Archive for June, 2010

A Business Backlash?

Friday, June 25th, 2010

By all rights, the laissez-faire crowd should be silent these days. Recent months have been marked by one example after another of the perils of deregulation and the folly of trusting large corporations to do the right thing. From Toyota to Goldman Sachs to Massey Energy to BP, 2010 has been the year of big business irresponsibility.

As in 2002 (after the accounting scandals involving Enron, WorldCom et al.) and 2008 (the meltdown of Wall Street), we’re now at one of those moments, following an outbreak of corporate misconduct, in which public sentiment about business is up for grabs, as is public policy.

The business camp is already working hard to regain support, in ways ranging from BP’s seemingly benign vow to “make things right” to Rep. Joe Barton’s shameless “shakedown” outburst designed to turn the Obama Administration into the villain. Here are some other signs that corporations and their defenders are already going back on the offensive:

  • A federal judge with personal investments in the petroleum industry struck down the Obama Administration’s moratorium on deepwater drilling, despite evidence brought to light by Congressional investigators that the practice is much more dangerous than we had been led to believe and none of the oil giants have adequate accident response plans. The challenge to the moratorium had been brought by smaller oil service firms, but the judge’s decision was hailed by majors such as Chevron and Royal Dutch Shell.
  • Massey Energy, apparently hoping for a like-minded judge, has filed suit against the federal Mine Safety and Health Administration in a brazen effort to pin the blame on regulators for the April explosion at the Upper Big Branch mine in West Virginia that killed 29 workers.
  • Verizon Communications CEO Ivan Seidenberg, the current head of the Business Roundtable, recently gave a speech in which he challenged regulatory initiatives in the telecom and financial sectors, criticized efforts to limit tax avoidance by multinational companies, and declared: “It’s time for us all to raise our game and embrace the power of the private sector that will create real value and real growth for our country.”

If business advocates are emboldened to speak out so soon, that suggests that corporations have not been reprimanded adequately for their misconduct. The criticism expressed by the Obama Administration and Congressional Democrats has had a ritualistic quality about it—a Kabuki dance of disapproval that may not result in any real change.

Even the $20 billion BP escrow fund feels inadequate, given the fact that there is no end in sight to the disaster. Although BP’s shareholders are agonizing over the suspension of the dividend payment, the company itself does not seem very put out by the creation of the fund, especially since it is being allowed to spread out the cost over several years.

The ability of BP to buy its way out of the crisis contributes to the sense that large corporations can do the most outrageous things and emerge relatively unscathed. It is unlikely that the forthcoming criminal case against the company will cause much more discomfort. The company has already been through that process with previous disasters involving oil spills in Alaska and a deadly refinery explosion in Texas. It paid the resulting penalties with no problem, and the fact that it was put on probation has had little practical effect.

What’s needed is a more dramatic response to corporate negligence. It might be the arrest of a top executive or an announcement that the federal government will no longer do business with companies with serious regulatory violations or an antitrust initiative to try to break up large firms which think that their size somehow makes them above the law. Only then might corporations think twice about lashing back and returning to business as usual.

There Will Be Damage

Thursday, June 17th, 2010

Twenty billion dollars. The amount BP agreed to put in escrow is more than 250 times the company’s maximum obligation under the Oil Pollution Act of 1990. It is a remarkable sum to get a corporation to disgorge before there has been any formal finding of guilt. But is it enough?

While it is commendable that the people of the Gulf Coast will be guaranteed compensation, there is a risk that BP’s voluntary participation in the fund will allow it to avoid what should be even higher liability costs. The Obama Administration insists that the $20 billion is not a cap, yet that is how it seems to be viewed by many in the financial markets, which reacted to the announcement with a degree of relief.

Obama is so eager for a win that he may have left money on the table. The fact that BP agreed to the $20 billion figure without much of a fight suggests that he could have gotten more. Another drawback: keeping the amount within BP’s comfort zone allowed the company to appear to be noble in cooperating, when it would have been preferable to see it squealing about an “unreasonable” demand. BP should be feeling more pain.

I also worry that BP’s acquiescence might cause the feds to go easier on the company in the criminal investigation of the gulf disaster. BP is already on probation in connection with criminal charges stemming from its previous recklessness in Alaska and at its Texas City refinery. Another conviction should get it debarred from receiving new drilling licenses or contracts from the federal government, and it would pave the way to huge payouts in the inevitable civil litigation.

The $20 billion deal is also less than fully satisfying because it applies to BP alone. The current mess in the gulf may be the doing of BP (and perhaps Transocean and Halliburton), but the Congressional testimony just given by top executives raises new concerns about other deepwater wells.

