Phil Mattera

The New Petro-Villain

The BP oil disaster in the Gulf of Mexico is 100 days old, and now another company is competing for the spotlight as a major petro-villain.

The upstart is Enbridge Energy Partners L.P. — a U.S.-based subsidiary of the Canadian pipeline giant Enbridge Inc. — which is responsible for the recent accident in Michigan that has filled the Kalamazoo River with some 800,000 gallons of oil and shown that crude does not need to be offshore to cause serious environmental damage. The incident occurred only months after the company was warned that it was not properly monitoring corrosion.

Enbridge is no stranger to controversy, both because of its own performance problems, including a series of earlier spills, and its role in facilitating the distribution of oil produced in environmentally destructive situations such as the Alberta tar sands. This dubious track record is worth a closer look.

In January 2001 a seam failure on a pipeline near Enbridge’s Hardisty Terminal in Alberta spilled more than 1 million gallons of oil.
In July 2002 a 34-inch-diameter pipeline owned by Enbridge Energy Partners ruptured in northern Minnesota, contaminating five acres of wetland with about 250,000 gallons of crude oil.
In January 2003 about 189,000 gallons of crude oil spilled into the Nemadji River from the Enbridge Energy Terminal in Superior, Wisconsin. Fortunately, the river was frozen at the time, so damage was limited.
In 2004 the federal Pipeline and Hazardous Materials Safety Administration (PHMSA) proposed a fine of $11,500 against Enbridge Energy for safety violations found during inspections of pipelines in Illinois, Indiana and Michigan. The penalty was later reduced to $5,000. In a parallel case involving Enbridge Pipelines operations in Minnesota, an initial penalty of $30,000 was revised to $25,000.
In January 2007 an Enbridge pipeline in Wisconsin spilled more than 50,000 gallons of crude oil onto a farmer’s field in Clark County. The following month another Enbridge spill in Wisconsin released 176,000 gallons of crude in Rusk County.
In November 2007 two workers were killed in an explosion that occurred at an Enbridge pipeline in Clearbrook, Minnesota. The PHMSA proposed a fine of $2.4 million for safety violations connected to the incident, but the case has not been resolved.
In 2008 the Wisconsin Department of Natural Resources charged Enbridge Energy with more than 100 environmental violations relating to the construction of a 320-mile pipeline across much of the state. The agency said that Enbridge workers illegally cleared and disrupted wooded wetlands and were responsible for other actions that resulted in discharging sediment into waterways. In January 2009 the company settled the charges by agreeing to pay $1.1 million in penalties.
In 2009 the PHMSA fined Enbridge Pipelines LLC-North Dakota $105,000 for a 2007 accident that released more than 9,000 gallons of crude oil.
In March 2010 the PHMSA proposed a fine of $28,800 against Enbridge Pipelines LLC for safety violations in Oklahoma; the case is not yet resolved.

Apart from its safety record, Enbridge is targeted by environmentalists for its role in transporting crude oil from the controversial tar sand operations of northeastern Alberta, which are regarded as one of the largest contributors to global warming as well as a major source of air and water pollution and forest destruction. Enbridge’s predecessor companies had some involvement in the tar sands as early as the 1970s. That role expanded greatly in the late 1990s, when Enbridge completed construction of an $800 million expansion of its pipeline system to bring tar sands oil to Eastern Canada and the U.S. Midwest. The pipeline initially served Suncor Energy, a spinoff of U.S.-based Sunoco that is now Canada’s largest petroleum company.

In recent years Enbridge has spent billions of dollars to expand its oil pipeline capacity, much of it dedicated to the tar sands industry. Enbridge is set to provide another boon to the tar sands producers with the opening later this year of its Alberta Clipper pipeline, which will carry more of the dirty crude to Superior, Wisconsin. It is also proceeding with its Northern Gateway Project, which involves the construction of parallel pipelines from the tar sands region to the western shore of British Columbia. Enbridge is partnering with PetroChina on that project.

Enbridge is also headed for more controversy in light of its announcement in March 2010 that it would develop a natural gas pipeline serving areas of Pennsylvania and nearby states where Marcellus Shale drilling is taking place. Those drilling activities have been the subject of numerous reports of drinking water contamination.

Like BP, Enbridge depicts itself as a strong proponent of corporate social responsibility. Also like BP, Enbridge illustrates how those noble sentiments are meaningless in the face of repeated acts of negligence and recklessness.

