Contingencies | 12 Months Ended |
Dec. 31, 2013 |
Disclosure Text Block [Abstract] | ' |
Contingencies | ' |
17. Contingencies |
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Litigation The Company is a defendant in a number of lawsuits and is involved in governmental proceedings and regulatory controls arising in the ordinary course of business, including, but not limited to, personal injury claims; title disputes; tax disputes; royalty claims; contract claims; contamination claims relating to oil and gas production, transportation, and processing; and environmental claims, including claims involving assets owned by acquired companies and claims involving assets previously sold to third parties and no longer a part of the Company’s current operations. The Company’s Consolidated Balance Sheets include liabilities of $854 million at December 31, 2013, and $49 million at December 31, 2012, for litigation-related contingencies. Anadarko is also subject to various environmental-remediation and reclamation obligations arising from federal, state, and local laws and regulations. While the ultimate outcome and impact on the Company cannot be predicted with certainty, after consideration of recorded expense and liability accruals, management believes that, with the possible exception of the Tronox Litigation discussed below, the resolution of pending proceedings will not have a material adverse effect on the Company’s consolidated financial position, results of operations, or cash flows. |
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Tronox Litigation On November 28, 2005, Tronox Incorporated (Tronox), at the time a subsidiary of Kerr-McGee Corporation, completed an IPO and was subsequently spun-off from Kerr-McGee Corporation. In August 2006, Anadarko acquired all of the stock of Kerr-McGee Corporation. In January 2009, Tronox and certain of Tronox’s subsidiaries filed voluntary petitions for relief under Chapter 11 of the U.S. Bankruptcy Code in the U.S. Bankruptcy Court for the Southern District of New York (Bankruptcy Court), which is the court that is also hearing the Adversary Proceeding (defined below). Subsequently, in May 2009, Tronox and certain of its affiliates filed a lawsuit against Anadarko and Kerr-McGee Corporation and certain of its subsidiaries (collectively, Kerr-McGee) asserting several claims, including claims for actual and constructive fraudulent conveyance (Adversary Proceeding). Tronox alleged, among other things, that it was insolvent or undercapitalized at the date of its IPO and sought, among other things, to recover damages from Kerr-McGee and Anadarko, as well as interest, appreciation, and attorneys’ fees and costs. In accordance with Tronox’s Bankruptcy Court-approved Plan of Reorganization (Plan), the Adversary Proceeding is being pursued by a litigation trust (Litigation Trust). Pursuant to the Plan, the Litigation Trust was “deemed substituted” for the Tronox plaintiffs in the Adversary Proceeding. For purposes of this Form 10-K, references to “Tronox” after February 2011 refer to the Litigation Trust. |
The U.S. government intervened in the Adversary Proceeding, and in May 2009 asserted separate claims against Anadarko and Kerr-McGee under the Federal Debt Collection Procedures Act (FDCPA Complaint). The Litigation Trust and the U.S. government have agreed that the recovery of damages under the Adversary Proceeding, if any, would cover both the Adversary Proceeding and the FDCPA Complaint. |
In February 2011, Tronox emerged from bankruptcy pursuant to the Plan. The terms of the Plan, which were confirmed by the Bankruptcy Court in the fourth quarter of 2010, contemplate that the claims of the U.S. government (together with other federal, state, local, and tribal governmental entities having regulatory authority or responsibilities for environmental laws, collectively, the Governmental Entities) related to Tronox’s environmental liabilities and tort claims asserted against Tronox by other creditors will be settled through certain environmental response trusts and the Litigation Trust. The Plan provides for an allocation of any proceeds from the Adversary Proceeding between the Governmental Entities and the other creditors. |
In January 2012, the Bankruptcy Court held that Section 550(a) of the Bankruptcy Code does not impose a cap on potential damages Tronox may recover, stating that the appropriate measure of damages should only be determined after trial in the Adversary Proceeding. |
The Adversary Proceeding trial was held from May 2012 through September 2012. In November 2012, the parties filed post-trial briefs, and closing arguments were presented in December 2012. In December 2013, the Bankruptcy Court issued a Memorandum of Opinion, After Trial (discussed below). |
17. Contingencies (Continued) |
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Historical Accounting The Company recognized losses of $250 million in the fourth quarter of 2011 and $275 million in the first quarter of 2012, for a total estimated contingent liability related to the Adversary Proceeding of $525 million at March 31, 2012. At that time, the Company’s assessment was that it was probable the parties would reach a settlement and thus the Company considered a loss, via settlement, to be probable. The Company’s attempts during the second quarter of 2012 to resolve the Adversary Proceeding through mediation and settlement discussions reached an impasse. Accordingly, based on information available at that time, the Company’s assessment was that the likelihood of resolving the Adversary Proceeding through settlement was remote, that the likely form of final resolution of this matter was through litigation and the appellate process, and that a loss was not probable. Therefore, the Company reversed the settlement-based $525 million contingent liability in the second quarter of 2012 resulting in no accrued liability for this matter at June 30, 2012. There were no events or developments that changed the Company’s assessment until December 2013. |
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Memorandum of Opinion In December 2013, the Bankruptcy Court issued a Memorandum of Opinion, After Trial (Opinion) in which the Bankruptcy Court found Kerr-McGee liable for fraudulent transfers in connection with Kerr-McGee’s 2002 internal corporate restructuring and the subsequent IPO of Tronox. In its Opinion, the Bankruptcy Court concluded that damages from the fraudulent conveyance were equal to the value of the transferred assets as of the IPO date of $14.459 billion, but that Kerr-McGee may file a claim under Section 502(h) of the U.S. Bankruptcy Code (502(h) Claim). The Opinion provisionally outlined a framework for determining the amount of Kerr-McGee’s 502(h) Claim, resulting in a 502(h) Claim amount of $10.459 billion. The Bankruptcy Court noted that a portion of the 502(h) Claim, if allowed, would be offset against an award of damages. The Bankruptcy Court expressed its opinion that it has the authority to enter a judgment against Kerr-McGee, but did not enter a judgment against Kerr-McGee at the time of the issuance of its Opinion because it had not resolved questions it raised concerning Kerr-McGee’s 502(h) Claim and the portion of the 502(h) Claim that could be recovered (Recovery Percentage). The Bankruptcy Court also noted that attorneys’ fees and costs could be added to an award to the extent appropriate. The Bankruptcy Court ordered the parties to submit further briefing regarding Kerr-McGee’s 502(h) Claim. |
