Wednesday, April 20, 2016

A Legal Review of the Oil and Gas Industry

from Woody Hibbard
From climate change activists to communities burdened with a neighboring refinery, the threats of lawsuits can be rather annoying in a conflicted economic environment. Plaintiffs can easily be appeased when oil prices are high and revenue streams are growing. Analyzing the legal issues of a company offers information concerning the long-term liabilities of their balance sheet. In the oil and gas agency, the most popular form of legal attack is claims of pollution or labor disputes. Lawsuits and court cases can become muddled over long periods of times making the outcome uncertain and difficult in security analysis. Not only are settlement amounts convoluted by the legal terms in which they are discussed, but an appeal from the firm can delay, dilute, and even diminish the punishment or reward.

Today, I've compiled some of the more recent legal disputes involving some of the largest oil and gas companies on the market. No matter what the judgment is to be, the mere existence of a legal measure can reveal a subtle connotation underlying the status of the company. Energy companies have the unique conundrum of appeasing environmentalists pitted against the methods which they use to make their money. They are just one of many antagonists that find themselves mitigating firms like Exxon-Mobil and Halliburton.Without further ado, let's take go ahead and peek into the courtroom.


  • Climatologists and environmental non-governmental organizations are gearing for a legal battle with Exxon-Mobil (and possibly more of its peers) over the knowledge that their operations were exacerbating the warming of the earth's climate.
The troubling allegations emerged last year when the New York attorney opened an investigation into Exxon's knowledge of the harmful effects of the use of their energy assets like oil, natural gas, and coal. The environmental organizations involved believe that the major oil company had shown the danger of their operations in research that is dated in the 1970's. The accusers have attracted the notable support of Rockefeller Family Fund, a nonprofit named after the creator of the first oil major in the United States. A Phys.org article claims that the plaintiff hopes "to establish in the public's mind that Exxon is a corrupt institution that has pushed humanity (and all creation) towards climate chaos and grave harm,"


Neither side has made any progress in disabling or advancing the investigation. The court has only directed that Exxon-Mobil makes available the relevant research, a seemingly small win for the plaintiffs will most likely end in a paper chase that could last for years. Their power originates from the Martin Act, a state law in New York that allows the attorney general powers to investigate financial fraud according to the New York Times. The conspiracy bordering on witch hunt reflects similar legal proceedings that dismantled the tobacco industry in the 1960's. Cases like these show that the quickest way to taboo something you don't like is to take it to a court and get the government on your side.

Financials might not be endangered by this fight. Instead, goodwill and reputation for the industry are being tested by climate change activists. The quicker they can show they have the government's support in the courts, the quicker they can push their green agenda. The emergence of organizations like InsideClimate and 350.org, both organizations fighting against Exxon, show that popular opinion is shifting towards environmentally friendly policy. The New York attorney general may never have the ability to prove that Exxon acted maliciously, but the rulings and reports that are produced will give grounds for further allegations against the industry as well as follow-up policies. Investors shouldn't be rushing to dump XOM if the case continues to see success, but they should monitor the rulings as it could have larger implications for the energy industry as renewable sources look to enter

Here's Exxon-Mobil's stance on climate change on their website.

  • After a punishment of $20 billion administered to BP for the Gulf oil spill in 2010, the Mexican government looks to build their own case for damages against to their environment
In July of 2015, the 2010 environmental crisis in the Gulf of Mexico finally concluded with a price tag of monumental proportions. After 11 workers died from a rig explosion and 134 million gallons of oil spilled into the warm waters just outside Louisiana, Mississippi, and Alabama, BP is ordered to pay $5.5 billion for violating the Clean Water Act and about three times as much to state governments for clean-up and mitigation of the damages. According to the Guardian, the money is to be paid over the period of 16 years threatening to strangle profits from the bleeding company in a time of low oil  prices. Last year, their earnings report frightened investors with a $6.3 billion loss in the fourth quarter. Investment spending reductions and labor cuts will most likely be a result of the fine.

