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Edgar v. Anadarko Petroleum Corp.

United States District Court, S.D. Texas, Houston Division

June 19, 2018

ROBERT EDGAR, Individually and on behalf of all others similarly situated, Plaintiff,



         The plaintiffs, a class of investors who purchased or acquired Anadarko common stock between February 8, 2016 and May 2, 2017, brought this securities class action against the defendants, Anadarko Petroleum Corporation and several of its executives.[1] (Docket Entry No. 35). The plaintiffs allege violations of § 10(b) of the Exchange Act and Rule 10b-5 against Anadarko and violations of § 20(a) of the Exchange Act against the executives. Id. at ¶¶ 38, 41. The defendants moved to dismiss, the plaintiffs responded, and the defendants replied. (Docket Entry Nos. 36, 46, 47). The parties appeared at a hearing on June 15 and presented oral argument.

         Based on the law, the record, and the parties' arguments, the motion to dismiss is granted, without prejudice and with leave to amend by August 3, 2018. The reasons for this ruling are explained below.

         I. Background

         I. The Factual Allegations

         Anadarko is a publicly traded oil and gas exploration and production company headquartered in the Woodlands. (Docket Entry No. 35 at ¶ 27). Anadarko focuses its operations on the Gulf of Mexico, the Delaware Basin in Texas, and the Denver-Julesburg Basin in Colorado. Id. at ¶ 27. Approximately one quarter of Anadarko's employees work out of its Colorado offices. Id. at ¶ 3. The plaintiffs allege that Anadarko's disregard for safety regulations led to the endangerment and death of Colorado residents. Id. at ¶¶ 1, 21. The plaintiffs contend that this, and Anadarko's failure to be honest, harmed investors and violated securities laws. The plaintiffs allege the following facts.

         In 2006, Anadarko acquired the oil and gas company, Kerr-McGee Corporation. Id. at ¶ 58. This, combined with Anadarko's acquisition of Western Gas Partners, LP, substantially increased Anadarko's oil and gas interests in the Denver-Julesburg Basin. Id. at ¶ 59. By the end of 2006, this region accounted for 38% of Anadarko's proved onshore oil and gas reserves in the lower 48 states. Id.

         Anadarko accrued $9 billion in environmental fines and settlements between 2011 and 2014. Id. at ¶ 4. The liabilities came primarily from the Macondo well explosion and the Kerr-McGee acquisition. Id. Anadarko paid what was the largest environmental settlement in United States history for the environmental damage Kerr-McGee had caused. Id. If not for these fines and settlements, Anadarko would have enjoyed multi-billion dollar profits between 2011 to 2013. Id. at ¶ 5. Instead, Anadarko lost one billion dollars. Id.

         On October 21, 2013, Anadarko and its closest competitor engaged in a land swap in the Wattenberg field, the most actively drilled part of the Denver-Julesburg Basin, located just north of Denver. Id. at ¶¶ 61, 77. Anadarko received about 1, 500 existing wells in the swap. Id. at ¶¶ 77-80. The land surrounding the wells was primarily rural when the wells were drilled. As Denver expanded, the surrounding land became more residential. Id. at ¶ 80. The wells, most of which were drilled 30 to 40 years ago, were not in compliance with Colorado's standards. Id. at ¶ 84. They lacked methane emission controls to prevent gas from being vented into residential airspace. Id. Other issues included outdated piping and oil storage tanks and deteriorated cellars and cement pits intended to prevent liquids from going into the ground or groundwater. Id. Anadarko's top management knew about these problems within six months after the land swap and were regularly presented with an up-to-date list of wells determined to be problematic by Anadarko's Colorado health, safety, and environment division. Id. at ¶¶ 85-86.

         At the end of 2015, Anadarko operated approximately 5, 000 vertical wells and 1, 000 horizontal wells in the Wattenberg field.[2] Id. at ¶¶ 64-65. Drilling in the Wattenberg field accounted for 30.1% of Anadarko's worldwide oil production and 20.7% of its worldwide natural gas production. Id. at ¶ 65.

         Anadarko assured investors that it had turned over a new leaf in regulation compliance. Id. at ¶ 6. Anadarko told investors that it had the ability to monitor all the wells in the Colorado region and could rapidly identify and address safety issues. Id. After making these assurances, Anadarko discovered that several hundred wells acquired in the land swap were safety and environmental hazards and would require remediation. Id. at ¶ 7. Anadarko authorized tens of millions of dollars for remediation. Id.