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Briefing on 502(h) Claim In accordance with the Bankruptcy Court’s order, Kerr-McGee submitted its brief and filed its 502(h) Claim in January 2014 and the plaintiffs’ response was submitted in February 2014. Kerr-McGee argued in its brief, among other things, that the Bankruptcy Court should not dilute Kerr-McGee’s 502(h) Claim and that the Bankruptcy Court, in its provisional findings, has not properly considered the amount of Kerr-McGee’s 502(h) Claim or the Recovery Percentage. Kerr-McGee argued that the proper application of the Bankruptcy Court’s findings of fact and conclusions of law would result in net damages of $850 million. Alternatively, the Company argued that using the Bankruptcy Court’s framework, damages should be limited to the net present value of the legacy environmental and tort liabilities at the IPO date, which the Bankruptcy Court determined to be $1.757 billion. |
In their responsive pleadings, the plaintiffs argued, among other things, that Kerr-McGee’s 502(h) Claim should be disallowed or, in the alternative, diluted to either 68% or 2.8% of its value. Furthermore, the plaintiffs argued that in addition to the value of the transferred assets as of the IPO date, they are entitled to recover appreciation in the value of those assets from the IPO date through June 2012, the date testimony was provided by a plaintiffs’ expert. If combined with a disallowed 502(h) Claim as argued by the plaintiffs, this would yield net damages to the plaintiffs in the amount of $18.85 billion, excluding interest and attorneys’ fees and costs. Further, the plaintiffs are seeking pre-judgment interest applied at a rate of 6% compounded annually from June 2012 through the date of judgment, which combined with the net damages amount above would total $20.77 billion as of February 2014. The plaintiffs also submitted a request to be reimbursed for $61 million in attorneys’ fees and costs. |
Kerr-McGee has until March 14, 2014, to submit a reply to the plaintiffs’ brief. The Opinion indicated that either party may request a hearing on the matters being briefed, and a hearing has been scheduled for April 2014. After this process, the Bankruptcy Court is expected to issue a judgment, which will then be subject to appeal. |
17. Contingencies (Continued) |
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Liability Accrual Analysis Applicable accounting guidance requires the Company to accrue a liability if (a) it is probable that a liability has been incurred and (b) the amount of that liability can be reasonably estimated. That guidance also requires a liability accrual at the low end of an estimated range of probable loss when no amount within the range is a better estimate than any other amount. The Company believes that a loss in the Adversary Proceeding is probable, based on the Bankruptcy Court’s finding of liability in its Opinion. The Company considers a reasonable estimate of the range of probable loss, after all appellate processes have concluded, to be $850 million to $5.15 billion, and recorded a liability of $850 million, equal to the low end of that range. Although the Company does not believe a loss in excess of $5.15 billion to be probable, it is reasonably possible that the loss could be as high as $14.52 billion, including $61 million for attorneys’ fees and costs, but excluding any potential interest and appreciation. |
The Company’s $850 million contingent liability accrual is based on the application of accounting guidance to currently available information and the Company’s judgment concerning the application of law to that information. Furthermore, the Company’s liability accrual and estimated range of probable loss do not include any amounts for interest, appreciation, or attorneys’ fees and costs, and reflects its assessment that resolution through settlement is not probable at this time. The ultimate outcome of the Adversary Proceeding is subject to significant uncertainty; accordingly, the Company’s liability accrual could change materially in the near term as events unfold and more information becomes available. In quantifying an estimated range of probable loss, the Company considered the following components of a possible award for which it could ultimately be responsible: damages, pre-judgment interest and appreciation, post-judgment interest, and attorneys’ fees and costs. |
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Damages The Company estimates a range of probable damages ultimately awarded to the plaintiffs to be $850 million to $5.15 billion. This estimate is based on currently available information and the Company’s opinion regarding the ultimate outcome of the Adversary Proceeding. As described below, the degree of uncertainty regarding the determination of Kerr-McGee’s allowable 502(h) Claim and the Recovery Percentage prevents the Company from determining any one amount within the estimated range of probable loss to be a better estimate than any other amount. |
Critical factors in assessing the estimated range of probable loss with respect to damages are the as-yet unresolved issues of the amount of Kerr-McGee’s 502(h) Claim, and the extent to which such an offset amount would reduce damages. The Bankruptcy Court provisionally stated that the 502(h) Claim could be $10.459 billion. This 502(h) Claim amount represents the difference between (i) $14.459 billion, which is the Bankruptcy Court’s finding as to damages based on the net value of the transferred assets as of the date of IPO, and (ii) $4.0 billion, which is the mid-point in the plaintiffs’ post-petition estimate of potential legacy environmental and tort liabilities as of 2010. To calculate the offset amount that could reduce damages, the Bankruptcy Court indicated that the Recovery Percentage to be applied to Kerr-McGee’s 502(h) Claim could be either 89% or 2.8%. The Bankruptcy Court noted in its Opinion that the Plan provides that Kerr-McGee’s 502(h) Claim must be multiplied by “the percentage recovery to Allowed Class 3 General Unsecured Creditors” (Class 3 Recovery). Additionally, the Bankruptcy Court noted that 89% represents the estimated average Class 3 Recovery as stated in the Disclosure Statement filed by Tronox in its bankruptcy case. Under this scenario, the damages paid to the plaintiffs would be reduced by approximately $9.3 billion, resulting in a net damage award to plaintiffs of $5.15 billion. |
