Will those responsible for OC oil spills pay for the damage?

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Six years ago, a ruptured oil pipeline in Santa Barbara County sent 140,000 gallons of crude oil spouting onto the sands of Refugio State Beach.

The company that owns the pipeline survived the onslaught of lost revenue and subsequent lawsuits, but not the offshore producer who used the line to transport its oil. After twice filing for Chapter 11 bankruptcy protection, Venoco Inc. eventually abandoned drilling operations in Southern California, leaving the state to shoulder millions of dollars in costs to shut down idle wells.

Patriot Environmental Services workers clean up oil that spilled into Talbert Marsh in Huntington Beach on October 3 following a spill off the coast of Orange County.

(Myung J. Chun / Los Angeles Times)

This month’s spill off the coast of Orange County, which dumped about 25,000 gallons into the ocean, could become a costly repeat of the Refugio spill, some experts say. The company that operates the San Pedro Bay pipeline faces intense pressure from federal regulators as well as businesses and residents who are pursuing the effects of the spill.

Filing for bankruptcy, as Venoco has done, could become an attractive option for the pipeline’s parent company, giving it temporary relief from financial and legal constraints. But it is too early to tell if Amplify Energy Corp. will take this step. Its oil production is less dependent on California than Venoco, but it is also a relatively small player in an industry in which the financial blow of an environmental disaster can be devastating.

“They can easily put up their hand and file for bankruptcy,” said Stephen Schork, a longtime analyst and adviser on energy markets.

Amplify Energy and its subsidiaries are not considering Chapter 11 bankruptcy “at this time,” instead focusing on cleaning up the environment and working with regulatory agencies investigating the spill, spokeswoman Amy Conway said. of the company.

As U.S. oil production has declined, major energy companies have turned their attention to deepwater drilling, where vast reserves – and profits – remain untapped. The companies sold their aging, shallow rigs and pipelines to smaller players, who struggled with the fall in the price of oil. The threat of Chapter 11 bankruptcies among these companies has increased during the pandemic.

Oil and gas rigs Edith, from left, Elly, Ellen are seen off the southern California coast.

Edith Oil and Gas Rigs, left to right, Elly, Ellen are seen off the southern California coast on October 18.

(Allen J. Schaben / Los Angeles Times)

Whether Amplify Energy ultimately decides to seek bankruptcy protection depends on several factors, including the terms of the company’s insurance coverage and whether the shipping company operating the vessel that may have initially damaged pipeline with its anchor is identified and held responsible.

Investigators plan to cut the San Pedro Bay pipeline and transport the ruptured section to a lab for analysis, crippling the company’s drilling operations in California. The length of the pipeline shutdown will be another big factor for the company, which derives about 14% of its total energy production from offshore operations in California, according to recent financial documents.

Following the Santa Barbara spill, Venoco went out of business after the state refused to relight the pipeline, cutting off half of the offshore company’s revenue. The state also refused to allow the company to use tankers to transport oil ashore.

Richard Carson, professor of economics at UC San Diego, was one of the leading economic investigators for the damage assessments after the Deepwater Horizon and Exxon Valdez spills. Unlike some observers, he said that while the federal government finds that Amplify Energy was ultimately the responsible party, he does not believe the company will be able to avoid financial liability for the spill by declaring bankruptcy or by throwing the responsibility on the subsidiaries.

“It would be really difficult to have a federal oil lease off the coast of California and have this thing in place in a way that denies state and federal restitution to the general public,” Carson said.

Amplify Energy said in a public notice this month in several local newspapers that the company could be responsible for cleanup costs and damage from the spill. The notice, required by the Federal Oil Pollution Act 1990, states that claims eligible for reimbursement include damage to natural resources, damage or loss of personal property, and loss of profit and capacity. gain.

Oil slicks lining Huntington State Beach

A man watches the scene of oil streaks in the sand after a major oil spill washed up in Huntington State Beach earlier this month.