         Oil prices dropped from $95.83 a barrel on September 1, 2014 to $54.56 a barrel on January 1, 2015. Id. at ¶ 73. Anadarko reversed course on its commitment and slashed its remediation budget before any substantial remediation had been performed. Id. at ¶ 9. Senior Colorado Anadarko executives were aware of the safety issues, but they acted to support Anadarko's bottom line by laying off 20% to 30% of the workforce in March 2016. Id. at ¶¶ 10-11. Included in the layoffs were 30% of the field operations personnel who were responsible for well remediation, as well as 30% of the company's health, safety, and environmental division. Id. at ¶ 95. There were not enough employees to operate the Denver-Julesburg Basin safely. Id. at ¶ 12.

         In late 2016 and early 2017, Anadarko “ramped up” its activity in Colorado. Id. at ¶ 97. In August 2016, Anadarko had one well-drilling rig in Colorado. Id. By November 2016, it had five. Id. Despite this increased drilling, Anadarko hired no additional employees. Id. One former employee brought up the inadequate staffing with John Christiansen, Anadarko's vice-president of corporate communications, approximately 12 times between late 2016 and March 2017. Id. at ¶ 99. She also brought her concerns to Craig Walters, vice-president of the Denver-Julesburg Basin; Shane Fross, an engineer; and Paul Schneider, the health, safety, and environment manager for the Denver-Julesburg Basin. Id. at ¶ 99. When another former employee found out that many of Anadarko's contractors did not comply with safety regulations, he sent an email to the contractors and “everyone and their brother” within Anadarko, but he received no responses. Id. at ¶ 101. Anadarko continued to hire the infringing contractors. Id.

         Anadarko determined that a 28, 000-gallon oil spill in January 2017 was caused by the lack of trained personnel. Id. at ¶ 12. At an internal meeting to prepare for a hearing before the Colorado Oil and Gas Conservation Commission to discuss the spill, Anadarko officials noted that the cause of the accident was a lack of “skilled staff.” Id. at ¶ 103. Anadarko executives decided not to inform Colorado regulators of the cause of the spill. Id. Fross instructed meeting attendants not to admit that cause to during the Commission hearing. Id. at ¶ 102. When a senior public-relations employee voiced concerns about Anadarko's lack of skilled staff and safety practices, Christiansen told her to “keep quiet” and that her job was to “shovel shit and clean up the messes that [Anadarko's employees] make.” Id. at ¶ 104.

         Anadarko used its remediation budget to support production and avoid fines. Id. at ¶ 105. Anadarko chose the wells to remediate based on the amount of oil they would produce or when failing to remediate would affect Anadarko's drilling schedule. Id. at ¶ 106. When Anadarko drilled new horizontal wells, it would:

[C]ross-reference the location against the location of the lease-maintaining assets. Anadarko would then perform mechanical integrity tests on [an] older well to ensure they could withstand the pressure of the nearby horizontal frack. If the old well did not pass these tests, Anadarko would plug and abandon the well to install a new horizontal well. In that way, Anadarko used the remediation budget to ensure “the machine of the horizontal drilling program did not get slowed down, ” rather than to address the actual health and safety risks of the wells.

Id. at ¶ 107. Only when it faced potential fines for methane emissions did Anadarko use funds in the remediation budget to remediate the high-emitting wells. Id. at ¶¶ 108-09.

         Safety risks and proximity to residential areas or schools were not factors considered in remediation. Id. at ¶ 105. According to one former employee, well remediation had “nothing to do with the probability of the wells, or flowlines, creating environmental or safety hazards. The company prioritized either the decommissioning of a well, the upgrade or a repair of the well, based on where the drilling schedule was.” Id. at ¶ 110. Colorado-based upper executives met several times to talk about how to prioritize using remediation funds to support drilling rather than to address environmental and safety hazards. Id. at ¶ 111. At group leadership meetings, Korby Bracken, the director of environment, regularly raised health and safety concerns. Id. at ¶ 113. His concerns were pushed aside. Id. at ¶ 113.