The Right Way to Cut Federal Spending

Resembling a scene from Alfred Hitchcock’s The Birds, deficit hawks are taking over Washington. They held up an extension of unemployment benefits and are poised to attack Social Security, Medicare and other supposedly out-of-control forms of federal spending. At a time when government outlays, at least those of the safety net variety, should be expanding to address the ongoing economic crisis, Republicans and many Democrats alike have bought into the dubious idea that now is a time for fiscal austerity.

Apart from the battle over entitlements, there is more sensible effort under way to cut spending that benefits those who need it the least: large corporations. One welcome side effect of the Gulf of Mexico oil disaster is that increased attention is being paid to the ways that federal policies reward the likes of BP, Exxon Mobil, Chevron, Shell and ConocoPhillips. On the Fourth of July, the New York Times devoted part of its front page to a story on this largesse, writing: “oil production is among the most heavily subsidized businesses, with tax breaks at virtually every stage of the exploration and extraction process.”

According to a detailed analysis prepared by the Texas Comptroller of Public Accounts in 2008, total federal subsidies to the oil and gas industry in 2006 were about $3.5 billion. The Times article puts the current cost at about $4 billion. A recent Citizens for Tax Justice report points out that these tax breaks do little to benefit the public and serve mainly to fatten profits and enrich investors.

Efforts to eliminate these subsidies—including one pursued last month by Vermont Sen. Bernie Sanders—have generally come to naught, given the petroleum industry’s formidable influence in Congress. One of the more persistent initiatives is Green Scissors, a 15-year-old project that targets subsidies not only to the energy sector but also to agribusiness, mining and highways — challenging them on environmental as well as fiscal grounds. The Green Scissors 2010 report – just issued by Friends of the Earth, Taxpayers for Common Sense, Environment America and Public Citizen – tallies more than $31 billion in oil and gas subsidies that could be cut over the next five years. The total Green Scissors hit-list amounts to more than $200 billion for that period, with much of the remainder coming from subsidies to other energy sectors such as coal, nuclear and biofuels.

Attacking these costly and harmful subsidies is a noble endeavor, but it may be more effective not to take on the entire energy industry at once. Another significant feature of the Gulf of Mexico disaster is the breakdown of corporate solidarity. BP’s major rivals have taken pains to distance themselves from the British company, implicitly depicting it as a renegade on safety matters. Four of them just formed a rapid-response force to deal with future spills without involving BP in the planning.

In this context, it might make sense to focus on making certain companies, beginning with BP, ineligible for all or part of the federal energy subsidy banquet. Until now, the tax breaks and other benefits have been treated as entitlements, there for the taking by any company involved in certain activities.

Why not modify the Internal Revenue Code so that the subsidies are not available to companies with a poor safety or environmental record, especially those like BP that have paid criminal fines for violations in those areas? The federal government has an Excluded Parties List (albeit underused) for contractors that have been barred from doing business with Uncle Sam. Shouldn’t there be a similar list for subsidy recipients?

Even better would be the creation of good-behavior criteria for receiving those subsidies in the first place. If corporations were required to have a record free of significant violations of regulations relating to the environment, occupational safety and health, employment practices, antitrust, etc., then there would probably be a lot fewer recipients and it might be easier to do away with these giveaways once and for all.

Shaming the Corporate Cheapskates

Buried among the many features of the financial reform bill passed by Congress is a provision that could get you a raise. For this to happen, however, you have to work for a large company that is uncomfortable with having it made public how little it pays its workers.

Section 953 of the Dodd-Frank bill deals with disclosures relating to executive compensation, not only at banks but at all publicly traded companies. One of the ways it seeks to rein in out-of-control CEO pay is by requiring firms to reveal how the amount paid to the head of the company compares to that received by the typical employee. The theory is that having this information made public would give pause to grasping CEOs and soft-touch board compensation committees.

The total compensation of chief executives (along with that of the four other highest paid executives) is already disclosed through the annual proxy statements companies have to file with the Securities and Exchange Commission (which makes them public through the EDGAR online system, where the documents are designated as DEF 14A). Yet there have been no requirements relating to the disclosure of how much is paid to the CEO’s underlings.

Section 953 fills this gap by instructing companies to include in their future proxies the median of the annual total compensation paid to all employees apart from the CEO. They also have to calculate the ratio of that median to the CEO’s total bounty.

Those ratios will be fascinating to see, but just as interesting will be the figures on non-CEO pay themselves. For the first time, we will be able to make direct comparisons of the broad compensation practices of different companies within given industries or across sectors. Getting official data from the companies themselves will be an improvement on the selective information that now gets posted on websites such as Glass Door.

