Note 12—Contingencies and Commitments
A number of lawsuits involving a variety of claims
arising in the ordinary course of business
have been filed
against ConocoPhillips.
We also may be required to remove or mitigate the effects on the environment of the
placement, storage, disposal or release of certain
chemical, mineral and petroleum substances
at various active
and inactive sites.
We regularly assess the need for accounting recognition or disclosure of these
contingencies.
In the case of all known contingencies (other
than those related to income taxes), we accrue
a
liability when the loss is probable and the amount
is reasonably estimable.
If a range of amounts can be
reasonably estimated and no amount within the range
is a better estimate than any other amount,
then the low
end of the range is accrued.
We do not reduce these liabilities for potential insurance or third-party recoveries.
We accrue receivables for insurance or other third-party recoveries when applicable.
With respect to income
tax-related contingencies, we use a cumulative probability-weighted
loss accrual in cases where sustaining a
tax position is less than certain.
Based on currently available information, we believe
it is remote that future costs related to known
contingent
liability exposures will exceed current accruals by
an amount that would have a material
adverse impact on our
consolidated financial statements.
As we learn new facts concerning contingencies,
we reassess our position
both with respect to accrued liabilities
and other potential exposures.
Estimates particularly sensitive to future
changes include contingent liabilities
recorded for environmental remediation, tax and legal
matters.
Estimated future environmental remediation
costs are subject to change due to such factors
as the uncertain
magnitude of cleanup costs, the unknown time
and extent of such remedial actions that
may be required, and
the determination of our liability in proportion
to that of other responsible parties.
Estimated future costs
related to tax and legal matters are subject to
change as events evolve and as additional
information becomes
available during the administrative and litigation
processes.
Environmental
We are subject to international, federal, state and local environmental laws and regulations.
When we prepare
our consolidated financial statements, we record
accruals for environmental liabilities
based on management’s
best estimates, using all information that is
available at the time.
We measure estimates and base liabilities on
currently available facts, existing technology, and presently enacted laws and
regulations, taking into account
stakeholder and business considerations.
When measuring environmental liabilities,
we also consider our prior
experience in remediation of contaminated sites,
other companies’ cleanup experience, and data released
by
the U.S. EPA or other organizations.
We consider unasserted claims in our determination of environmental
liabilities, and we accrue them in the period they are
both probable and reasonably estimable.
Although liability of those potentially responsible
for environmental remediation costs is generally
joint and
several for federal sites and frequently so for other
sites, we are usually only one of many companies
cited at a
particular site.
Due to the joint and several liabilities, we could
be responsible for all cleanup costs related
to
any site at which we have been designated as a
potentially responsible party.
We have been successful to date
in sharing cleanup costs with other financially
sound companies.
Many of the sites at which we are potentially
responsible are still under investigation by the EPA or the agency concerned.
Prior to actual cleanup, those
potentially responsible normally assess the
site conditions, apportion responsibility and determine
the
appropriate remediation.
In some instances, we may have no liability
or may attain a settlement of liability.
Where it appears that other potentially responsible
parties may be financially unable to bear their
proportional
share, we consider this inability in estimating
our potential liability, and we adjust our accruals accordingly.
As a result of various acquisitions in the past,
we assumed certain environmental obligations.
Some of these
environmental obligations are mitigated by indemnifications
made by others for our benefit, and some of the
indemnifications are subject to dollar limits
and time limits.
We are currently participating in environmental assessments and cleanups at numerous
federal Superfund and
comparable state and international sites.
After an assessment of environmental exposures
for cleanup and
other costs, we make accruals on an undiscounted
basis (except those acquired in a purchase
business
combination, which we record on a discounted basis)
for planned investigation and remediation activities
for
sites where it is probable future costs will be incurred
and these costs can be reasonably estimated.
We have
not reduced these accruals for possible insurance recoveries.
