Back in 2013, the world’s largest private-sector coal company, Peabody Energy (NYSE:BTU), pulled off a new trick from the ever-growing trove of corporate subterfuge. Peabody created a new entity that it named Patriot Coal and moved more than $2 billion in retirement and environmental obligations into the new subsidiary. Patriot Coal, shortly thereafter, filed for bankruptcy, making Peabody the energy sector’s pioneer of this new type of malfeasance. And now a host of oil companies have borrowed a leaf from Peabody’s playbook with an oily twist: Declaring bankruptcy and shirking the environmental cleanup responsibilities for their abandoned wells.
Fieldwood Energy, an offshore drilling company, is one such company.
Fieldwood Energy is facing stiff opposition from the likes of Chevron Inc. (NYSE:CVX), BP Inc. (NYSE:BP), and Marathon Oil (NYSE:MRO) after it recently declared Chapter 11 bankruptcy and proposed a restructuring plan that will see the company offload part of the more than $7 billion in environmental cleanup responsibilities to the three predecessor companies it purchased oil assets from.
And given the growing wave of bankruptcies in the Shale Patch, this might not be the last we will be hearing of this.
According to Energy and restructuring law firm Haynes and Boone, bankruptcies by North American oil producers climbed to the highest first-quarter level since 2016 as energy firms continue to struggle to recover from the carnage of the oil price crash in 2020.
Haynes and Boone has reported there were eight bankruptcies by North American oil and gas producers in Q1 2021, the second-highest figure for a first quarter ever since 17 were reported for Q1 2016, the last time U.S. crude futures dipped under $30 a barrel over the past decade.
The big difference this time around is that smaller producers appear to be the main victims, with just $1.8 billion in aggregate debt for the quarter, the second-lowest Q1 total after $1.6 billion in Q1 2019.
Many smaller oil companies have been turning to bankruptcy in an attempt to shed their debts and reorganize their assets. Others like Fieldwood Energy have been utilizing limitations and loopholes in the existing bankruptcy laws to shed their environmental and, in some cases, labor liabilities.
Bankruptcy for profit
Founded in late 2012 at the height of the shale boom by New York-based private equity firm Riverstone Holdings, Fieldwood Energy has gone on multiple spending sprees, buying $3.75 billion worth of oil assets including wells and platforms from Apache Corp. (NYSE:APA) in the Gulf of Mexico as well as Noble Energy’s offshore assets worth $710 million.
But the latest oil price crash forced the debt-laden company to file for bankruptcy for the second time since 2018.
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In its latest bankruptcy plan, Fieldwood has proposed transferring more than 380 wells covered by 50 leases to a new company that it has dubbed NewCo, with the three oil majors saying these are the company’s valuable revenue-generating assets. Fieldwood has also proposed moving a second tranche of ‘bad’ assets into a separate set of newly-formed companies, something that the oil majors have objected to, noting that the new companies lack adequate finances to ensure that they can fulfill their environmental obligations.
Finally, Fieldwood has proposed to walk away from or return an additional 187 leases, including 1,170 wells, 280 pipelines, and 270 drilling platforms to “predecessor companies” that previously operated them.
Never mind the fact that that’s technically illegal under the element of bankruptcy law known as “fraudulent conveyance law” that deems it unlawful to move money to third parties so that creditors cannot access it right before or during a bankruptcy.
Or the fact that Fieldwood has a long history of environmental infractions, having been issued close to 1,800 “shut-in incidents of noncompliance.”
Unsurprisingly, the oil majors have vehemently opposed the whole plan, terming it as Fieldwood Energy basically trying to profit from bankruptcy.
Chevron has described Fieldwood’s plan as “fundamentally flawed,” “truly unprecedented,” and a “liquidation of Debtors’ assets masquerading as a ‘reorganization. ”
The surprising finding is that bankruptcy law contains gaping loopholes that the likes of Fieldwood Energy can easily exploit.
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In Fieldwood’s case, the company intends to abscond from the expensive task of cleaning up wells that are at the end of their productive lives by spinning them off into entities that are low on cash and are, therefore, likely to go under before very long. This is made possible by the fact that bankruptcy law’s priority scheme places environmental obligations lower in the payout queue, meaning government agencies are only paid after other creditors. Fossil fuel companies also take advantage of a provision in the bankruptcy code that allows companies to abandon “burdensome” properties by discarding low-producing wells.
In effect, state and federal regulators such as the Department of the Interior that are tasked with ensuring that operators clean up the environment by plugging wells and restoring the land or seabed to pre-drilling condition are left with little leverage in a bankruptcy court to secure money for the cleanup exercise.
In other cases, the funds that oil companies allocate for environmental purposes do not come anywhere near meeting their obligations, with an average orphan well costing north of $80K to reclaim.
Ultimately, the taxpayer is left to shoulder the burden of paying tens of billions of dollars for cleaning up the environment when oil and gas companies become insolvent.
By Alex Kimani for Oilprice.com
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