Amplify Energy Cashed Out Cleanup Fund While Racking Up Violations

Years before Amplify Energy made headlines for its ruptured pipeline that spewed oil into Southern California ocean waters in early October, the company’s owners were successfully fighting in court to change its obligation to maintain federally mandated funds for plugging and abandoning offshore oil and gas wells and equipment.

Capital & Main reviewed records that show the company cashed out funds required by the government so that taxpayers don’t foot the bill for cleaning up these operations, reducing it from $90 million to just $300,000. Instead, it swapped out the cash with surety bonds, which some experts say are a less preferred form of financial assurance when it comes to offshore decommissioning obligations.
 

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“I’d say restricted cash is about as secure as things get so [it] is preferable to a surety bond,” explained Rob Schuwerk, executive director of the Carbon Tracker Initiative, a think tank that analyzes the financial impact of the energy transition.

Amplify was allowed to do this due to lax regulations that don’t require companies to keep enough reserves on hand. Companies can keep cash in a restricted trust or post bonds for cleanup costs, but the total amount currently pledged is woefully inadequate; out of upwards of $50 billion in potential liabilities for plugging and abandoning offshore wells in U.S. waters, only about $3.47 billion has been pledged in total, according to the Carbon Tracker Initiative.

Federal regulators estimate the cost for decommissioning Amplify’s three offshore platforms, as well as the nearly 18-mile San Pedro Bay pipeline carrying oil from one platform to a processing facility at the Port of Long Beach and other infrastructure and equipment, to be about $215.1 million. By comparison, Amplify holds only $161.3 million in surety bonds.
 

In the weeks following the devastating oil spill, some questioned whether profit-maximizing incentives could have resulted in efforts to cut corners that worsened the impact of the spill.

 
Amplify’s focus on reducing decommissioning costs through lawsuits, and later through lobbying, is par for the course for its hedge fund owners, according to industry experts and public interest advocates.

In the weeks following the devastating spill, some questioned whether profit-maximizing incentives, coupled with inadequate federal oversight, could have resulted in efforts to cut corners that worsened the impact of the spill, or whether they’ll have an effect on how the company deals with its costly aftermath.

The U.S. Coast Guard, which is working with Amplify in response to the environmental fallout, is investigating evidence suggesting a cargo ship’s anchor struck the pipeline in January. The company’s divers found that a 4,000 foot section of the pipeline had been dragged more than 100 feet from where it was supposed to be, and that it had a 13-inch split running parallel to the pipe.

Other investigating agencies include the federal Pipeline and Hazardous Materials Safety Administration, which issued a corrective action order requiring the company to perform a root cause analysis of the failure.

The U.S. House of Representatives’ Committee on Oversight and Reform has also requested reports detailing Amplify Energy’s regulatory history. One of the committee’s members, Rep. Katie Porter (D-Irvine), said at a congressional subcommittee hearing that the company received $36.5 million in federal subsidies since 2016.

Even as the Coast Guard estimated the spill to have been around 25,000 gallons — much lower than initial estimates — the damage appears extensive, including reports of dozens of dead fish and birds as well as two sea lions and one dolphin, according to the Oil Wildlife Care Network.

 
Multiple Enforcement Violations: One Rig Was “a Mess”

The Bureau of Safety and Environmental Enforcement, which oversees safety on offshore operations, has issued more than 110 enforcement violations since 2010 to the company’s Beta subsidiary, which operates Houston-based Amplify’s Southern California activities. The regulator offers little detail for these violations, but they indicate a company that may be scrimping on safety.

An inspection conducted last year stands out. It says one rig was “a mess,” noting oil on the deck, on the stairs, on handrails and on the blowout preventer, and ropes or lines blocking exits and clogging the deck, with “no housekeeping.”

A more recent violation, from just two days before the spill was first reported, describes that operations on a rig “were not performed in a safe and workmanlike manner.”

The San Pedro Bay pipeline traverses an “ecologically unusually sensitive area,” subjecting it to additional PHMSA regulations. Yet as recently as last year, the company asked BSEE whether it could reduce the frequency of internal inspections for three pipelines from every two years to four.
 