The English company now faces a new threat from Mexico as a new class action lawsuit gathers under the non-governmental organization Sinaloa Class Actions. Hundreds of communities on the coast of Mexico saw their fishing and tourism industries damaged and now have an opportunity to be reimbursed for their pain in this lawsuit. Compensation could near the figures seen in the U.S. case if the expert witnesses and research prove to move the Mexican Supreme Court in the way of the plaintiff, according to the Guardian

BP certainly does have another crisis on their hands with the new lawsuit coming out of Mexico. The fact that the company has to deal with another year of a Deepwater Horizon stained reputation is dangerous news in a low price environment. Paying $20 billion over 16 years is already a serious long-term liability that costs about $1 billion a year; a ruling of half the size would bring the yearly cost to almost $2 billion. Over the next couple years, this could prove to be debilitating to BP's bottom line which is already malnourished by cheap oil. A dividend will be hard to maintain in the long run which should scare investors away from leaving their money with this company. To survive, BP might have to shed some weight off their market capitalization with some asset sales with a potential decrease in the book to market ratio. An overpriced BP security will be very hard to buy into as these legal punishments settle into their books.

  • A small community in New Hampshire is filing a lawsuit against many major oil and gas companies for health problems caused by methyl tertiary-butyl ether contamination of the local drinking supply
The chemical has wreaked havoc to the health and value of the community as the gasoline additive infected the local gas station and convenience store. Attorney Peter McGrath, representing the victims, said that many of those affected were plagued by "terrible skin rashes" and other health effects without ever knowing something was wrong. The chemical, MBTE, was used as an additive in gasoline around 1979 and was banned in New Hampshire in 2007. According to the Sentinel Source, a spill of the stuff in 1990 caused NH Department of Environmental Resources to establish a clean-up site working to remove 440 tons of contaminated soil.

Some of the companies that are targeted by this smaller lawsuit include Exxon-Mobil, Hess Corp, Chevron, ConocoPhillips, and Citgo among others. There's no mention of how much in damages the community is looking for, but compensation for property and health damages could reach the millions. Currently, long-term damages are under question as research on this chemical has yet to include human subjects. Known short-term effects of water with more than 13 micrograms per liter can result in headaches, nausea, dizziness, and other side effects. This chemical seems fairly obscure right now, but a case like this could support more research on the human effects of MBTE. The fact that this stuff is still around in 2016 to contaminate the water could mean that more instances will pop up and this suit could turn into a class action movement. The ensuing legal battle will be damaging to the reputation and goodwill of the oil and gas industry while supplying environmentalists with more ammunition with which to lobby.

  • A rift in Louisiana has triggered the release of 11 lawsuits naming 195 oil and gas giants two months ago in February.
Cases of coastal zone law violations and drilling permit problems have forced almost a dozen lawsuits on the hands of oil and gas companies operating in Louisiana. The list goes on for almost 100 names although some companies are duplicates in different suits. Tuscon News Now reports that the Louisiana Oil and Gas Association has responded in an outrage claiming the firms don't have the capacity to fight allegations, "The cost to litigate this is millions and millions of dollars. The industry right now, our revenue stream has been cut by almost 70-percent." 

The organization representing the oil and gas companies makes a decent point. The Cameron Police introduced this suit at a very inconvenient time for the economy. The local community which relies on the jobs provided by these operations might not appreciate the backlash that occurs. Companies are already bankrupt and laying people off, a cash settlement for legal violations will only exacerbate the effects. Investors shouldn't worry about the repercussions affecting the investment grade of the company's securities, but local operations could face an increase in costs in the region perhaps boosting the local Henry Hub natural gas price. But an effect of that magnitude would only come with a significant settlement. Other vulnerabilities that arise from this lawsuit are smaller companies that might be hurt by fines that could potentially be administered.  


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