         On April 17, 2017, a home in Firestone, Colorado exploded, killing two people and critically injuring another. Id. at ¶ 14. The home was 200 feet away from the Anadarko-operated Firestone Well. Id. at ¶ 127. The well was one of the several hundred acquired in the land swap but was never remediated. Id. at ¶ 15. On April 26, 2017, Anadarko announced that the Firestone Well may have been involved in the explosion, and that the company would be shutting down 3, 000 similar wells in Colorado. Id. at ¶ 16. Anadarko's stock price fell 4.7% the next day. Id. at ¶ 17.

         Anadarko had turned on the Firestone Well, in January 2017 to maintain the lease. Id. at ¶ 121. The well did not emit methane when it was turned on because it did not have a compressor to dispose methane. Id. at ¶¶ 122. In early April 2017, Anadarko had sent crews to the Firestone Well. Id. at ¶ 123. Though the crews could not explain why the well was not emitting methane, Anadarko did not shut off the well. Id. Because Anadarko was short-staffed, it did not check to make sure the Firestone Well's flowlines were not leaking.[3] Id. at ¶ 125. It did not know about the existence of the leaking line that caused the explosion. Id.

         On May 2, 2017, the Firestone-Frederick Fire Department confirmed the link between Anadarko's well and the Firestone explosion. Id. at ¶ 18. A return line that was connected to the Firestone Well leaked methane into the home's drains, which exploded when a hot-water heater was being installed. Id. at ¶ 129. Anadarko violated Colorado Oil and Gas Conservation Commission Rule 1103 by abandoning the flowline without disconnecting and sealing it. Id. at ¶¶ 18, 129. On May 3, 2017, Anadarko's stock price fell by 7.7%. Id. at ¶ 19. On June 30, 2017, Anadarko announced that it had cut and sealed more than 2, 400 abandoned flowlines located within 1, 000 feet of buildings, each of which violated Rule 1103. Id. at ¶ 138. Anadarko additionally disconnected, plugged, and abandoned 3, 600 return lines. Id.

         Anadarko publicly expressed sympathy in a published statement attributed to its Robert Walker, Anadarko's chief executive officer, but its executives admitted internally that they were not worried about the explosion. Id. at ¶¶ 20, 132. At the next Anadarko town hall meeting, the Firestone explosion came up only when Walker mentioned that Anadarko was “not too concerned” about it. Id. at ¶ 133.

         On May 24, 2017, a new methane cloud was discovered west of the Firestone explosion site, with even higher levels of methane. Id. at ¶ 136. The following day, a fire at an Anadarko oil container in Weld County, Colorado killed one worker and injured three others. Id. at ¶ 137.

         ii. The False Statement Allegations

         In February 2016 and 2017, Anadarko published its 2016 and 2017 Health, Safety, and Environment Fact Sheets. Id. at ¶ 140, 153. The documents stated: “[w]e work to ensure that all of our activities are conducted to meet or surpass applicable health, safety, and environmental laws, regulations, and international standards.” Id. The 2016 Fact Sheet additionally stated: “our [health, safety, and environment] team works seamlessly with operations and facilities to ensure compliance with all applicable laws and regulations.” Id. at ¶ 140. The plaintiffs argue that these statements were false because: “(a) Anadarko intentionally violated Colorado law and regulations as a matter of course, including Rule 1103; and (b) Anadarko knew that hundreds of the wells it had acquired in the Land Swap did not comply with a variety of Colorado laws and regulations, including those violations leading to the Firestone Well explosion.” Id. at ¶ 141, 154.

         On February 16, 2016, Anadarko filed its 2015 Form 10-K, which Walker and Robert Gwin, Anadarko's executive vice-president of finance and chief financial officer, signed. Id. at ¶ 143. The 2015 Form 10-K stated:

Anadarko's business operations are subject to numerous international, provincial, federal, regional, state, tribal, local, and foreign environmental and occupational health and safety laws and regulations. . . .
Many states where the Company operates also have, or are developing, similar environmental laws and regulations governing many of these same types of activities. In addition, many foreign countries where the Company is conducting business also have, or may be developing, regulatory initiatives or analogous controls that regulate Anadarko's environmental-related activities. While the legal requirements imposed under state or foreign law may be similar in form to U.S. laws and regulations, in some cases the actual implementation of these requirements may impose additional, or more stringent, conditions or controls that can significantly alter or delay the permitting, development or expansion of a project or substantially increase the cost of doing business. In addition, environmental laws and regulations, including new or amended legal requirements that may arise in the future to address potential environmental concerns such as air and water impacts, are expected to continue to have an increasing impact on the Company's operations. . . .
The Company believes that it is in material compliance with existing environmental and occupational health and safety regulations. Further, the Company believes that the cost of maintaining compliance with these existing laws and regulations will not have a material adverse effect on its business, financial condition, results of operations, or cash flows, but new or more stringently applied existing laws and regulations could increase the cost of doing business, and such increases could be material.

