On the (lack of) incentives for Anadarko to behave responsiblyJanuary 15th, 2014
Here’s how you’d think the system would work, when it comes down to the environmental impacts of oil and gas exploration. You’d hope and expect that a good carrot and stick regime would be in place, right? Well, the carrots are obvious enough ; the potential of an oil and/or gas strike is why companies like Andarako and Shell are here in the first place. But the sticks that would induce them to be good corporate citizens while they’re here, such that they will respect our environment ? Not so much.
Worldwide, there is a problem for host countries that carry all of the major risks involved with oil and gas drilling – not just to wildlife, but to the livelihoods of those ( eg, in the fishing and seafood industries) who also depend on the maritime environment in which these exploration and extraction companies are operating.
A lot of corporate spin – which the government faithfully echoes – would have you believe that these companies operate to the highest industry standards of worker safety and environmental concern. That’s only the case until it becomes evident that uh oh, they don’t – and when such events occur, the reality is that public has no proportionate means of redress.
Its not simply a matter that the penalties for lax practice are too low – although in New Zealand, it is true that the penalties available under our legislation serve as no realistic deterrent. Problem is, when the penalties are high and when local courts do try to impose them – as when local courts in Ecuador tried to penalise Chevron for the environmental depradations committed by its previous corporate incarnation as Texaco – the company has tied the outcome up in legal knots for years and years, and even shopped around and found an international tribunal willing to over-ride the findings of the local Ecuadorian court.
In recent weeks, Anadarko has offered a perfect example of how untouchable such companies can be, even when US courts impose substantial penalties. ( I’m talking here about the parent company to the Anadarko subsidiary currently drilling off the New Zealand coastline.) As reported in Werewolf in December, Anadarko has just been hit (in the so – called Tronox case) with a massive liability for environmental damage caused by what is now one of its subsidiaries, Kerr-McGee.
The details of the damage are sordid enough. Basically, Kerr-McGee has tried to avoid the clean up costs and health impacts on its workers and nearby residents at over 2,000 sites it polluted with chemical waste and nuclear radiation for decades. To escape liability, Kerr-McGee spun those costs off into one of its own subsidiaries ( Tronox) thus sending it into bankruptcy and then hightailed out of Dodge by selling itself (and its remaining valuable assets) to Anadarko. In December after litigation stretching back to 2007, a US court found Anadarko is liable for a massive multi-billion penalty – one yet to be finally determined but far in excess of what the stockmarket had expected Anadarko to have to pay, and of what the company had set aside in a contingency fund.
The point of this column is not to rehash that sorry tale, which includes the sickness and death suffered by Kerr-McGee workers and people unlucky enough to live near the contaminated sites. They have been dying of terrible diseases while Anadarko and Kerr -McGee have fought tooth and nail to avoid paying compensation – and Anadarko has now served notice that it intends to appeal this latest court ruling. Its latest contorted arguments – as to why it should pay only $1.7 billion at most – can be found here.
OK, no surprises there – it would be a bit naive to expect oil companies to accept any moral responsibility. (And as Werewolf reported, the longer Anadarko can string out the legal delays, more complainants die and drop off the compensation register.) Moral issues aside though…wouldn’t you expect that when a company gets hit with a liability that is potentially more than treble the $4 billin that the market had been expecting that this would ripple through the sharemarket and affect the company’s share price ? Isn’t that how a deterrence system is supposed to work ? That if a company screws up and incurs legal penalties, its share price will suffer – and therefore this prospect should work pre-emptively and serve to encourage good safety and environmental standards ? Apparently not. Oh, there were a few brief murmuring s that a weakened Anadarko might become ripe for takeover by Exxon or Chevron.
Since then, it has been fascinating to see the sharemarket analysts and tip sheets rally behind Anadarko. Here’s how Deutsche Bank weighs it up: [Anadarko] likely comes out of Tronox in a more aggressive monetization/value realization mode with the market focused on NAV [Net Asset Value] upside and improving operating trends in 2014.” In plain English, this means that Anadarko can ride this one out, baby.
Another analysis available here also tells shareholders to hang onto those Anadarko shares at the circa $78-80 level where they are now. It outlines the levels of financial penalty the court might apply to Anadarko, and the impact this would have on current shareholders – but argues that the shares will rebound to a level way, way above their current position, based on those net asset values and future prospects mentioned by Deutsche Bank:
Analysts have estimated per-share net asset value of the company to be between $125 to $151. Even if I consider NAV of $125 per share, at its current price the stock is trading about 37% below this level. Once the uncertainty ends over how much penalty the company has to pay, stock price is expected to rise.
Oh, and another thing. Any payments Anadarko may finally have to pay to fix the sites and compensate the people and places that its subsidiary has poisoned, may well be tax deductible:
It is still not clear whether Anadarko can claim a tax deduction on this payment. Some analysts believe it can, but others do not and that the real picture will be out only in future proceedings.
Here’s how it works:
Courts can impose punitive damages against a company when its actions cause harm. The [US] tax code, however, lets companies write off their payment, which produces an after-tax savings worth about 40 percent. Take the case of the Exxon Valdez, a tanker ship that ran aground and released nearly 11 million gallons of oil into Alaska’s Prince William Sound in 1989. Following this spill a court set punitive damages at $5 billion. Exxon litigated the decision for nearly 20 years until 2005 when the Supreme Court slashed the company’s punitive damages to $500 million. Of that, Exxon paid about $300 million after taking its tax deduction for punitive damages. Exxon’s profits that same year totaled $36.1 billion.
Meaning : after 20 years of litigation over the Exxon Valdez spill, people who had formerly relied on fishing to earn their living received the equivalent of one’s year’s salary for the lifelong loss of their livelihoods. Incredibly, even these compensation payments were tax deductible for Exxon. What I’m getting at here is that these companies have no incentive whatsoever to practice good environmental and safety standards, because they are beyond reach of any meaningful legal sanction – or given their resources, any meaningful financial sanction, either. As a result, many communities ( and much of the wildlife) around New Zealand that depends on the maritime environment are entirely at risk from oil exploration and extraction. The Bluff fishing and seafood industries for instance – on which local tourism depends so heavily – would be wiped out by any major spill in the Great South Basin, without any prospect of adequate compensation.
Rather than living in denial and spouting corporate spin about industry standards, perhaps the political and business friends of Anadarko and Shell should just simply ‘fess up – and admit that they are playing Russian roulette with New Zealand communities, our environment. and the tourism industry.