The Bankruptcy Court also suggested that the Recovery Percentage might be determined after including Kerr-McGee’s 502(h) Claim with the Class 3 claims allowed under the Plan, which would have the effect of diluting Kerr-McGee’s Recovery Percentage. Under this scenario, the Recovery Percentage to be applied to Kerr-McGee’s 502(h) Claim would be 2.8%, resulting in an allowed 502(h) Claim of $293 million and a net damages award to plaintiffs of approximately $14.16 billion. |
The Company believes that Kerr-McGee’s 502(h) Claim should be computed by reference to the Bankruptcy Court’s own findings in the Opinion and the language of the Plan, as opposed to being computed by reference to the plaintiffs’ post-petition estimate of the amount of legacy environmental and tort liabilities as of 2010. Accordingly, the Company believes that Kerr-McGee’s 502(h) Claim should be computed by reference to $850 million, which represents the Bankruptcy Court’s finding as to the amount of the net creditor shortfall at the IPO date, which considers the fair value of all of Tronox’s assets and liabilities including the legacy environmental and tort liabilities. |
17. Contingencies (Continued) |
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Using the Bankruptcy Court’s framework for calculating the amount of Kerr-McGee’s 502(h) Claim that may be allowed, but applying the Bankruptcy Court’s finding of the $850 million net creditor shortfall instead of the plaintiffs’ post-petition estimate of legacy environmental and tort liabilities used in the Bankruptcy Court’s calculation, results in a 502(h) Claim of $13.609 billion. Furthermore, it is Kerr-McGee’s position that the applicable Recovery Percentage should be determined by the Plan, which states that Kerr-McGee is entitled to the same Class 3 Recovery actually received in the bankruptcy, which exceeded 100%. In accordance with the principles of law and equity outlined in the Opinion, the Company believes that Kerr-McGee is entitled to a Recovery Percentage of 100%, resulting in a net damage award to plaintiffs of $850 million. While it is possible that damages could be determined using a Recovery Percentage of less than 89%, the Company does not believe that this outcome is probable, and therefore a lower Recovery Percentage is not included in the Company’s estimated range of probable loss. |
The following summarizes the Company’s estimated range of probable loss: |
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billions, except percentages | Low End of | | High End of |
Range of | Range of |
Probable Loss | Probable Loss |
Value of Transferred Assets as of IPO date (1) | $ | 14.459 | | | $ | 14.459 | |
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Net Creditor Shortfall/Legacy Liabilities | (0.850 | ) | | (4.000 | ) |
Allowable 502(h) Claim | $ | 13.609 | | | $ | 10.459 | |
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Recovery Percentage | 100 | % | | 89 | % |
Offset Amount | $ | 13.609 | | | $ | 9.309 | |
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Value of Transferred Assets as of IPO date (1) | $ | 14.459 | | | $ | 14.459 | |
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Offset Amount | (13.609 | ) | | (9.309 | ) |
Net Damages | $ | 0.85 | | | $ | 5.15 | |
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-1 | As determined by the Bankruptcy Court. | | | | | | |
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The Company’s estimate of the range of probable loss requires significant assumptions. As summarized above, the Company’s estimated range of probable loss uses the net creditor shortfall of $850 million on the low end and plaintiffs’ estimated legacy environmental and tort liabilities of $4.0 billion on the high end. Alternatively, the Bankruptcy Court could use $1.757 billion, which represents the Bankruptcy Court’s findings of fact related to the net present value of the environmental and tort liabilities at the IPO date. Further, the Company’s estimated range of probable loss uses a Recovery Percentage of 100% for the low end and 89% for the high end. Combinations of the above factors would result in damage estimates that are within the Company’s estimated range of probable loss. |
If no 502(h) Claim is allowed, the Company could incur a liability for damages of $14.459 billion, which is materially higher than the Company’s estimated range of probable loss. |
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Pre-Judgment Interest and Appreciation The Bankruptcy Court did not address pre-judgment interest or appreciation in its Opinion. The Bankruptcy Court has discretion in deciding whether to award pre-judgment interest and how such interest may be calculated. The interest rate that may be charged, the date from which such interest is calculated, and whether any such interest is compounded or computed as simple interest may vary. If the Bankruptcy Court chooses to award pre-judgment interest, the amount could be material depending on the amount of net damages awarded in a judgment and the interest rates, dates, and compounding method applied for purposes of calculating the amount of pre-judgment interest. |
17. Contingencies (Continued) |
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As noted above, the plaintiffs argued that, in addition to the value of the transferred assets as of 2005, the plaintiffs should recover appreciation in the value of those assets from November 2005 until June 2012. In connection with their appreciation argument, the plaintiffs also are seeking pre-judgment interest applied at a rate of 6% compounded annually from June 2012 until the date of judgment. Appreciation was not addressed by the Bankruptcy Court in its Opinion and it is unclear how any such argument by the plaintiffs will be addressed by the Bankruptcy Court, if at all. |
The inherent uncertainty and lack of information, including the lack of a court-provided framework for whether or how the Bankruptcy Court would consider pre-judgment interest or appreciation, prevent the Company from formulating a reasonable estimate of the amount of pre-judgment interest or appreciation that could be included as part of a judgment. Accordingly, the Company is unable to estimate a range of probable or reasonably possible loss from pre-judgment interest or appreciation at this time, and the Company’s liability accrual does not include any such amounts. The Company will continue to evaluate the extent to which a reasonable estimate of such amounts can be made as additional information regarding the above factors becomes available. Developments that could assist the Company in estimating interest or appreciation include a judgment by the Bankruptcy Court or matters raised in potential hearings regarding the remaining issues being briefed. |