Id. at ¶¶ 143-44. The plaintiffs allege that the statement, “the Company believes that it is in material compliance with existing environmental and occupational health and safety regulations, ” was false because: “(a) Anadarko intentionally violated Colorado law and regulations as a matter of course, including Rule 1103; and (b) Anadarko knew that hundreds of the wells it had acquired in the Land Swap did not comply with a variety of Colorado laws and regulations.” Id. at ¶ 145.

         On August 12, 2016, Anadarko filed a Registration Statement on Form S-3, which incorporated the 2015 Form 10-K by reference. Id. at ¶ 152. On September 12, 2016, Anadarko sold 40, 537, 500 shares at an offering price of 54.50 per share, its largest stock offering by dollar amount. Id. The offering raised net proceeds of $2.2 billion. Id.

         Anadarko published a Wattenberg Integrated Operations Center Factsheet on its website. The Factsheet stated that the Operations Center “[p]rovides real-time remote-monitoring capabilities for 6, 800 wells and 3, 700 tank facilities, ” and that it “applies state of the art oil, natural gas, and water management to Anadarko tank batteries, facilities and pipeline infrastructure.” Id. at ¶ 146. It also stated that Anadarko “[i]mmediately pinpoints issues associated with field alerts and alarms.” Id. at ¶ 146. The plaintiffs allege that these statements were false because: “(a) a large proportion of Anadarko's facilities and pipeline infrastructure was not state of the art, but old and decaying; and (b) the Operations Center could not pinpoint issues or provide real-time monitoring consistently because Anadarko did not know where many of its lines in Colorado were located.” Id. at ¶ 147.

         In March 2016 and 2017, Anadarko published its Health, Safety, Environmental and Sustainability Overviews for 2015 and 2016 on its website. Id. at ¶¶ 148, 156. The reports, which Walker and David McBride, Anadarko's vice-president of global health, safety, and environment signed, stated:

Oil and natural gas upstream and midstream operations are subject to laws and regulations in every country in which Anadarko operates. Anadarko operates its global onshore and offshore operations in compliance with the applicable laws and associated regulations. . . .
Anadarko is committed to preventing and minimizing the impacts of spills [at all operations/everywhere it operates]. This commitment is demonstrated by the implementation of best management practices, engineering design, mechanical integrity, product assessment and training. Anadarko promotes a culture that allows for employee involvement in maintaining a safe work environment while recognizing that environmental incidents are preventable. The teams strive for ZERO incidents. Spills can be prevented by designing and operating equipment and training staff to avoid releases.

Id. at ¶¶ 148-50, 156-58. The plaintiffs challenge two statements: (1) “Anadarko operates its global onshore and offshore operations in compliance with the applicable laws and associated regulations”; and (2) “[t]he teams strive for ZERO incidents. We believe spills can be prevented by designing and operating equipment and training staff to avoid releases.” The plaintiffs allege that the statements were false because: “(a) Anadarko intentionally violated Colorado law and regulations as a matter of course, including Rule 1103; and (b) Anadarko knew that hundreds of the wells it had acquired in the Land Swap were not in compliance with a variety of Colorado laws and regulations.” Id. at ¶¶ 151, 159. The plaintiffs also allege that Anadarko knew that it did not have enough employees to prevent Colorado spills and that instead of hiring employees, it allowed spills when the costs of clean up were cheaper than remediation. Id.

         iii. The Legal Allegations

         The plaintiffs assert that Anadarko violated Section 10(b) of the Exchange Act, 15 U.S.C. § 78j(b) and the Security Exchange Commission's Rule 10b-5. Id. at ¶ 170. The plaintiffs assert that the executive committee defendants, Bradley Holly, Craig Walters, and John Christiansen, violated Section 20(a) of the Exchange Act, 15 U.S.C. § 78t(a). Id. at ¶ 182.

         III. The Legal Standards

         A. ...

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