Has big oil and gas undeclared liabilities undermined confidence in the industry

Canals map

Ezra Boyd (Reprint with permission) Recently, the Southeast Louisiana Flood Protection Authority-East, a small flood protection board for the New Orleans area filed a lawsuit against 97 oil and gas companies that they allege caused damage to the region’s coastal wetlands and hence contributed significantly to the cost of managing flood risk for their jurisdiction.  The industry responded with their typical denial and an approach that seems more based in fantasy than sound business accounting.

The industry has not convincingly argued against the merits of the lawsuit, and in fact they even acknowledge that their activities have been a major contributor to Louisiana’s coastal crisis.  However, instead of demonstrating that they are prepared to honestly account for this liability, the industry approach has been to use politics and legal maneuvers to block the lawsuit. For example, the Louisiana Oil and Gas Association (LOGA) recently filed suit against the Louisiana Attorney General’s office for approving the flood protection board’s request to hire lawyers to pursue their case. This suit has nothing to do with the industry’s responsibilities for damages they caused; it just argues that the board followed the wrong procedure when putting together their legal team. In the end, it’s doubtful that this strategy will get them off the hook. In fact, three parishes have since started the process of filing their own, independent lawsuits for oil and gas’s coastal damage.

 Indeed, a slow but steady tide is building to use legal instruments to force oil and gas companies to pay compensation for the damages that they acknowledge causing.  Such judgements could reach into the billions.

In pursuing a strategy of denial, the industry and LOGA are sending a bad signal to investors.  This strategy indicates that it is an industry that remains in denial of large sums of undeclared liabilities.  Instead of showing a plan to manage this cost, this strategy has just created a big, grey cloud of uncertainty over the industry. Ultimately, the strategy has scared off investors.

The coastal damage lawsuit comes on the heels of another high profile attempt by the industry to avoid their liabilities: BP’s attempt to do away with an independently administered settlement process.  The company initially agreed to this settlement process, but then experienced second thoughts once they realized their true liabilities.
Like the damage from oil and gas canals, no one denies that BP’s Deepwater Horizon Oil Well Blowout caused damage to Louisiana’s coast and communities.  With this case, the legal process has had time to play out and it’s clear that BP’s legal tactics have largely failed, as have their public relation attempts. A Federal judge has repeatedly denied BP’s attempts to have the claims settlement process tossed out or delayed.  BP remains on the hook for the billions in damages they have caused, and, of course, their global brand is mud.

Just to prove to everyone how deep their denial goes, BP recently attacked famed Chef Emeril Lagasse, alleging that he wrongfully claimed damages due to the spill.  Chef Lagasse’s lawyers and investors know that the Gulf seafood brand will suffer long-term damage because BP’s Spill.  Based on an honest accounting of his company’s future liabilities, Lagasse’s damage claims have merit.  The independent administrator of the claims process agreed, as did a three panel review board.  On the other hand, investors are starting to appreciate that BP’s brand will long be associated with Beached Petroleum and Beyond Polluted or simply Bad Prospects for a return on your investment.

The final example is LOGA’s failure to stop what they call ‘Legacy Lawsuits.’  ’Legacy Lawsuits’ are the industry’s term for a series of lawsuits they have faced from private landowners in Louisiana who have suffered damages because of oil and gas activity on or near their land. Instead of honestly accounting for this liability, they have spent 10 years pursuing a failed strategy of lobbying to change laws to stop the suits.

And, it appears that investors have taken note of this failed strategy, exemplified by declining rig counts in South Louisiana.  After observing the failure to stop so called legacy lawsuits despite a decade of effort, and then hearing the same broken record played out in the BP case and now in the lawsuit over oil and gas canals, a rational, third party investor can only wonder why the industry remains steadfast in pursuing the failed strategy of denying their undeclared liabilities for coastal damage.

Linking legacy lawsuits to declining investment, Don Briggs, who heads LOGA, was recently quoted as saying: “”Why would anyone want to invest millions of dollars drilling in south Louisiana if you’re just going to get sued?”  For the sake of the industry’s future, he asks the right question.  But, to the industry’s detriment he finds the wrong answer when he blames landowners, environmentalists, and trial lawyers.  For ten years, LOGA fought the landowners, environmentalists, and trial lawyers, and, for ten years, it has failed miserably to see the fantasy of stopping legacy lawsuits become reality. In turn, investors have noted that Louisiana’s oil and gas companies do not have a realistic plan to meet their liabilities and, as LOGA notes, they have acted as any smart investor would — putting their money into companies that do have realistic financial plans.

Investors want honesty and predictability, not a business model based on the fantasy that an industry can avoid responsibility for its harmful actions by hiring some lawyers and bribing lobbying some politicians.  If the industry wants to regain investor confidence, then they need to honestly account for their liabilities and send investors a message that they have a sound financial plan to meet them.

The industry’s damage to Louisiana’s coast is not going away anytime soon.  Likewise, as long as they remain unsettled, the coastal damage lawsuits, like the legacy lawsuits and the BP settlement, will remain big, dark clouds of uncertainty in any investor’s forecast.  When the industry and LOGA are ready to regain investor confidence, the first step is to acknowledge that their failed policy of the past has led to serious questions about the industry’s ability to manage its liabilities, and then they should start seriously accounting for the full costs of the industry’s damage to Louisiana’s land and communities.  Once they have declared these liabilities, they can take the next step by demonstrating that that the have a fiscally sound to manage this cost.

Dr. Ezra Boyd, a co-founder of DisasterMap.net, is a hazards geographer and disaster scientists who resides near New Orleans. He recently earned his PhD from Louisiana State University, and his dissertation presented a comprehensive assessment and analysis of deaths associated with Hurricane Katrina and the catastrophic failure of the Federal levee system for southeast Louisiana.  While at LSU, he participated in theTeam Louisiana report for the Louisiana Department of Transportation and Development and co-authored the Health Care and Disaster Planning book for the Louisiana State Medical Society.  His research on the preparations, response, and impacts of Hurricane Katrina has been published in Risk Analysis, Public Performance and Management Review, and Risk, Hazards, and Crisis in Public Policy..

Edited by Bruce Biles.

References:

Louisiana’s attorney general defends his approval of east bank levee authority’s resolution for hiring wetlands suit law firmhttp://www.nola.com/environment/index.ssf/2014/01/louisiana_attorney_gen_buddy_c.html

Oil industry blames ‘legacy lawsuits’ for drilling rig decline in south Louisianahttp://www.nola.com/business/index.ssf/2013/12/oil_industry_blames_legacy_law.html

Celebrity chef Emeril Lagasse targeted by BP in fight over oil spill paymentshttp://www.nola.com/business/index.ssf/2013/12/celebrity_chef_emeril_lagasse.html

Historic lawsuit seeks billions in damages from oil, gas, pipeline industries for wetlands losseshttp://www.nola.com/environment/index.ssf/2013/07/historic_east_bank_levee_autho.html#incart_2box

Diversifying Energy Industry Risk in the Gulf of Mexico: Post-2004 Changes in Offshore Oil and Gas Insurance Market / BOEM 2011-05http://www.data.boem.gov/PI/PDFImages/ESPIS/5/5164.pdf

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Ezra Boyd, Ph.D, is an expert in weather information and disaster, both as a professional and a survivor of Hurricane Katrina.  He brings relevant information to the world from a high degree of sophisticated knowledge and experience.