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Post-Judgment Interest Post-judgment interest is mandated by federal law. Post-judgment interest would not begin to accrue until the date a judgment is entered, and would continue until that judgment is paid in full. Because no judgment had been issued as of December 31, 2013, a liability for post-judgment interest has not been incurred. Accordingly, no amount for post-judgment interest has been included in the Company’s accrual or estimated range of probable loss. Further, the Company cannot estimate a range of future liability related to post-judgment interest at this time. At December 31, 2013, the annual interest rate for post-judgment interest was 0.13%. |
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Attorneys’ Fees and Costs In its Opinion, the Bankruptcy Court stated that the plaintiffs could request reimbursement of attorneys’ fees and costs. Based on the Company’s review of relevant law, aside from certain de minimis costs the Company believes there is no basis in law or contract that would permit the plaintiffs to recover attorneys’ fees and costs. Accordingly, the Company has not included any amount related to attorneys’ fees and costs in its estimated range of probable loss. However, it is reasonably possible that a loss related to attorneys’ fees and costs could be as high as the $61 million requested by the plaintiffs. |
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Tax Deductibility The Company has concluded that it is more likely than not that 88% of the $850 million loss recognized in 2013 will be deductible for U.S. tax purposes. Accordingly, the Company recognized a deferred tax benefit of $274 million in its 2013 financial statements. If additional losses are accrued in the future, the Company will evaluate the tax deductibility of any such accrual based on the facts and circumstances related to that accrual. |
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Liability Outlook A separate action pending before the U.S. Supreme Court to which Anadarko is not a party, Executive Benefits Insurance Agency v. Arkison, raises certain legal issues including, but not limited to, whether a bankruptcy court has authority to enter a judgment or to make a report and recommendation in a fraudulent transfer case. The Company is uncertain, at this time, what impact any ruling in that case would have on the Adversary Proceeding. |
17. Contingencies (Continued) |
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As discussed above, the Company’s $850 million accrued contingent liability as of December 31, 2013, has been established based on the application of accounting guidance to currently available information and the Company’s judgment concerning the application of law to that information. A wide range of possible ultimate outcomes currently exists, and the Company may ultimately incur a liability related to the Adversary Proceeding materially in excess of the current accrued liability. The Company’s liability accrual could also change materially in the near term as events unfold and more information becomes available. Further, it is possible that the Company’s ultimate liability could exceed the currently estimated range of probable loss of $850 million to $5.15 billion. A judgment could also include an award of pre-judgment interest and appreciation, which could be material, as well as attorneys’ fees and costs. In addition, the Company does not believe that the current contingent liability of $850 million accrued at December 31, 2013, is representative of the amount it could be required to pay to reach final resolution of the Adversary Proceeding through settlement. Although the Company does not believe final resolution through settlement to be probable at this time, it expects that any such settlement would require payment of an amount substantially greater than the current accrued liability. |
Following a judgment, the Company would be required either to pay the damage award or appeal the judgment. If the Company pursues its rights through the appellate process, the Company may be required to post a bond or provide sufficient security to stay execution of the judgment by the plaintiffs pending the outcome of the appellate process. As the Bankruptcy Court has not yet issued a judgment, the Company is unable to estimate whether the Company would be required to provide a bond or other security or the potential form or amount of any such bond or other security. However, depending on the amount of the judgment and other factors relating to the appellate process, satisfying any security requirements could have a potentially material negative impact on the Company’s consolidated financial position in the short term. |
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Deepwater Horizon Events In April 2010, the Macondo well in the Gulf of Mexico blew out and an explosion occurred on the Deepwater Horizon drilling rig, resulting in an oil spill. The well was operated by BP Exploration and Production Inc. (BP) and Anadarko held a 25% nonoperated interest. In October 2011, the Company and BP entered into a settlement agreement, mutual releases, and agreement to indemnify relating to the Deepwater Horizon events (Settlement Agreement), under which the Company paid $4.0 billion in cash and transferred its interest in the Macondo well and the Mississippi Canyon Block 252 (Lease) to BP. Pursuant to the Settlement Agreement, the Company is fully indemnified by BP against all claims, causes of action, losses, costs, expenses, liabilities, damages, or judgments of any kind arising out of the Deepwater Horizon events, related damage claims arising under the Oil Pollution Act of 1990 (OPA), claims for natural resource damages (NRD) and assessment costs, and any claims arising under the Operating Agreement with BP (OA). This indemnification is guaranteed by BP Corporation North America Inc. (BPCNA) and, in the event that the net worth of BPCNA declines below an agreed-upon amount, BP p.l.c. has agreed to become the sole guarantor. Under the Settlement Agreement, BP does not indemnify the Company against fines and penalties, punitive damages, shareholder derivative or securities laws claims, or certain other claims. |
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Liability Accrual Below is a discussion of the Company’s current analysis, under applicable accounting guidance, of its potential liability for (i) amounts invoiced by BP under the OA (OA Liabilities), (ii) OPA-related environmental costs, and (iii) other contingent liabilities. Applicable accounting guidance requires the Company to accrue a liability if both (a) it is probable that a liability has been incurred and (b) the amount of that liability can be reasonably estimated. |
