Dark Days at Anadarko

The Tronox pollution case comes home to roost for the Texas oil giant

by Gordon Campbell

As Bloomberg News reported on December 13, the nearly year-long wait for a verdict in the massive pollution case involving the Texas oil company Anadarko and its subsidiary Kerr-McGee is finally over, bringing bad news for the energy giant :

Anadarko Petroleum Corp and its Kerr-McGee unit acted improperly in the 2005 spinoff of Tronox Inc. and may have to pay as much as $14 billion related to environmental cleanup and health claims, a judge ruled. Anadarko shares have plunged 9.3 percent in after-hours trading, cutting its market value to $38 billion. The judge’s ruling yesterday weighed how much money can be recovered from a successor to a polluting company, even after bankruptcy has ostensibly cleaned the slate of obligations. The company said it expects to appeal the ruling.

The case is relevant here, to the extent that the behaviour of the US parent company is indicative of the behaviours New Zealand might reasonably expect to encounter if liability for any pollution by Anadarko in our waters should ever come to court here. Werewolf first reported on the Tronox case in April of this year.

To recap the essentials : Anadarko bought Kerr – McGee for $18 billion in 2006, three months after Kerr-McGee had spun off its hapless Tronox subsidiary to avoid meeting costly obligations to carry out remedial work on an estimated 2,772 sites across the US that it had contaminated during seven decades of producing chemicals, fertilizer and plutonium pellets. Any extensive history of this affair also has to include the case for adequate compensation for the thousands of individuals given serious (and in many cases) terminal illnesses by their mere proximity to Kerr-McGee’s operations. Movie fans who saw the 1983 film Silkwood starring Meryl Streep will also recall Silkwood’s suspicious death in a 1974 car accident, while she was driving to meet a reporter about the ways Kerr-McGee that had allegedly exposed its employees to plutonium poisoning, as a consequence of poor safety standards.

In the court hearings that concluded early this year, Anadarko was being sued for $25 billion in a suit originally brought by Tronox creditors and investors, and by those with health claims against Kerr-McGee. They were joined by the US government on behalf of the Environmental Protection Agency, which faces the cost of the related site clean-ups. The important legal question originally at stake being : as Kerr-McGee’s corporate parent, was Anadarko liable only in a technical sense for Kerr-McGee’s past sins, or did it collude with Kerr-McGee in shedding its costly and poisoned liabilities ? To use an analogy – was Anadarko liable as a parent only in the sense that it was its kid who had, sometime in the past, crashed the family car? Or did Anadarko actively conspire with the kid in concocting what was, in liability terms, a hit and run violation?

The case has evolved, over time. At the outset of the Tronox proceedings, the US government was certainly alleging that a sham “ two step fraudulent process” had been carried out between Anadarko and Kerr-McGee. Proving such a conspiracy in court however, proved quite another matter. Some sense of the two sides in contention can be gleaned from this summary by the time things got to the sharp end of the court action, the Tronox litigants had dropped the conspiracy theory. As the court papers show, neither the claims of a civil conspiracy nor claims of aiding and abetting a breach of fiduciary duty were seen to hold water. Here’s a key paragraph from pages 15 of the court brief :

The Amended Complaint makes it clear that Anadarko had previously baulked at acquiring unliquidated liabilities that could potentially reach into the billions of dollars, but the Plaintiffs have not alleged sufficient facts to support the conclusion that Anadarko acted in concert with New Kerr-McGee to structure the spin-off, or that Anadarko dictated which assets and liabilities would be retained by New Kerr-McGee.

Even so, the expectation among sharemarket and energy sector analysts had been that Anadarko would be held accountable to the tune of about $4 billion, tops.

The company had itself set aside $1.4 billion as the topmost expected penalty. That’s why the court findings have been such a bombshell. While a final liability figure had not been set at time of writing, Judge Alan Gropper (pictured left) has signalled that a figure between $5 billion and $14.2 billion plus attorney fees, is in the offing – at the high end, that’s roughly ten times what Anadarko had been expecting. Clearly, the unexpectedly high penalty range has been a factor in the sharp fall in Anadarko’s share price, down 11.5% since last week, in the most recent trading figures available. In fact, only 24 hours after the verdict on December 13, $4 billion was wiped off Anadarko’s market capitalisation. Since Friday’s news, some analysts (eg on the Seeking Alpha sharemarket news and commentary site) have argued why the share dip may only be temporary. As in :

Anadarko is a very well run company and should make it through this situation, the most important question for investors now is whether the company negotiates a better deal to settle the case or decides to prolong any future payouts by continuing to fight this judgment.

On that last point, there has been speculation that the size of the penalty reflects a court attempt to motivate Anadarko to settle, rather than continue to fight in court. If so, that gambit doesn’t seem to be working. Reportedly, the company has liquid assets of over $7 billion to call on for starters, and it could sell fields in Mozambique and Brazil worth in total, about $18 billion. Even so, Seeking Alpha and Marketwatch in San Francisco have suggested that a weakened Anadarko may now be at risk of an unsolicited take-over bid.