Corporate solidarity fell by the wayside as the big shots from Exxon Mobil, Chevron, Shell and ConocoPhillips distanced themselves from BP. Rex Tillerson of Exxon Mobil was especially blunt about BP’s screw-ups,  seeking perhaps to drive down the company’s stock price further and facilitate a rumored takeover bid.

Yet what was even more amazing was the admission by the executives that, four decades after the 1969 Santa Barbara accident that demonstrated the risks of offshore drilling, their companies are still not in a position to handle such occurrences. “We are not well-equipped to deal with them,” Tillerson said matter-of-factly. “There will be damage.” This came on top of revelations by the House Energy and Commerce Committee that the spill response plans of the oil majors were cookie-cutter documents with outdated and irrelevant information.

All this is a far cry from the rosy scenarios and confident assurances that the industry has been peddling to the public for decades and selling to gullible (or indifferent) federal regulators. Here was the chief executive of the world’s largest oil corporation in effect admitting that it is helpless when something big goes wrong at one of its wells beneath the sea.

As satisfying as is to beat up on BP for the current catastrophe, the culpability extends to the entire industry. None of the oil giants took safety seriously, and by all rights they should all be digging into their corporate pockets to clean up the mess and compensate the people of the Gulf Coast.

One hundred billion dollars: that has a better ring to it.

Would a Defunct BP Make Good On Its Liabilities?

Wednesday, June 9th, 2010

The BP deathwatch has begun. It’s not trial lawyers or environmental activists who pose an immediate threat to the continued existence of the oil giant, but rather the market. BP’s stock price is down about 50 percent since the beginning of the Gulf of Mexico disaster — a loss of more than $80 billion in capitalization — and there is rising speculation about a takeover by another petroleum behemoth such as Shell or Exxon Mobil.

The demise of a company with a track record as sullied as that of BP is no cause for mourning, but there is a serious risk that its dismantling would be done in a way that limits the resources available for cleanup and compensation in the gulf. Mainstream analysts such as those at Credit Suisse now estimate the company’s total liability at more than $35 billion. As the damaged underwater well continues to spew oil — and more indications of BP’s negligence come to light — the final dimensions of the financial blowout are likely to be much larger. BP’s current or future owners are not likely to part with that kind of money without a fight.

One maneuver they might consider is to break up the company. The New York Times is reporting that investment bankers are already working on scenarios in which BP would submit a prepackaged bankruptcy filing and split off a separate entity that would be saddled with the liabilities and given limited assets to make good on them.

Such attempts to shield assets from massive environmental liabilities are not unprecedented. In the 1980s Johns-Manville, the world’s leading producer of asbestos, restructured itself, changed its name, and then filed for bankruptcy in the face of more than 16,000 lawsuits brought by victims of asbestos disease. Mining company Asarco was accused of using a 2005 Chapter 11 filing to reduce its financial responsibility for cleaning up nearly 100 Superfund toxic waste sites.

There are also troublesome precedents that don’t involve bankruptcy filings. After taking over Union Carbide, the company responsible for the 1984 industrial accident in Bhopal, India that killed thousands, Dow Chemical disavowed any liability. After being hit with $5 billion in punitive damages in connection with the Exxon Valdez oil spill, Exxon resisted paying for more than a decade and was finally rewarded when the U.S. Supreme Court slashed the judgment.

What, then, needs to be done to prevent BP from evading its full obligations related to the present disaster? The ideal course of action would be for the federal government to seize enough of the company’s assets in the United States to cover its expected obligations. This is what the Seize BP movement is already demanding.

Such an aggressive action would probably run afoul of Supreme Court rulings such as the 1952 decision regarding President Truman’s seizure of steel mills during a strike by steelworkers. On the other hand, the government could use the fact that BP is on probation in connection with criminal charges relating to workplace safety and environmental violations in Texas and Alaska to justify a seizure. The likelihood that BP has violated laws in connection with the gulf disaster is quite high, meaning that it is technically in violation of its probation. A seizure of its property would be the equivalent of arresting an individual who violates probation.

Another alternative would be not to seize assets but to force the company to pledge enough of them to cover likely liabilities. If BP was later unable or unwilling to pay what the courts or government agencies mandate — a possibility that is more likely in light of the fact that the company is self-insured — those assets could then be taken.