The Company is fully indemnified by BP against OPA damage claims, NRD claims and assessment costs, and other potential liabilities. The Company may be required to recognize a liability for these amounts in advance of or in connection with recognizing a receivable from BP for the related indemnity payment. In all circumstances, however, the Company expects that any additional indemnified liability that may be recognized by the Company will be subsequently recovered from BP itself or through the guarantees of BPCNA or BP p.l.c. The Company has not recorded a liability for any costs that are subject to indemnification by BP. |
17. Contingencies (Continued) |
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OA Liabilities Pursuant to the Settlement Agreement, all amounts deemed by BP to have been due under the OA, as well as all future amounts that otherwise would be invoiced to Anadarko under the OA, have been satisfied. |
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OPA-Related Environmental Costs BP, Anadarko, and other parties, including parties that do not own an interest in the Lease, such as the drilling contractor, have received correspondence from the U.S. Coast Guard (USCG) referencing their identification as a “responsible party or guarantor” (RP) under OPA. Under OPA, RPs, including Anadarko, may be jointly and severally liable for costs of well control, spill response, and containment and removal of hydrocarbons, as well as other costs and damage claims related to the spill and spill cleanup. The USCG’s identification of Anadarko as an RP arises as a result of Anadarko’s status as a co-lessee in the Lease. |
Under accounting guidance applicable to environmental liabilities, a liability is presumed probable if the entity is both identified as an RP and associated with the environmental event. The Company’s co-lessee status in the Lease at the time of the event and the subsequent identification and treatment of the Company as an RP satisfies these standards and therefore establishes the presumption that the Company’s potential environmental liabilities related to the Deepwater Horizon events are probable. |
As BP funds OPA-related environmental costs, any potential joint and several liability for these costs is satisfied for all RPs, including Anadarko. This bears significance in that once these costs are funded by BP, such costs are no longer analyzed as OPA-related environmental costs, but instead are analyzed as OA Liabilities. As discussed above, Anadarko has settled its OA Liabilities with BP. Thus, potential liability to the Company for OPA-related environmental costs can arise only where BP does not, or otherwise is unable to, fund all of the OPA-related environmental costs. Under this scenario, the joint and several nature of the liability for these costs could cause the Company to recognize a liability for OPA-related environmental costs. However, the Company is fully indemnified by BP against these costs (including guarantees by BPCNA or BP p.l.c.). |
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Gross OPA-Related Environmental Cost Estimate In prior periods through the fourth quarter of 2011, the Company provided an estimated range of gross OPA-related environmental costs for all identified RPs. This estimate was comprised of spill-response costs and OPA damage claims and was derived from cost information received by the Company from BP. The Company no longer receives Deepwater Horizon-related cost and claims data from BP. Accordingly, the OPA-related environmental cost estimate included in BP’s public releases is the best data available to the Company. |
Based on information included in BP p.l.c.’s public release on February 4, 2014, gross OPA-related environmental costs are estimated to be $10.9 billion, excluding (i) amounts BP has already funded, which constitute settled OA Liabilities; (ii) amounts that in BP’s view cannot reasonably be estimated, which include NRD claims and other litigation damages; (iii) non-OPA-related fines and penalties that may be assessed against Anadarko, including assessments under the Clean Water Act (CWA); and (iv) estimated state and local governmental claims, which BP no longer publicly discloses and, as a result, Anadarko cannot estimate. Actual gross OPA-related environmental costs may vary from those estimated by BP p.l.c. in its public releases, perhaps materially from the above estimate. |
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17. Contingencies (Continued) |
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Allocable Share of Gross OPA-Related Environmental Costs Under applicable accounting guidance, the Company is required to estimate its allocable share of gross OPA-related environmental costs. To date, BP has paid all Deepwater Horizon event-related costs, which satisfies the Company’s potential liability for these costs. Additionally, BP has repeatedly stated publicly and in congressional testimony that it will continue to pay these costs. BP’s funding and public commentary has continued subsequent to the release of BP’s own investigation report, the National Commission on the BP Deepwater Horizon Oil Spill and Offshore Drilling’s final report, and the Deepwater Horizon Joint Investigation Team final report, which the Company considers to be significant positive indications in assessing the likelihood of BP continuing to fund all of these costs. Based on BP’s stated intent to continue funding these costs, the Company’s assessment of BP’s financial ability to continue funding these costs, and the impact of BP’s settlements with both of its OA partners, the Company believes the likelihood of BP not continuing to satisfy these claims to be remote. Accordingly, the Company considers zero to be its allocable share of gross OPA-related environmental costs and, consistent with applicable accounting guidance, has not recorded a liability for these amounts. |