A 2016 inspection report found that part of the concrete-coated San Pedro Bay pipeline had already been displaced about 150 feet, something Amplify Energy had known about since 2010.

 
BSEE, which oversees pipeline safety in partnership with several other agencies, granted that request in part. Bill Caram, executive director of the Pipeline Safety Trust, questioned both the request from the company and approval by regulators.

“Requesting a reduction of inspection frequency, whether it’s for the line that leaked or adjacent lines, on aging infrastructure in an ecologically sensitive and treasured place such as our Pacific Coast is a terribly misguided action,” said Caram.

A spokesperson for BSEE didn’t acknowledge Capital & Main’s questions about why it granted Amplify’s request for a two year exemption for internal pipeline inspections.

Other internal and external pipeline inspection reports commissioned by the company since 2010 indicated potential trouble spots.

A 2016 report found that part of the concrete-coated San Pedro Bay pipeline had already been displaced about 150 feet from where it was supposed to be, something the company had known about since 2010. It also noted a “minor gas leak” from the pipeline connecting platforms Elly and Eureka.

Two years later, another report found three spans of at least 50 feet where the San Pedro Bay pipeline was unsupported, or not lying directly on the ocean floor. More than 30 pieces of debris were found on or adjacent to the pipeline, including several “clump weights,” which are used to weigh down anchor chains and are very heavy.

Amplify did not respond to multiple emails and calls for this story.

 
Vulture Funds Consolidated Control

Through it all, the company continued bringing in hundreds of millions of dollars in annual revenue after so-called vulture funds consolidated control.

A hallmark strategy of vulture funds, a type of investment firm, is to buy distressed companies, public debt or other entities at low prices and then aggressively generate huge profits through a variety of means — including stripping their targets of assets or buying debt and pressuring debtors to meet harsh deadlines.

For the firms that have owned the Beta properties over the last 15 years, a central concern has been the obligation to maintain funds for the eventual plugging and abandonment of the wells, platforms, pipelines and other equipment. (The requirement comes from the Bureau of Ocean and Energy Management.)

When Aera Energy and Noble Energy sold the Beta assets to another company in 2009, the deal included a rule that the new owner couldn’t access $90 million in a decommissioning trust fund without the prior owners’ consent. The new owner also agreed to pay $1.25 million per quarter into the trust until 2016 so that it would reach a target value of $152 million set by regulators.

The terms were meant to shield Aera and Noble from liability, since BOEM can also approach previous owners for plugging and abandonment costs.
 

Although Amplify Energy says it holds $161.3 million in surety bonds to cover decommissioning costs, there is a risk that the insurer could refuse to pay out the full amount.

 
But the new Beta owners moved to pull millions from the trust anyway, proposing to replace them with surety bonds, a form of credit that works similar to an insurance policy. When the previous owners objected, the new owners filed for bankruptcy and sued both Aera and Noble, eventually prevailing, since the government allows the use of surety bonds.

The bankruptcy was also a way to combine 11 indebted oil and gas companies with operations spread across the country into Amplify Energy while also shedding $1.3 billion in debt.

The new company’s board of directors included partners from Fir Tree Partners and Axys Capital Management. Other vulture funds that gained a stake included Brigade Capital Management and Cross Sound Management.

Another fund, Avenue Capital Management, picked up a board seat after Amplify merged with another company, Midstates Petroleum. Positions on the board give owners a clear hand in steering the company toward profits.

By the end of 2020, the amount of cash in the decommissioning trust fund had shriveled to $300,000.

Although the company says it holds $161.3 million in surety bonds to cover decommissioning costs — still lower than the estimated $215.1 million total liability — there is a risk that the insurer could refuse to pay out the full amount. There’s also a chance that the government could revise the liability amount significantly upward.

But for the company, paying only a relatively small premium for the surety bonds is a far better deal than maintaining the decommissioning trust fund at healthy levels.
 

“When hedge funds take over a company, they take everything that isn’t nailed down, and sometimes what is nailed down. They don’t give a damn about the public impact of their profiteering.”