There will be limitations, of course. Congress should have required the disclosure of data specifically on hourly workers rather than lumping them in with higher-paid professionals and executives. It would also be preferable to have separate numbers on domestic and foreign employees. And it is likely that companies will exclude low-paid temps and (often misclassified) independent contractors in making their calculations.

Yet this information could still be put to good use. Having clear, company-specific data could help stimulate a much-needed movement to address the problem of wage stagnation in the United States. The reality of that stagnation is quite evident from overall labor market data collected by the U.S. Bureau of Labor Statistics, but it would be much more effective to point the finger at individual companies with low medians and seek to shame them for failing to provide adequate compensation to their workers.

The ability of employers to keep wages low stems from two classic sources: low unionization and high unemployment. We know all too well the story of how anti-union animus on the part of employers has pushed the percentage of private sector workers with collective bargaining protections to historic postwar lows. To the extent they are able, unions target individual companies such as Wal-Mart, T-Mobile and (until it was finally organized) Smithfield Foods for denying their workers the right to representation.

Unions and other advocacy groups also criticize specific companies that engage in mass layoffs, especially when they seem to be undertaken mainly to impress Wall Street.

Yet we rarely hear criticisms of particular companies for failing to hire new workers when conditions seem to warrant it. The “economy” is assumed to be to blame for the high levels of joblessness afflicting us, not deliberate decisions by corporations to keep their payrolls artificially lean. Recently, the U.S. Chamber of Commerce made the absurd argument that overregulation is responsible for the anemic hiring situation. The Obama Administration responded by saying that weak consumer demand is the cause. Absent is the idea that corporations are failing in their responsibilities.

The unwillingness to chastise corporations is all the more bewildering in the face of growing evidence that business is hoarding cash instead of investing in job-creating ways. A front-page story in the Washington Post headlined COMPANIES PILE UP CASH BUT REMAIN HESITANT TO ADD JOBS notes that U.S. nonfinancial companies, buoyed by rising profits, are now sitting on $1.8 trillion in liquid reserves.

Why is there not more of an outcry about this behavior? Here’s an idea: pick companies with the most egregious combinations of rising profits and falling payrolls and press them to justify their boycott of U.S. workers. Once the new disclosure requirement kicks in, they could also be pushed to explain their low compensation levels. Business needs a strong reminder that it also exists to provide opportunities for people to earn a living.

Barbarians on the Big Board

The barbarians have finally become full-fledged members of the business establishment. The buyout firm Kohlberg Kravis Roberts & Co., which for three decades has targeted publicly traded corporations, is about to start trading on the New York Stock Exchange. The one-time master of taking companies private is now taking itself public.

Seeing KKR featured on the business pages sparks flashbacks to the 1980s, when the firm was at the center of the largest transformation of corporate America since the days of the robber barons. Yet KKR is of interest not only for historical reasons. Its financial maneuvers harmed the American economy in ways that are still being felt today.

Fortune once called KKR founder Jerome Kohlberg Jr. “the spiritual father of the entire LBO industry,” LBO being short for leveraged buyouts – the process of buying control of a company using its own borrowing capacity. Frequently working with top executives who wanted to share in the windfall, KKR took over companies with the intention of restructuring them and later taking them public again at a fat profit. Workers were usually the ones who paid the price, through layoffs or intensified work.

Led by Henry Kravis and George Roberts (Kohlberg was pushed out), KKR used a series of such buyouts to became the country’s second largest conglomerate (after General Electric), with control of corporate trophies such as Beatrice, Safeway Stores and Owens-Illinois. A Business Week cover story dubbed Kravis “King Henry,” while Fortune dubbed him and his partner “Masters of the Buyout Game.”

The greed and reckless speculation of LBOs reached its apotheosis in 1988 in the battle for RJR Nabisco. KKR emerged victorious from the free-for-all and carried out what was then a record $25 billion takeover of the tobacco and food giant. The excesses of all involved inspired Time magazine to write that the process had “crossed an invisible line that separates reasonable conduct from anarchy.” Bryan Burrough and John Helyar titled their 1990 book about the takeover Barbarians at the Gate.

After the RJR Nabisco deal, the appetite for major LBOs waned, in large part because of the collapse of the market for the junk bonds that made most of those deals possible — a collapse hastened by the demise of Drexel Burnham Lambert amid an insider trading scandal. KKR survived, though its stature was considerably diminished. Its reputation took a big hit in 1991, when Sarah Bartlett’s book on the firm, The Money Machine, accused KKR of gouging its own investors, including public pension funds.