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Penalties and Fines These costs include amounts that may be assessed as a result of potential civil and/or criminal penalties under various federal, state, and/or local statutes and/or regulations as a result of the Deepwater Horizon events, including, for example, the CWA, the Outer Continental Shelf Lands Act, the Migratory Bird Treaty Act, and possibly other federal, state, and local laws. The foregoing does not represent an exhaustive list of statutes and regulations that potentially could trigger a penalty or fine assessment against the Company. To date, no penalties or fines have been assessed against the Company. However, in December 2010, the U.S. Department of Justice (DOJ), on behalf of the United States, filed a civil lawsuit in the U.S. District Court in New Orleans, Louisiana (Louisiana District Court) against several parties, including the Company, seeking an assessment of civil penalties under the CWA in an amount to be determined by the Louisiana District Court. In February 2012, the Louisiana District Court entered a declaratory judgment that, as a partial owner of the Macondo well, Anadarko is liable for civil penalties under Section 311 of the CWA. The declaratory judgment addresses liability only, and does not address the amount of any civil penalty. The assessment of a civil penalty against Anadarko has been reserved until a later proceeding to be scheduled by the Louisiana District Court. In August 2012, Anadarko filed a notice of appeal in the U.S. Court of Appeals for the Fifth Circuit concerning that portion of the February 2012 declaratory judgment finding Anadarko liable for civil penalties under the CWA. The appeal is pending and oral arguments were heard in December 2013. The Louisiana District Court has not yet issued a ruling. |
As discussed below, numerous Deepwater Horizon event-related civil lawsuits have been filed against BP and other parties, including the Company. Certain state and local governments have appealed, or have provided indication of a likely appeal of, the Louisiana District Court’s decision that only federal law, and not state law, applies to Deepwater Horizon event-related claims. For example, eleven Louisiana Parish District Attorneys appealed that decision to the U.S. Court of Appeals for the Fifth Circuit. In February 2014, the Fifth Circuit denied the appeal. If any such appeal is successful, state and/or local laws and regulations could become sources of penalties or fines against the Company. |
17. Contingencies (Continued) |
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The Louisiana District Court’s declaratory judgment in February 2012 satisfies the requirement that a loss, arising from the future assessment of a civil penalty against Anadarko, is probable. Notwithstanding the declaratory judgment, the Company currently cannot estimate the amount of any potential civil penalty. The CWA sets forth subjective criteria, including degree of fault and history of prior violations, which significantly influence the magnitude of CWA penalty assessments. As a result of the subjective nature of CWA penalty assessments, the Company currently cannot estimate the amount of any such penalty nor determine a range of potential loss. Furthermore, neither the February 2012 settlement of Deepwater Horizon-related civil penalties (including those under the CWA) by the other nonoperating partner with the United States and five affected Gulf states (Texas, Louisiana, Mississippi, Alabama, and Florida) nor the January 2013 settlement of CWA civil and criminal penalties by the drilling contractor with the United States affects the Company’s current conclusion regarding its ability to estimate potential fines and penalties. The Company lacks insight into those settlements, retains legal counsel separate from the other parties, and was not involved in any manner with respect to those settlements. Events or factors that could assist the Company in estimating the amount of any potential civil penalty or a range of potential loss related to such penalties include (i) an assessment by the DOJ, (ii) a ruling by a court of competent jurisdiction, or (iii) the initiation of substantive settlement negotiations between the Company and the DOJ. |
Given the Company’s lack of direct operational involvement in the event, as was reconfirmed by the Louisiana District Court in September 2013 by excluding any evidence of Anadarko’s alleged culpability or fault in the Phase II trial, and the subjective criteria of the CWA, the Company believes that its exposure to CWA penalties will not materially impact the Company’s consolidated financial position, results of operations, or cash flows. |
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Natural Resource Damages This category includes future damage claims that may be made by federal and/or state natural resource trustee agencies at the completion of injury assessments and restoration planning. Natural resources generally include land, fish, water, air, wildlife, and other such resources belonging to, managed by, held in trust by, or otherwise controlled by, the federal, state, or local government. |
The NRD-assessment process is led by government agencies that act as trustees of natural resources on behalf of the public. Government agencies involved in the process include the Department of Commerce, the Department of the Interior (DOI), and the Department of Defense. These governmental departments, along with the five affected states – Alabama, Florida, Louisiana, Mississippi, and Texas – are referred to as the “Co-Trustees.” The Co-Trustees continue to conduct injury assessment and restoration planning. |
The DOJ civil lawsuit filed against BP, the Company, and others seeks unspecified damages for injury to federal natural resources. Not all of the Co-Trustees were a party to this lawsuit; however, during the second quarter of 2011, the states of Alabama and Louisiana each filed NRD-related state law claims against the Company in the Louisiana District Court. In November 2011, the Louisiana District Court dismissed all the NRD-related state law claims asserted against the Company by the states of Alabama and Louisiana. In April 2013, the states of Texas and Mississippi filed NRD-related state law claims against the Company, which were consolidated in the federal Multidistrict Litigation (MDL) action before the Louisiana District Court discussed below and are stayed until further order of the Louisiana District Court. |
NRD claims are generally sought after the damage assessment and restoration planning is completed, which may take several years. Thus, the Company remains unable to reasonably estimate the magnitude of any NRD claim. The Company anticipates that BP will satisfy any NRD claim, which eliminates any potential liability to Anadarko for such costs. In the event any NRD damage claim is made directly against Anadarko, the Company is fully indemnified by BP against such claims (including guarantees by BPCNA or BP p.l.c.). |
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17. Contingencies (Continued) |
