Anadarko, Kerr-McGee & the EPA: The Case for Oil & Gas to Contribute to Louisiana Coastal Restoration

Louisiana’s oil and gas industry lobbying groups remain adamantly opposed to reaching any kind of settlement over the industry’s liability for its share of damage to Louisiana’s coast. It’s the kind of circle-the-wagons, short-sighted position we’ve come to expect from an industry that has, in recent years, had a free-hand in running anything in state government having to do with oil and gas. The Jindal administration publicly fought to relieve the oil and gas industry of any liability for coastal damage.

Anadarko's settlement with the EPA could set the model for a grand bargain on coastal damages in Louisiana.
Anadarko’s settlement with the EPA could set the model for a grand bargain on coastal damages in Louisiana.

But, there are cracks showing in that united ‘no settlement’ facade that run roughly between the publicly traded and privately held oil and gas firms doing business here. Better yet, look and the publicly versus private companies named in the Southeast Louisiana Flood Protection Authority-East’s 2013 lawsuit that is still in the federal courts. At least two parishes located in the Coastal Zone have lawsuits against oil and gas companies over wetlands loss.

The short-sightedness of this never settle approach can be found in a 2014 settlement between the Environmental Protection Agency (EPA) and Anadarko Petroleum over environmental damage one of its subsidiaries (Kerr-McGee) tried to dump on taxpayers. It was a massive bit of fraud that brought with it a massive settlement — $5.15 Billion to be exact.

Despite the massive fine, Anadarko’s stock skyrocketed in the wake of the settlement. Here’s why:

“This settlement agreement with the litigation trust and the U.S. government eliminates the uncertainty this dispute has created, and the proceeds will fund the remediation and cleanup of the legacy environmental liabilities and tort claims,” said Anadarko CEO Al Walker. “Investor focus can now return to the tremendous value embedded in Anadarko’s asset base, allowing our peer-leading operational and exploration results to again become the basis for valuation.”

Anadarko agreed to the settlement in exchange for a complete release of all claims against Kerr-McGee, now a subsidiary. The agreement represents a principal sum of about $3.98 billion and 6% interest from the filing of the complaint in May 2009. Federal officials also agreed to provide contribution protection from third-party claims seeking reimbursement from Kerr-McGee at more than 4,000 sites covered by the covenants.

A global settlement with the State of Louisiana and parishes in the Coastal Zone for damage to Louisiana’s coastal wetlands by the oil and gas industry could provide a similar degree of economic certainty for the industry. A very large liability overhang could be removed from the the industry going forward if a settlement could be reached that was both fair and removed industry liability for any claims of wetlands loss going forward (provided, of course, the industry operated by the rules going forward).

Mark Davis, Tulane Institute on Water Resources Policy & Law
Mark Davis, Tulane Institute on Water Resources Law & Policy.

How big is that liability overhang? Look no further than the Coastal Protection and Restoration Authority‘s Coastal Master Plan to get an idea. The 2012 version of that plan (now in the process of being revised for 2017) carried a price tag of about $50 Billion. Mark Davis of Tulane Institute on Water Resources Law & Policy produced a report last year that pegged the price tag considerably higher due to inflation and other costs that would accrue over the 50-year life of the first phase of the plan. Davis’ report pegged the cost at closer to $91 Billion.

Various studies — most of which the oil and gas industry participated in researching and producing — put industry’s impact on coastal wetlands loss at between 35% and 70%, depending on the area in question.

The 2017 iteration of the Coastal Master Plan is expected to be significantly more expensive than the 2012 version. Climate science has gotten a lot clearer in the past five years. The focus of the plan is shifting. Sea level rise is happening faster than originally predicted.

All of which leads to the conclusion that there is a lot riding on coming up with some kind of coastal settlement with the industry both for them and for the people who live in South Louisiana. For starters, it is very clear that the state does not have the money to fund the first phase of the 2012 Master Plan (even at the low-balled price tag developed by the CPRA in 2012). Second, it is questionable whether the industry wants to risk such a high-stakes court fight that could stretch out for years (if not decades) during which time the impact of climate change, sea level rise, and land subsidence might well force a massive migration away from much of Louisiana’s coast.

The split between larger, publicly traded companies and privately held companies has begun to show up in other areas of the climate change discussion. ExxonMobil has begun to quietly move from talk to action in support of a tax on carbon.

Using Anadarko as an example, large publicly traded companies like ExxonMobil, Shell, BP, Chevron, et al, could benefit significantly by striking a deal on coastal wetlands damage in Louisiana that would fix current liabilities but eliminate future liability for wetlands loss from their balance sheets. This would make sound economic sense for these companies, particularly in the wake of the signing of the Paris Accord in which world political leaders committed to policies that will reduce dependence on fossil fuels such as oil and natural gas.

The companies that would not like such a settlement are those privately held companies that most likely cannot draw down the resources to cover their share of such a coastal wetlands damage settlement.

Part of the industry’s Louisiana legacy has been to narrowly define the cost of its operation. The focus has always been on the price of oil or gas, while ignoring costs like cleanup, remediation, and damage to the the environment and climate. The Louisiana Legislative Auditor found this to be the case in the state’s Orphaned and Abandoned Well Cleanup Program. Essentially the rates charged companies for the cleanup fund are too low to keep up with the rate of drilling of new wells.

The purpose of this attempt to narrowly define the costs of the industry is now clear. Without that narrow focus, many companies don’t have the resources to address those broader costs. What’s clear going forward is that if companies can’t pay for the damage they’ve done, if they can’t help repair the coast that they’ve helped ruin, if they can’t help cleanup drill sites, and take steps to mitigate harm to the climate, then they have no business being in the energy business.

Louisiana and the world can no longer afford their pushing their costs onto the rest of us. If companies can’t afford to clean up their mess, we can’t afford to have them in the business.

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