~ Michael Kink, executive director of the Strong Economy for All coalition

 
It’s not surprising that hedge fund owners would work so hard to access a pile of cash meant to be set aside for cleanup, says Michael Kink, a member of activist group the Hedge Clippers and executive director of the Strong Economy for All coalition. He likens Amplify’s actions to looting.

“When hedge funds take over a company, they take everything that isn’t nailed down, and sometimes what is nailed down,” Kink says. “They don’t give a damn about the public impact of their profiteering — they’re in business to make maximum return over the shortest period of time.”

Fir Tree Partners, Brigade Capital Management and Avenue Capital Management were part of a “coalition of vulture funds that hold bonds issued by Puerto Rico’s Government Development Bank,” according to the Nation.

Billionaire Marc Lasry, the owner of Avenue Capital Management and a Democratic megadonor who is also Amplify’s largest shareholder, chased a payoff for years in Puerto Rico, where pressure from hedge fund bondholders led to deep cuts to public utilities, education, pensions and other basic services on the island. Fir Tree also reaped profits from debt in Argentina and made plays in Greece.

Amplify paired its forceful legal strategy with significant lobbying in Washington, D.C. As Capital & Main previously reported, the company paid $610,000 to Capitol Hill Consulting Group for lobbying work from 2019 through the third quarter of 2020 on matters related to royalty rates and decommissioning funds.

Offshore oil drillers in federal waters more than 200 meters deep pay a royalty fee of 18.75% of their production value to the federal government, a low amount that the Government Accountability Office says has likely cost hundreds of millions in tax revenue. Yet Amplify was able to secure $31 million in royalty discounts since 2016, in part by claiming some of its wells were at the end of their productive life — even as the company claimed it was one of the largest oil producers in Southern California.

It’s less clear what changes Amplify sought regarding decommissioning rates, but the issue is clearly significant for the company; Christopher Hamm, Amplify’s current board chairman (and founder of Axys Capital Management) also leads the oil company’s decommissioning strategy.
 

Federal regulators offer little incentive for companies to decommission unproductive wells within five years — increasing the chances they will declare bankruptcy and pass on the obligation to someone else.

 
Near the end of President Obama’s term, his administration started tightening regulations and meeting with offshore oil companies to design tailored decommissioning plans. The Trump administration suspended these efforts, and last fall, BSEE and BOEM announced they were considering looser requirements for maintaining decommissioning funds.

A spokesperson for BOEM said the agency was continuing to review the rule, while a spokesperson for BSEE referred questions to BOEM. The Biden administration has offered no indication of how or whether it will update offshore decommissioning obligations.

The spill has, however, put the subject of decommissioning under a congressional microscope.

Federal regulators don’t require companies to keep funds on hand that match the total cost of decommissioning, and offer little incentive for companies to decommission unproductive wells within five years — increasing the chances they will declare bankruptcy and pass on the obligation to someone else.

Legislation proposed by two congressional representatives from California would increase inspections for offshore pipelines, require a new pipeline fee tied to decommissioning costs and introduce new rules on when decommissioned pipelines can be left in place (as most currently are).

Meanwhile, it’s not clear whether the Orange County spill will motivate Amplify to file for bankruptcy and ditch its Beta assets. It wouldn’t be the first time in recent history this has happened in California.

After an onshore pipeline ruptured in 2015 at Refugio State Beach in Santa Barbara County, releasing 142,800 gallons of crude and killing hundreds of animals, Venoco ceased production at its platform in state waters and the company declared bankruptcy.

The state took over the rig and began making payments of over a million dollars a month to Venoco to cover decommissioning costs, filing a claim for $130 million in reimbursement. But the company effectively walked away from its funding obligations after filing for bankruptcy and hasn’t repaid any of it. Other creditors, including ExxonMobil, have filed claims against the company, according to the California State Lands Commission.

Venoco shared something else with Amplify: The company was majority owned by Apollo Global Management, another vulture fund with investments in Puerto Rico bonds.

 
Ingrid Lobet contributed to this story.

Copyright 2021 Capital & Main.