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Civil Litigation Damage Claims Numerous Deepwater Horizon event-related civil lawsuits have been filed against BP and other parties, including the Company by, among others, fishing, boating, and shrimping enterprises and industry groups; restaurants; commercial and residential property owners; certain rig workers or their families; the States of Alabama, Louisiana, Texas, and Mississippi, and several of their political subdivisions; the DOJ; environmental non-governmental organizations; and certain Mexican states. Many of the lawsuits filed assert various claims of negligence, gross negligence, and violations of several federal and state laws and regulations, including, among others, OPA; the Comprehensive Environmental Response, Compensation, and Liability Act; the Clean Air Act; the CWA; and the Endangered Species Act; or challenge existing permits for operations in the Gulf of Mexico. Generally, the plaintiffs are seeking actual damages, punitive damages, declaratory judgment, and/or injunctive relief. |
This litigation has been consolidated into a federal MDL action pending before Judge Carl Barbier in the Louisiana District Court. In March 2012, BP and the Plaintiffs’ Steering Committee entered into a tentative settlement agreement to resolve the substantial majority of economic loss and medical claims stemming from the Deepwater Horizon events, which the Louisiana District Court approved in orders issued in December 2012 and January 2013. Only OPA claims seeking economic loss damages against the Company remain. In addition, certain state and local governments have appealed, or have provided indication of a likely appeal of, the Louisiana District Court’s decision that only federal law, and not state law, applies to Deepwater Horizon event-related claims. Certain Mexican states also have appealed the dismissal of their claims against BP, the Company, and others. The Company, pursuant to the Settlement Agreement, is fully indemnified by BP against losses arising as a result of claims for damages, irrespective of whether such claims are based on federal (including OPA) or state law. |
The first phase of the trial in the MDL commenced in February 2013 (Phase I). In April 2013, all parties rested their Phase I cases. Findings of fact, post-trial briefs, and responsive briefs were submitted in July 2013. BP, BP p.l.c., the United States, state and local governments, Halliburton Energy Services, Inc. (Halliburton), and Transocean Ltd. (Transocean) participated in Phase I. Anadarko was excused from participation in Phase I. The issues tried in Phase I included the cause of the blow-out and all related events leading up to April 22, 2010, the date the Deepwater Horizon sank, as well as allocation of fault. The allocation of fault remains in the Phase I trial because Halliburton and Transocean have not settled with any of the parties and each wishes to prove to the Louisiana District Court that their respective company was not at fault. The second phase of trial began in September 2013 (Phase II) and in November 2013 the parties rested their Phase II cases. The issues tried in Phase II included spill-source control and quantification of the spill for the period from April 20, 2010, until the well was capped. The Company, BP, BP p.l.c., the United States, state and local governments, Halliburton, and Transocean participated in Phase II of the trial. Prior to commencement of Phase II, the judge entered an order excluding any evidence of Anadarko’s alleged culpability or fault during Phase II. |
Two separate class action complaints were filed in June and August 2010, in the U.S. District Court for the Southern District of New York (New York District Court) on behalf of purported purchasers of the Company’s stock between June 9, 2009, and June 12, 2010, against Anadarko and certain of its officers. The complaints allege causes of action arising pursuant to the Securities Exchange Act of 1934 for purported misstatements and omissions regarding, among other things, the Company’s liability related to the Deepwater Horizon events. The plaintiffs seek an unspecified amount of compensatory damages, including interest thereon, as well as litigation fees and costs. In November 2010, the New York District Court consolidated the two cases. In March 2012, the New York District Court granted the plaintiffs’ motion to transfer venue to the U.S. District Court for the Southern District of Texas - Houston Division (Texas District Court). In May 2012, the Texas District Court granted the defendants’ motion to transfer the consolidated action within the district to Judge Keith P. Ellison. In July 2012, the plaintiffs filed their First Amended Consolidated Class Action Complaint. The defendants filed a renewed motion to dismiss in the Texas District Court in September 2012. In July 2013, the Texas District Court dismissed the claims relating to all but one of the alleged misstatements asserted in the plaintiffs’ complaint. The Texas District Court gave the plaintiffs 30 days to amend the complaint to attempt to rehabilitate the claims that were dismissed. The plaintiffs declined to amend the complaint. The Company filed its answer to the complaint in September 2013. The parties have not commenced discovery. |
17. Contingencies (Continued) |
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In September 2010, a purported shareholder made a demand on the Company’s Board of Directors (the Board) to investigate allegations of breaches of duty by members of management related to the Deepwater Horizon events. The Board received a supplemental demand letter from the shareholder in March 2012. The Board considered each of the demand letters in January 2011 and April 2012 and determined that it would not be in the best interest of the Company to pursue the issues alleged in the demand letters. In May 2013, a shareholder derivative petition was filed in the 215th District Court of Harris County, Texas by the shareholder against Anadarko (as a nominal defendant) and certain current and former directors and officers. The petition alleges breach of fiduciary duties, unjust enrichment, abuse of control, and gross mismanagement in connection with the Deepwater Horizon events. The plaintiff seeks an unspecified amount of damages, certain changes to the Company’s governance and internal procedures, disgorgement of profits, and reimbursement of litigation fees and costs. By agreement of the parties, this case has been stayed. |
Given the various stages of these matters, the Company currently cannot assess the probability of losses, or reasonably estimate a range of any potential losses, related to ongoing proceedings. The Company intends to vigorously defend itself, its officers, and its directors in each of these matters, and will avail itself of the indemnities provided by BP against civil damages. |