KKR held on during the deal drought of the 1990s and finally got its reward in the mid-2000s, when buyouts started to enjoy a resurgence. This time around, KKR and the other LBO firms, now operating under the sanitized rubric of private equity, avoided much of the risk of the dealmaking of the 1980s and shamelessly milked bought-out firms with bloated management fees. As a 2006 Wall Street Journal headline put it, “In Today’s Buyouts, Payday for Firms is Never Far Away.”

The Great Recession has put a crimp in the private equity game, but KKR could not resist one more big deal: itself. For the past three years it has struggled to go public in a convoluted process involving an offshore affiliate based in Guernsey. Now it finally seems to be succeeding, but this is hardly a cause for celebration.

KKR’s initial offering serves mainly as a reminder of how much the firm has done to bring about our current economic ills. KKR helped popularize the idea that wealth could be created out of thin air rather than real productive activity. Its buyouts were part of the inspiration for securitization and other machinations that precipitated the near meltdown of the financial system in 2008. Given that the interest paid on LBO debt was deductible on company tax returns, KKR’s buyouts also pioneered the dubious practice of having the federal government effectively subsidize wheeling and dealing, paving the way to the Big Bailout of Wall Street.

All those deals made Henry Kravis and George Roberts very rich, but they have left the country much poorer.

Refusing the Poisoned Apple

Strikes are rare these days (outside China), so the walkout by a group of some 300 workers at a Mott’s juice and applesauce plant in upstate New York takes on added significance: All the more so because the plant’s parent company has gone through a string of ownership changes involving a notorious corporate raider and a major transnational company whose machinations paved the way for the pressure on the Mott’s workers to reduce their standard of living.

The current dispute began earlier this year when contract renewal talks broke down between Mott’s and Local 220 of the Retail, Wholesale and Department Store Union, an affiliate of the United Food and Commercial Workers. According to the union, management refused to bargain in good faith and threatened to cut wages if its final offer was not accepted. The workers did not back down, the company made good on its threat, and a strike was called in May.

“Mott’s told us we were simply making too much,” said Local 220 President Mike Leberth. Most of the workers earn $19.92 an hour — a decent but hardly a princely rate.

The company’s move to cut labor costs was not born of necessity. Mott’s — the country’s number one brand for apple juice and applesauce — is owned by Dr. Pepper Snapple Group (DPS), one of the dominant companies in the U.S. non-alcoholic beverage market. Last year DPS reported profits of $555 million on sales of $5.5 billion. The company does not provide financial results for individual brands, but the segment of which Mott’s is a part (Packaged Beverages) enjoyed an increase in operating profit of more than 18 percent over the year before.

It is difficult to avoid the conclusion that the inclination of DPS management to squeeze workers comes out of its history of wheeling and dealing. The Dr. Pepper part of the company, which originated in the 1880s, went through a leveraged buyout in the 1980s and was then merged with another buyout victim, the Seven-Up Company, in 1988. Seven years later, the combined firm was acquired by British beverage and candy giant Cadbury Schweppes. In 2000 Cadbury purchased Snapple from Triarc Companies, the investment vehicle of corporate raider Nelson Peltz, and combined it with Dr. Pepper and Seven-Up. In 2007 Cadbury (now part of Kraft Foods) decided to exit from the American beverage business and spun off DPS the following year through a public offering.

The spinoff was instigated by Peltz, who had become one of Cadbury’s largest shareholders. Peltz then turned his sights on DPS. After accumulating a stake of more than 7 percent in the company through his Trian group, he began to pressure management to sell off its bottling operations.

Peltz appears to have given up on that effort (he has sold off about three quarters of his shares), but he must still be keeping DPS executives on edge. Peltz — a member of the Forbes 400 — has a history of squeezing corporations, to the detriment not only of management but also workers. One of his most notable “successes” was condiment maker Heinz, which Peltz pressured to close some 15 factories and eliminate thousands of jobs worldwide. In 2007 Britain’s Birmingham Post published an article on Peltz headlined “Billionaire Hated by Unions.”

Apart from the lingering effects of Peltz’s maneuvers, DPS may be facing some price pressure exerted by Wal-Mart, which, according to the DPS 10-K annual filing, is the company’s single largest customer, accounting for 13 percent of its sales.

