Corporate Bankruptcy: A Tool for Capitalists to Escape Accountability
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There’s a real divide between the need for relatively loose personal bankruptcy law and much tougher corporate bankruptcy law. That’s because corporations routinely declare bankruptcy to avoid any kind of costly regulations they don’t want to deal with. That’s a perversion of the law and an unacceptable practice. This is a good story about how oil companies use bankruptcy to escape environmental responsibility.
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.
There is so, so, so much wrong with this country. This is one of those things. This is why it’s not only necessary to have a Democratic administration, it’s necessary to have a generation of Democrats in power in order to slowly fix these problems. Alas, that is not the reality in which we are likely to live.