(Allen J. Schaben / Los Angeles Times)

Claims denied or not resolved within three months can be sent to the National Pollution Funds Center for payment by the Oil Spill Liability Trust Fund, the company said in the notice. The fund, administered by the Coast Guard, is funded by a per barrel tax on crude oil.

Federal law requires oil companies to keep $ 35 million available for oil spills of this magnitude.

Since 2016, US regulators have sought to toughen the liability and dismantling rules for offshore drillers, particularly in the Gulf of Mexico, where the majority of US offshore drilling takes place, fearing that taxpayers will be forced to pay to shut down. unused oil rigs if they were smaller. players have retreated under financial pressure, said Tyler Priest, an associate professor at the University of Iowa who studies the history of oil and gas drilling.

But this attempt to increase bonding and insurance requirements, first proposed under the Obama administration, has met with strong reluctance from industry. The rule was “rescinded” under the Trump administration, Priest said, and remains unfinished despite the forward momentum under the Biden administration.

It’s unclear how much insurance Amplify Energy was carrying at the time of the spill, but experts say it’s unlikely that policies will be able to pay for every claim.

The number of lawsuits that pile up “may be a significant factor” in a potential bankruptcy, said Lexi Hazam, a San Francisco lawyer representing a group of plaintiffs including commercial fishermen and a whale-watching company.

The number of legal complaints has already reached double digits, including those filed by owners of coastal properties in Laguna Beach, a surf school in Huntington Beach, a bait and tackle shop in Seal Beach and several corporate groups. fishing and seafood sales.

If Amplify Energy were to file for bankruptcy, there’s a good chance the plaintiffs won’t receive as much compensation as they hoped, experts say. Bankruptcy judges set the amount of potential damages that can be paid by companies in Chapter 11, and even the federal government cannot force a company to pay more than that amount, said Eric Smith, business professor at the ‘Tulane University and Associate. director of the Tulane Energy Institute.

“You can bankrupt the business, but there’s not much you can do to be fully paid off,” Smith said.

A potential bankruptcy would not mean the end of litigation, Hazam said, but it would result in “a different kind of process, and of course, it puts a limit on the amounts that can be recovered.”

The amount that Amplify Energy ends up paying could also depend on the company’s success in isolating the risk of an oil spill in its subsidiaries, a complex network of limited liability companies and corporations.

A subsidiary of Amplify Energy, Beta Operating Co., operates the oil rigs off the coast of Orange County. Another, the San Pedro Bay Pipeline Co., is responsible for the pipeline rupture.

If small businesses were held solely responsible for the spill, and prosecutors and plaintiffs could not blame Amplify Energy for the pipeline spill, then the company could cut the subsidiaries, allow them to go bankrupt and avoid a direct financial blow. to his heart. business, say some experts.

“You can throw your affiliate to the wolves,” said Ted Borrego, an oil and gas lawyer with five decades of industry experience and an assistant professor at the University of Houston Law Center.

Amplify Energy is a relatively small company with a poor track record compared to large international oil companies. Its executives have pursued a corporate strategy over the past several years that left the company with little cash on hand when the spill occurred.

Times review of Amplify Energy’s financial years reveals that company executives have long focused on cutting costs, buying back shares and paying millions of dollars in dividends to shareholders instead. than to maintain a substantial cash reserve.

Amplify Energy itself was the result of bankruptcy. Its predecessor restructured four years ago, paying off $ 1.3 billion in debt. The new business came out lighter, with relatively little cash on hand.

When the pandemic struck and oil prices fell, Amplify Energy said it had cut costs by 37%. A subsidiary also received a paycheck protection program loan of $ 5.5 million, subsequently canceled, to cover the wage costs of 292 employees.

As of July, Amplify Energy had $ 235 million in debt and $ 21 million in cash, far less than the expected cost of the cleanup and any legal damages.

Like the Santa Barbara spill, which is still the subject of litigation, the Orange County disaster will be in court for years to come – and will likely continue to incur costs in the interim.


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