All of this is not to take the management of DPS off the hook. DPS chief executive Larry Young apparently did not think there was anything wrong when he (presumably) authorized the management of Mott’s to seek wage and benefit reduction at around the same time that the company’s proxy statement was reporting that he received total compensation of $6.5 million last year.

DPS has also not been completely diligent about environmental matters. In 2005 one of its units in California paid the EPA more than $1 million in criminal and civil penalties for industrial stormwater and wastewater violations at two bottling plants. And this year, tests of children’s juice boxes done by Florida’s St. Petersburg Times found that Mott’s samples had arsenic concentrations above the “level of concern” set by the U.S. Food and Drug Administration and were the highest among those brands tested.

More than anything else, the situation at Mott’s illustrates that Corporate America no longer has any interest in permitting workers to be decently paid. Whereas certain companies once took pride in providing higher wages and better working conditions, that is now seen as a stigma — even when a firm is thriving. Whether to please Wall Street, Wal-Mart or the likes of Nelson Peltz, Mott’s and DPS are trying to force their employees to eat the poisoned apple of reduced living standards. It is encouraging that the members of Local 220, unlike Snow White, are not being lulled into oblivion.

A Business Backlash?

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

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?

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

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.

Federalize BP

President Obama’s declaration that the federal government is in charge of the response to the oil disaster in the Gulf of Mexico is apparently meant to deflect Katrina comparisons and show that his administration is fully engaged. With that p.r. mission accomplished, Obama now needs to turn to the question of what to do about BP.

As a helpful Congressional Research Service report points out, the Oil Pollution Act of 1990 gives the federal government three options: monitor the efforts of the spiller, direct the efforts of the spiller, or do the clean-up itself. So far, the Obama Administration has followed the second path and resisted growing pressure to “federalize” the response.

This was said to be necessary because the feds do not have the technical expertise to handle a deepwater leak. As Coast Guard Adm. Thad Allen, the National Incident Commander, put it: “To push BP out of the way would raise the question of: Replace them with what.”

The idea that the government is completely dependent on BP to stop the leak is a dismaying thought. But even if it’s true, it no longer applies once the gusher is brought under control. When the center of attention shifts from 9,000 feet below the surface to the clean-up, there is no reason why BP should continue to run things.

The simple fact is that the company cannot be trusted. As Obama himself noted, the company’s interests diverge from those of the public when it comes to assessing the true extent of the damage and deciding what is necessary in the way of remediation. Keep in mind that BP’s total liability will be determined at least in part by the final estimate of how much oil its screw-ups caused to be released into the ocean. It has every incentive to obscure the full magnitude of the catastrophe.

The company’s motivation in employing massive quantities of the controversial chemical Corexit may have had more to do with dispersing evidence of the spill than with helping the ecosystem of the gulf recover. BP had to be pressured to back off from a plan to have clean-up workers sign confidentiality agreements to prevent them from disclosing what they observed. The company resisted making public the live video feed showing the full force of the oil spewing out of the wrecked well and then delayed making a high-definition version of that video available to federal investigators.

For BP, job one is now not clean-up but cover-up. Allowing it to manage the ongoing response would be akin to allowing the prime suspect in a mass murder to assist in processing the crime scene.

Taking operational control of the clean-up away from BP should be a no-brainer, but it is not enough. This is a company that has repeatedly shown itself to be reckless about safety precautions. The gulf disaster comes on the heels of previous incidents—a 2005 explosion at a refinery in Texas that killed 15 workers and a 2006 series of oil spills at its operations in the Alaskan tundra—in connection with which it pleaded guilty to criminal charges and paid large fines. It was also put on probation that has not yet expired.

An individual who violates probation can be deprived of liberty through imprisonment. A giant corporation that violates its probation—as BP undoubtedly has done by breaking various federal and state laws in its actions precipitating the Deepwater Horizon explosion—cannot be put behind bars, but it can be deprived of freedom of action.

Federal sentencing guidelines (p.534) allow probation officers to monitor the finances of a business or other organization under their supervision. In BP’s case, the issue is safety. One way to ensure that the company acts responsibly is to station inspectors inside all of its U.S. operations (at BP’s expense) to oversee any operational decision that could impact the safety of workers and the environment. Those inspectors would also make it harder for the company to cover up the full extent of what it has done to the Gulf Region.

In other words, the Obama Administration should federalize not only the Gulf of Mexico clean-up but BP itself. That would show that the government really is in charge until we can be sure that the oil giant is no longer a public menace.