdings, a New York-based private equity firm that funneled $600 million into the company. The company has gone on multiple spending sprees since then. It bought $3.75 billion worth of wells, platforms, and other assets spread out over 1.9 million acres in the Gulf of Mexico from Apache, one of the country’s biggest energy explorers. It also acquired Noble Energy’s offshore assets worth $710 million. But after a pandemic-induced depression in prices and an oil supply glut, last year the debt-laden company filed for bankruptcy for the second time since 2018.
According to a plan submitted to the bankruptcy judge, Fieldwood is proposing moving more than 380 wells in about 50 leases to NewCo, the new company it created. Chevron and other oil and gas companies objecting to Fieldwood’s plans claim that these leases are the company’s “revenue-generating” assets. A second batch of assets they describe as “bad” is being moved into a separate set of newly-formed companies that critics say do not have adequate finances in place to ensure that they can fulfill their environmental obligations. Finally, the company is proposing either walking away from or returning an additional 187 leases to “predecessor companies” that previously operated them — without specifying which companies they would be transferred to.
Lawyers and spokespeople for Fieldwood Energy did not respond to multiple requests for comment.
Chevron identified that it had sold interests in 44 leases that Fieldwood is attempting to abandon and that the wells and other equipment on these leases would cost upwards of $500 million to clean up. BP identified 14 leases and estimated the cost of cleanup would exceed $422 million.
In a 51-page objection, Chevron described Fieldwood’s plan as “truly unprecedented,” “fundamentally flawed,” and a “liquidation of Debtors’ assets masquerading as a ‘reorganization.’” It attempts to, Chevron’s lawyers argue, “foist billions of dollars of safety and environmental obligations upon the U.S. government, taxpayers, and others.”
Fieldwood has a long history of environmental infractions. According to federal records from the Bureau of Safety and Environmental Enforcement, an agency under the Interior Department’s umbrella, Fieldwood has been issued close to 1,800 “shut-in incidents of noncompliance,” an enforcement action taken when a violation is severe or threatens human health or safety. The company has also received an additional 2,000 “warning” notices for not complying with federal rules and is among the top ten companies with the most number of violation notices, alongside Chevron, Shell, Exxon, and Apache. Earlier this year, the Department of Justice indicted one Fieldwood employee for knowingly releasing oil into the Gulf of Mexico, failing to report it, and falsifying a report. A second employee was indicted for negligence that led to a spill and intentionally bypassing safety systems to continue producing oil.
“These indictments raise serious concerns about the conditions of [Fieldwood’s] other assets,” Chevron wrote in its objection to the company’s bankruptcy plan.
Attempts to spin off troublesome assets are not new. According to Joshua Macey of the University of Chicago, St. Louis-based coal giant Peabody Energy pioneered the strategy when it and another company moved more than $2 billion in retirement and environmental obligations into Patriot Coal, a subsidiary that would later file for bankruptcy.
That’s technically illegal. An element of bankruptcy law known as “fraudulent conveyance law” states that it’s unlawful to move money to third parties so that creditors cannot access it right before or during a bankruptcy. But Macey said that the burden of proving fraudulent conveyance is quite high and the statute of limitations is short.
“By separating into multiple firms, companies have ensured that the funds they have available can be used to pay shareholders and to fund ongoing operations and not to pay environmental claims of coal mines or gas well heads that are no longer productive,” said Macey.
Bankruptcy laws also provide an avenue for companies to dump assets of low or no financial value. Oil and gas wells nearing the end of their life fall squarely into this category. In a 1986 case in which a company attempted to shirk its obligation to clean up property where it had stored 70,000 gallons of oil in leaky containers, the U.S. Supreme Court found that the company could not abandon the property because it was violating New Jersey environmental laws. The Court ruled that a bankruptcy court could not authorize abandonment “without formulating conditions that will adequately protect the public’s health and safety.” The jurisprudence established a narrower condition for abandonment: If companies are in violation of laws that protect public health or safety from “imminent and identifiable harm,” they cannot abandon property.
“The fight is always over, ‘Hey, is this an issue that’s potentially really harmful to people imminently or not,’ and courts come out in different ways,” said Carbon Tracker’s Schuwerk.
Whether companies attempt to abandon wells during bankruptcy or not, even the threat of abandonment can prompt regulators to delay issuing fines or take other enforcement action to force a company to clean up its act. In a situation where a company appears to be potentially close to insolvency, a regulator pushing a company to plug wells or clean up sites could tip it into bankruptcy.
“You end up having this really weird perverse incentive,” said Steven Feit, an attorney with the Center for International Environmental Law, an advocacy group based in Washington, D.C., and Switzerland. “The agency has to either decide between doing the responsible thing and closing the well or kind of hoping for the best that it would be able to get the money later.”
*Correction: This story originally misidentified Marathon Oil, one of the objectors in Fieldwood Energy’s bankruptcy case.
This story was originally published by Grist with the headline How bankruptcy lets oil and gas companies evade cleanup rules on Jun 7, 2021.