Oil Extraction Spin-offs: Take Two

I mentioned the other day that I was adding another take to my thought that it was good thing that ConocoPhillips and Marathon were spinning off their oil exploration and extraction businesses.  I still think that it could be a good thing, but I also think it may not be so great, especially if aggressive pursuit of company executives for environmental crimes (rather than more rigorous oversight of safety processes) is going to be the model moving forward.  So, here's an excerpt from a rough draft of my paper that argues reducing mens rea requirements in environmental crimes is not likely to be effective in reducing the risk of environmental harm (the paper will also suggest a few alternatives that may be more effective):

[D]iluting mens rea requirements [for executives companies responsible for environmental disasters] could have the effect of increasing risk taking by those charged with oversight of the very activities that the laws were designed to make safer.[1]  The risk is that those who are likely to be risk averse to criminal sanctions will leave the field all together (to work in other less risky arenas), while leaving those who are undeterred by the risk of jail time in positions of power (and potentially greater positions of power).[2]  In fact, there may be some indication this is happening right now.

In July 2011, ConocoPhillips announced that it would be splitting its company into two separate entities, one that explores for and produces oil, and another that refines the oil.[3]  This followed the January 2011 move by Marathon Oil to the same thing.  Marathon’s spin-off, Marathon Petroleum Corp., which is the refining company, starting trading July 1, 2011. [4]  On the one hand, separating these operations into separate companies could be a good thing. The executives of these entities will now have a more focused business model, and the concerns of each part of the business are now less likely to compete with one another. Further, the companies may be better focused on their own expertise.

These companies are splitting to isolate the risk of the extraction process; at least, that is part of the equation. On the one hand, splitting the entity in two may be reasonable and sensible business planning and risk management.  By spinning off the exploration company, the resulting refining company is giving up the opportunity to participate in the upside of the spun off company, and is eliminating the related risk. If the entity’s decision makers believe that is best, there is little reason to question the decision on that basis.[5]

An inherent risk of this division, though, is that the resulting exploration-and-extraction entity will take along with it executives and other leaders who are not appropriately risk averse, and thus increase the likelihood of disaster.[6] This is not because executives or employees who are in the exploration and extraction industry are generally unlawful or poor risk assessors. But, as the risk of punishment increase (and inappropriately aggressive pursuit of criminal penalties increase) in the industry, there is a parallel risk that executives who are appropriately mindful of the law will be inclined to work in industries where an executive’s actions more likely control how and whether an executive will face criminal sanctions.[7] 

--JPF

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[1] Cf. Craig S. Lerner & Moin A. Yahya, ‘Left Behind’ After Sarbanes-Oxley, Regulation, at 44, 47 (Fall 2007)  (stating that strict liability penalties could increase the number of executives for whom “criminal laws are just another cost of doing business”).

[2] See id.

[3] See Chris Kahn, Oil Giant ConocoPhillips To Split into 2 Companies (“This is so positive for [ConocoPhillips]. Everyone should stick to one business.”) (quoting Oppenheimer & Co. analyst Fadel Gheit).

[4] Id.

[5] See, e.g., Stephen M. Bainbridge, Dodd-Frank: Quack Federal Corporate Governance Round II, 95 Minn. L. Rev. 1779, 1812 (2011) (“There is no more basic question in corporate governance than ‘who decides.’ . . . Corporate law generally adopts what I have called ‘director primacy.’ It assigns decisionmaking to the board of directors or the managers to whom the board has properly delegated authority.” (footnotes omitted)).

[6] See Lerner & Yahya, supra note 1, at 47  

[7] See id.