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For Fossil Fuel Companies, Bankruptcy Is a Bailout

Declaring bankruptcy means executives pocket cash and workers lose livelihoods, while the public sector pays for environmental cleanup.

Scott Olson/Getty Images
Blackjewel miners blocked a railroad leading to a mine in Cumberland, Kentucky, in 2019.

Around this time last year, Jeff Hoops—CEO of Blackjewel LLC—was having a busy week. On July 1, 2019, he filed for Chapter 11 bankruptcy, abruptly closing the company’s Bell Ayr and Eagle Butte mines in Wyoming and laying off 700 workers. Construction had by that point begun on a $30 million “first phase” of the new Grand Patrician Resort he was building in his hometown of Milton, West Virginia, set to include a 3,500-seat replica of the Roman Colosseum. Within days, hundreds of Blackjewel miners in the Powder River Basin and Appalachia reported money “disappearing” from their bank accounts after paychecks had been deposited. On July 3, a bankruptcy judge granted Blackjewel $5 million in relief funds in exchange for Hoops stepping down as CEO. Blackjewel workers filed a lawsuit over stolen wages shortly thereafter. In Harlan County, Kentucky, they held a two-month sit-in on train tracks to block coal from their former employer from getting to market. Eventually, a court ordered that Blackjewel cough up the back pay.  Many say Blackjewel still owes them, and Hoops is under investigation

Similar stories could be coming soon to the notoriously overleveraged oil and gas industry, which has been struggling during the current pandemic but is already lavishing its executives with healthy payouts. In April, Diamond Offshore Drilling asked a bankruptcy judge to let it funnel $9.7 million in bonuses to its top executives, the same amount it had just gotten through a tax rebate created by the March stimulus package. Chesapeake Energy—the company that helped sell fracking to Wall Street—and California Natural Resources, the Golden State’s largest oil and gas company, have each filed for Chapter 11 bankruptcy within the last month, amid the Covid-19-sparked downturn in demand and investors’ cooling attitude toward a sector that has always struggled to turn a profit; hundreds more could be coming, as investor patience continues to wane and debt obligations come due. As bankruptcy—often a new lease on life for struggling companies—becomes a ubiquitous feature of the fossil fuel industry, who’s looking out for the workers and pensions it’s leaving behind? 

Coal’s declining fortunes have made bankruptcies a relatively common occurrence in that sector and created a wealth of case studies for how fossil fuel executives handle their shrinking prospects. In addition to the Blackjewel example, coal giant Murray Energy filed for Chapter 11 bankruptcy last October, potentially allowing it to shirk billions of dollars’ worth of pension obligations to tens of thousands of miners. Robert Murray—the company’s bombastic, Trump-aligned CEO—collected $440 million in new financing through a restructuring agreement that included him resigning as CEO but staying on as chairman of the Board. Murray then defaulted on that new financing, and Congress, after pressure from the United Mineworkers of America and its allies, resolved to pay $10 billion to save the UMWA’s endangered pension fund. Those funds—which cover a small portion of the pension obligations across the fossil fuel industry—are set to run out in 2023.

A 2018 study by Joshua Macey and Jackson Salovaara found that between 2012 and 2017, four coal companies, taken together, used bankruptcy courts to shed $5.2 billion worth of environmental and retiree obligations, including pensions and health care. Effectively, they argue, bankruptcy created various means for companies to externalize regulation and worker costs to third parties, including workers themselves. Communities surrounding the extraction sites also suffer, with environmental cleanup efforts abandoned: Public money picks up the tab. 

Extractive companies are supposed to pay into bonds that help cover these cleanup expenses for abandoned mines and wells, which leak massive amounts of heat-trapping methane into the atmosphere every minute they remain unplugged. But the industry has grossly underestimated the costs of plugging such wells. While it has estimated them at between $20,000 and $40,000 per well, a Carbon Tracker analysis in June found that average costs for cleanup are closer to $300,000 each. Combined with already low and outdated bonding requirements, required contributions are therefore too small to cover the actual costs of plugging wells—and some companies have tried to get out of paying even those modest sums. (A practice known as self-bonding allows larger companies to argue that they’re good for the cash, pointing to their big balance sheets as proof that they don’t need to pay into state-managed cleanup funds.) Chesapeake Energy, The New York Times’ Hiroko Tabuchi reported last month in a detailed look at oil and gas bankruptcies, is responsible for an estimated $1.4 billion in cleanup costs—nearly as much as the entire company is worth. It has set aside just $41 million for cleanup. 

Bankruptcy also creates low-regulation buying opportunities for other firms. Blackjewel, for example, before filing for bankruptcy itself, had collected 71 percent of its mining permits by snapping up the assets of other bankrupted coal companies, Mary Varson Cromer, deputy director of the Appalachian Citizens Law Center, pointed out in a webinar on Tuesday organized by the Institute for Energy Economics and Financial Analysis. “Bankruptcy is a very flawed system. It allows a company that should not exist to continue to exist,” Shannon Anderson, of Wyoming’s Powder River Basin Resource Council, said during the same event. “These are companies that exist solely to get coal out of the ground. Their workers are liabilities and externalities that they don’t really think about.”

After Wyoming’s three biggest coal companies (Peabody Energy, Arch Coal, and Alpha Natural Resources) went bankrupt, PRBR worked to get state regulators to reform the state’s bonding rules for coal mines and eliminate self-bonding. Ultimately, though, placing meaningful checks on these bankruptcy processes across the country’s fossil fuel industry will require rewriting the law that governs them. Johanna Bozuwa, of the Next System Project, has suggested amending those statutes to place bankrupt fossil fuel companies into government receivership, a practice that’s already been used in municipal bankruptcies. That would mean placing the company under the control of a federal agency that would oversee its restructuring and, in this case, liquidation. Another option would be mandating that fossil fuel companies file for Chapter 7 bankruptcy, entailing a court-ordered liquidation where their assets are sold off and used to pay debts, including cleanup, rather than restructuring them to allow the company to still exist. Such a rule would help address the systemic risks posed by their carbon-intensive core business model. “If we are truly thinking about winding down fossil fuels, fossil fuel companies should not be able to file under Chapter 11 unless they are able to reorganize away from fossil fuel extraction,” says Carla Santos Skandier, co-manager, with Bozuwa, of the climate and energy program at the Democracy Collaborative. “Otherwise it makes no sense to give a second chance to companies that should no longer exist in the future.”