It turns out that BP and other companies drilling for oil on U.S. public lands or offshore already have to make a commitment of the sort by posting bonds with the Interior Department. The bonds are meant to cover reclamation of the site after the drilling is completed; i.e., returning it to some approximation of its original condition, which in the case of offshore wells includes the removal of the drilling platform. According to a GAO report published earlier this year, the bond requirements are quite low and in some cases have not changed in decades. A company such as BP is required to post only $3 million for all of its drilling activities in the Gulf of Mexico.

The Oil Pollution Act of 1990 also requires that companies provide proof — whether in the form of insurance coverage or a bond — that they can meet their financial obligations relating to a spill, but as has been widely discussed, the liability limits mandated by the act are grossly inadequate.

The current catastrophe in the gulf demonstrates that the potential liabilities from an offshore drilling accident, especially the deepwater variety, are enormous. At the very least, the federal government should vastly increase the bonding requirements — or other ways of reserving assets — beginning immediately and including BP. Knowing that a substantial portion of their resources are immediately at risk might make oil companies think twice about employing reckless drilling practices.

BP’s Partner in Crime

Friday, June 4th, 2010

The liability costs stemming from the ongoing environmental disaster in the Gulf of Mexico are likely to be in the tens of billions of dollars. BP, of course, will bear the brunt of those costs, but other deep pockets should not be ignored. Transocean, the owner of the rig where the initial explosion occurred, and Halliburton, which was supposed to seal the well with concrete, will both be targeted.

But we shouldn’t forget that BP is not the sole owner of the underground well, known as Macondo, that continues to spew large quantities of crude oil into the sea. The biggest minority holder, with a 25 percent share, is Anadarko Petroleum, which is a major offshore driller in its own right and has ties to major controversies in the energy industry. The company is worth a closer look.

Anadarko was formed in 1959 as a subsidiary of Panhandle Eastern Pipe Line Company, which used the entity to get around Federal Power Commission limitations on the price it could charge on natural gas produced from properties it owned in the Anadarko Basin in Texas, Oklahoma and Kansas. Anadarko got involved in offshore exploration in 1970. Among its early project partners was Amoco, which would later (1998) be acquired by BP.

By the 1990s Anadarko was a major player in the Gulf of Mexico. During the following decade the company became better known (and much larger) after acquiring Union Pacific Resources and then Kerr-McGee, which had pioneered offshore petroleum exploration in the late 1940s. The latter acquisition, in particular, saddled Anadarko with a dubious legacy.

In the 1970s Kerr-McGee was embroiled in a scandal over accusations of serious safety violations and falsification of records at its nuclear fuel plant in Oklahoma. The controversy escalated after the whistleblower in the case, technician and union activist Karen Silkwood, died under suspicious circumstances in 1974.  Silkwood’s family sued the company for causing her to be contaminated with plutonium.  In 1986 Kerr-McGee paid $1.38 million to settle the case after a jury award of $10.5 million had been overturned on appeal.

Two decades later, Kerr-McGee mounted a court battle to prevent the federal government’s Minerals Management Service from restoring royalty rates paid by offshore drillers to reasonable rates after they had been reduced by Congress when energy prices were low in the mid-1990s. The case, which was resolved after Anadarko completed its acquisition of Kerr-McGee, could cost U.S. taxpayers, according to a Government Accountability Office estimate, more than $50 billion.

While Kerr-McGee was pursuing its case it was also defending itself against a whistleblower suit charging that the company had cheated the federal government out of millions of dollars in offshore drilling royalties by underreporting its output. In January 2007 a federal jury found the company guilty, but the judge in the case later overturned the verdict on a technicality.

Anadarko’s own record is not unblemished. Last year it and two related companies paid $1.05 million in civil penalties and agreed to spend $8 million in remedial actions to resolve charges that they violated the Clean Water Act by discharging harmful quantities of oil from a production facility in Wyoming. Two years earlier the company was fined $157,500 by the EPA for destroying wetlands in southwest Wyoming. Anadarko is also heavily involved in natural gas drilling in the Marcellus Shale in the northeastern United States, which is viewed as a serious threat to drinking water supplies. Its joint venture partner in the shale operations is Mitsui, which is also the third partner (with a 10 percent stake) in the Macondo well.

Anadarko does not appear to have had any role in operational decisions at that ill-fated Macondo well, but the company is separately involved in its own deepwater drilling activities in the Gulf of Mexico that were temporarily shut down as a result of the moratorium announced by President Obama. While BP rightfully remains the primary target of legal and other responses to the gulf disaster, Anadarko – both by virtue of its ownership interest in Macondo and its own risky drilling – also deserves to feel some of that pain.