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Remaining Liability Outlook It is possible that the Company may recognize additional Deepwater Horizon event-related liabilities for potential fines and penalties, shareholder claims, and certain other claims not covered by the indemnification provisions of the Settlement Agreement; however, the Company does not believe that any potential liability attributable to the foregoing items, individually or in the aggregate, will have a material impact on the Company’s consolidated financial position, results of operations, or cash flows. This assessment takes into account certain qualitative factors, including the subjective and fault-based nature of CWA penalties, the Company’s indemnification by BP against certain damage claims as discussed above, BP’s creditworthiness, the merits of the shareholder claims, and directors’ and officers’ insurance coverage related to outstanding shareholder claims. |
The Company will continue to monitor the MDL and other legal proceedings discussed above as well as federal investigations related to the Deepwater Horizon events. The Company cannot predict the nature of evidence that may be discovered during the course of legal proceedings or the timing of completion of any legal proceedings. |
Although the Company is fully indemnified by BP against OPA damage claims, NRD claims and assessment costs, and certain other potential liabilities, the Company may be required to recognize a liability for these amounts in advance of or in connection with recognizing a receivable from BP for the related indemnity payment. In all circumstances, however, the Company expects that any additional indemnified liability that may be recognized by the Company will be subsequently recovered from BP itself or through the guarantees of BPCNA or BP p.l.c. |
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17. Contingencies (Continued) |
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Other Litigation In December 2008, Anadarko sold its interest in the Peregrino heavy-oil field offshore Brazil. The Company is currently litigating a dispute with the Brazilian tax authorities regarding the tax rate applicable to the transaction. Currently, $144 million, the amount of tax originally in dispute, resides in a judicially controlled Brazilian bank account pending final resolution of the matter and is included in other assets on the Company’s Consolidated Balance Sheet at December 31, 2013. |
In July 2009, the lower judicial court ruled in favor of the Brazilian tax authorities. The Company appealed this decision to the Brazilian Regional courts, which upheld the lower court’s ruling in favor of the Brazilian tax authorities in December 2011. In April 2012, the Company filed simultaneous appeals to the Brazilian Superior Court and the Brazilian Supreme Court. The Brazilian Superior Court and the Brazilian Supreme Court have agreed to hear the case and the Company currently is awaiting the setting of initial hearing dates. In August 2013, following a determination by an administrative court in a related matter that the amount of tax in dispute was not calculated properly, the Company filed a petition requesting the withdrawal of a portion of the judicial deposit to the extent it exceeds $47 million, the amount of tax currently in dispute, and any interest on such amount. |
The Company believes that it will more likely than not prevail in Brazilian courts. Therefore, no tax liability has been recorded for Peregrino divestiture-related litigation at December 31, 2013. The Company continues to vigorously defend itself in Brazilian courts. |
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Algeria Exceptional Profits Tax Settlement In 2006, the Algerian parliament approved legislation establishing an exceptional profits tax on foreign companies’ Algerian oil production and issued regulations implementing this legislation. The Company disagreed with Sonatrach’s collection of the exceptional profits tax and initiated arbitration against Sonatrach in 2009. In March 2012, the Company and Sonatrach resolved this dispute and the resolution provided for the transfer of $1.7 billion of crude oil to the Company over a 12-month period ending in mid-2013. |
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Guarantees and Indemnifications The Company provides certain indemnifications in relation to asset dispositions. These indemnifications typically relate to disputes, litigation, or tax matters existing at the date of disposition. In 2013, as a result of a bankruptcy declaration by a third party, the DOI ordered Anadarko to decommission offshore wells and production facilities previously sold to the third party and not related to the Company’s current operations. During 2013, the Company recognized a decommissioning charge of $117 million, reported in other (income) expense, net in the Consolidated Statement of Income. Anadarko expects to complete decommissioning of the production facilities in 2014 and the wells in 2015. Decommissioning obligations of $21 million were included in accrued expenses and $85 million were included in other long-term liabilities on the Consolidated Balance Sheet at December 31, 2013. Actual costs may vary from this estimate; however, the Company does not believe that any such change will materially impact its consolidated financial position, results of operations, or cash flows. |
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17. Contingencies (Continued) |
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Environmental Matters Anadarko is also subject to various environmental-remediation and reclamation obligations arising from federal, state, and local laws and regulations. The Company’s Consolidated Balance Sheets include liabilities of $126 million at December 31, 2013, and $81 million at December 31, 2012, for remediation and reclamation obligations. The current portion of these amounts was included in accounts payable and the long-term portion of these amounts was included in other long-term liabilities—other on the Company’s Consolidated Balance Sheets. The Company continually monitors remediation and reclamation processes and adjusts its liability for these obligations as necessary. |
The Company was previously notified by the California Department of Toxic Substances Control (DTSC) that, as a result of a prior acquisition, it is one of 27 potentially responsible parties with respect to a landfill located in West Covina, California. While no agreement is in place with the DTSC, the Company has recorded a $50 million restoration liability with respect to the site, representing the current estimated obligation, which is included in the Company’s liability balance at December 31, 2013. The Company could incur additional obligations if any of the potentially responsible parties are ultimately not able to fund their allocated share of the costs or if the DTSC requires a more costly remedial approach. It is possible that the Company’s current estimate of probable loss related to this matter could change, perhaps materially, in the future. |