Chinese Court Accepts $78M Oil Spill-Related Lawsuit against ConocoPhillips

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Bohai Bay
A labourer walks toward the Jidong Nanpu oilfield in Bohai Bay of north China's Hebei province. A Chinese court accepted a lawsuit that claims leaks from offshore oil-production platforms operated by ConocoPhillips on Friday, suggesting a change in how governments are dealing with energy companies.

A Chinese court is allowing a $78 million lawsuit brought against ConocoPhillips (NYSE:COP) to move forward, after having dismissed a similar lawsuit in 2011, the state-run Xinhua News Agency reported Friday. The legal action was brought by a group of local aquaculture farmers who believe their sea cucumbers were killed off by two June oil spills in the Bohai Sea. ConocoPhillips had previously acknowledged the leaks.

The maritime court in the northern coastal city of Tianjin took up the case on Friday. It pits a group of 29 aqua-farmers against ConocoPhillips China and the China National Offshore Oil Corporation (CNOOC), which operate a joint offshore drilling venture. ConocoPhillips China is a wholly-owned subsidiary of the American oil giant.

Approximately 700 barrels of oil and some 2,500 barrels of mineral oil-based drilling mud were released into Bohai Bay during the June incidents. The industrial accidents that led to the leaks occurred at two separate platforms, according to company statements. One platform has been repaired, while the other well is permanently plugged and abandoned, ConocoPhilips said.

ConocoPhillips has a 49 percent stake in the field and the remaining 51 percent stake is held by CNOOC Ltd.

ConocoPhillips deeply regrets these incidents and apologizes for the impact that the incidents have had on the Chinese people and the environment, James Mulva, chairman and chief executive officer at ConocoPhillips, said in a September statement. In that same statement, he noted the establishment of a fund designed to address the company's responsibilities in the incident.

The Peng Lai fields where the leaks occurred produced about 114,500 barrels of oil a day in 2010, Conoco data indicates. That is a small percentage of China's total production, which exceeded 4.1 million barrels a day in the same year, according to IHS World Markets Energy.

The Change

The legal developments set a significant precedent for China, and suggest that countries around the world are stepping up oversight of oil companies.

Energy has always been an important pressure point for countries because leaderships want to be perceived as responding in a way that the population thinks is appropriate, Jim Smith, partner and environmental attorney at the Houston-based law firm Porter Hedges LLP, told the International Business Times.

Also on Friday, Brazil's oil regulator fined Chevron Corp. (CVX) for the third time for not properly managing an offshore oil field that leaked about 3,000 barrels of oil in November, the Agencia Nacional do Petroleo, Gas Natural e Biocombustiveis, known as ANP, said on its website.

ANP did not say how much it planned to fine Chevron, but it can fine the oil company up to 50 million reais ($26.8 million) for each citation.

And the news from Brazil followed developments earlier in the week in the U.S., where prosecutors said they were preparing what would be the first criminal charges against BP employees for the massive spill that sullied the Gulf Coast in 2010. Officially known as the 2010 Deepwater Horizon incident, that spill was caused by an offshore well blowout which killed 11 workers. It was the worst offshore oil spill in U.S. history, according to the Wall Street Journal.

The company is facing what could amount to $36.6 million in administrative fines, and volunteered to establish a $20 billion claims fund for the Deepwater Horizon spill.

Terming these prosecutorial actions as quasi-legal procedures, Smith said he saw them as a new tactic as opposed to a new strategy in how governments respond following major oil spills.

In the past, it was more like nationalization or kicking certain energy companies out of a country, he added.

Political Risk

Smith said energy companies are very sophisticated about the notion of political risk. In making their investment decisions, assigning cost of capital and discount rates, energy companies have and will continue to include significant political risk in places where they are doing business that have those political risks.

Energy companies will continue to use the very information resources that are causing governments to be more proactive to tell their story about the positive effects these companies have on the countries, according to Smith.

As the populations grow ground up in their economic well-being, the stories that the energy companies have to tell will be better received, Smith said.

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