In a better-case scenario, the company will rebound – although the penalty will be hefty and reputational damage will occur as well, given the tenor of the language used by the trial judge :

The defendants acted “with intent to hinder and delay” Tronox creditors when they transferred out and then spun off oil and gas assets, and the transaction “was not made for reasonably equivalent value,” Gropper said in a 166-page ruling. Just how adverse a ruling it is for Anadarko and Kerr-McGee will come down to the issue of damages. While Gropper found that the trust is entitled to recover about $14.17 billion, Anadarko may be entitled to decrease the figure by roughly $9 billion for offsetting costs it may have incurred from the transaction. Overall damages could be between about $5.15 billion and $14.17 billion, plus attorneys’ fees, Gropper said.

Even if its subsidiary did the bad things in question during its previous corporate lifetime, Anadarko has chosen to fight this case on Kerr-McGee’s morally dubious behalf right to the bitter end. In these circumstances, delay can be a useful substitute for victory. The simple truth is that the longer the delay, more and more claimants afflicted with terminal cancers will die, and drop off the compensation list. This has been occurring ever since the claimants first began chasing a moving ball in the early 2000s as Kerr-McGee went through various corporate formulations, a process that required the claimants to refile their claims against each new incarnation. This problem would be compounded if Andarko should now fall victim to a hostile take-over.

New Zealanders can read into the strategies adopted by Anadarko and Kerr-McGee in the Tronox case just how badly this country might fare if Anadarko should ever be called on to compensate those affected by contamination of our coastal or marine environment. Even though it was Kerr-McGee that was responsible for the original contamination, Anadarko has consistently sought dismissal of any attempt by those seeking compensation for the wrongs committed by what is now a wholly-owned Anadarko subsidiary. A short video from mid 2012 in which local residents in Columbus Mississippi express their grievances about the damage done to them can be seen here :

In the Tronox affair, we are not talking about seals and dolphins. This video transcript offers just one chilling example (among thousands) of the people whom Anadarko has been fighting tooth and nail :

Reverend Steven Jamison recalls the February day 13 years ago when he was digging ditches to replace culverts at his Maranatha Faith Center in Columbus, Mississippi. As he switched from a shovel to an excavator, an oily black substance began to fill the trench. It smelled like turpentine, and the deeper he dug, the more he saw….“We called the city right away to come and look,” says Jamison, 58, a Pentecostal minister whose speech quickens as he relives the incident. “They told us they thought we’d hit creosote.” Jamison phoned the Kerr-McGee Corp. plant down the road. The company produced creosote, a toxic wood preservative, and coated railroad ties and telephone poles with it. A manager told him the stuff probably wasn’t creosote and that even if it were, it wouldn’t hurt anyone, Jamison says. So he kept working, immersing himself in sludge and bringing in dirt to absorb it.

After digging for six weeks, Jamison, who says he hadn’t had health problems beforehand, was sick and losing weight. He says his kidneys were functioning at less than a third of their normal level. That April, when Kerr-McGee offered to help remove the old culverts, the crew arrived in hazmat suits, Jamison says.

As mentioned above, Anadarko intends to appeal the latest decision. The Tronox action has been before the courts since 2007. Further delays will be fatal ( literally) for some of the plaintiffs. Wilbur Colom, a lawyer who has worked on this (and previous) compensation claims explained to Bloomberg News the basic problem involved in continuing to fight :

Colom says he faced a big dilemma when he counseled clients whether to settle around 2002. Some were so sick that he advised them to take a payout sooner rather than endure drawn-out court proceedings. “Ten years later, all of the people who had serious cancers are dead,” Colom says, reviewing thousands of names next to such entries as “sarcoidosis with renal involvement,” “lung and colon cancer” and “dec’d ovarian cancer,” meaning deceased. Jamison struggled with the temptation to settle too. He says lawyers for Kerr-McGee offered him $3 million to drop the lawsuit he brought on behalf of his church and not tell anyone he thought the tarry substance was harming people and properties around the plant.

It really is a losing hand. Even if – after all the legal appeals are exhausted – the final penalty that Anadarko has to eventually pay turns out to be in the top end vicinity of $14.2 billion (which is unlikely) the individual claimants stand to get only 12% of that figure. This would have to be shared among thousands of people, after legal costs have been deducted. The rest (ie. 88% of the settlement) will go to the US government, to help pay for re-mediating the sites that Kerr-McGee has contaminated, lest anyone else should derive cancers, kidney and respiratory failures, skin diseases etc from the toxic residue of its activities.

All up, the Tronox case can be taken as a warning about the kind of corporate creature that the New Zealand government has invited here, to explore our deepwater oil deposits.

Footnote : some elements of this story were originally published in the Werewolf story “Risky Business” in our May 2013 issue.