At June 30, 2020 and December 31, 2019, our balance
sheet included a total environmental accrual
of
$
171
million for remediation activities
in the U.S. and Canada.
We expect to incur a substantial amount of
these expenditures within the next
30 years
.
In the future, we may be involved in additional
environmental
assessments, cleanups and proceedings.
Legal Proceedings
We are subject to various lawsuits and claims including but not limited to matters
involving oil and gas royalty
and severance tax payments, gas measurement and
valuation methods, contract disputes, environmental
damages, climate change, personal injury, and property damage.
Our primary exposures for such matters
relate to alleged royalty and tax underpayments
on certain federal, state and privately owned
properties and
claims of alleged environmental contamination
from historic operations.
We will continue to defend ourselves
vigorously in these matters.
Our legal organization applies its knowledge, experience
and professional judgment to the specific
characteristics of our cases, employing a litigation
management process to manage and monitor the
legal
proceedings against us.
Our process facilitates the early evaluation and quantification
of potential exposures in
individual cases.
This process also enables us to track those cases that
have been scheduled for trial and/or
mediation.
Based on professional judgment and experience
in using these litigation management tools and
available information about current developments
in all our cases, our legal organization regularly assesses
the
adequacy of current accruals and determines if
adjustment of existing accruals, or establishment
of new
accruals, is required.
Other Contingencies
We have contingent liabilities resulting from throughput agreements with pipeline and
processing companies
not associated with financing arrangements.
Under these agreements, we may be required
to provide any such
company with additional funds through advances
and penalties for fees related to throughput capacity
not
utilized.
In addition, at June 30, 2020, we had performance
obligations secured by letters of credit of
$
196
million (issued as direct bank letters of
credit) related to various purchase commitments
for materials,
supplies, commercial activities and services incident
to the ordinary conduct of business.
In 2007, ConocoPhillips was unable to reach agreement
with respect to the empresa mixta structure
mandated
by the Venezuelan government’s Nationalization Decree.
As a result, Venezuela’s
national oil company,
Petróleos de Venezuela, S.A. (PDVSA), or its affiliates, directly assumed control over ConocoPhillips’
interests in the Petrozuata and Hamaca heavy oil
ventures and the offshore Corocoro development project.
In
response to this expropriation, ConocoPhillips
initiated international arbitration on November 2, 2007,
with the
ICSID.
On September 3, 2013, an ICSID arbitration tribunal
held that Venezuela unlawfully expropriated
ConocoPhillips’ significant oil investments
in June 2007.
On January 17, 2017, the Tribunal reconfirmed the
decision that the expropriation was unlawful.
In March 2019, the Tribunal unanimously ordered the
government of Venezuela to pay ConocoPhillips approximately $
8.7
billion in compensation for the
government’s unlawful expropriation of the company’s investments in Venezuela in 2007.
ConocoPhillips has
filed a request for recognition of the award in several
jurisdictions.
On August 29, 2019, the ICSID Tribunal
issued a decision rectifying the award and reducing
it by approximately $
227
million.
The award now stands
at $
8.5
billion plus interest.
The government of Venezuela sought annulment of the award, which
automatically stayed enforcement of the award.
Annulment proceedings are underway.
In 2014, ConocoPhillips filed a separate and independent
arbitration under the rules of the ICC against
PDVSA under the contracts that had established the
Petrozuata and Hamaca projects.
The ICC Tribunal issued
an award in April 2018, finding that PDVSA owed ConocoPhillips
approximately $
2
agreements in connection with the expropriation of the
projects and other pre-expropriation fiscal
measures.
In
August 2018, ConocoPhillips entered into a settlement with PDVSA to recover the full amount of this ICC
award, plus interest through the payment period, including initial payments totaling approximately
$500 million within a period of 90 days from the time of signing of the settlement agreement. The balance of
the settlement is to be paid quarterly over a period of four and a half years.
To date, ConocoPhillips has
received approximately $
754
million.
Per the settlement, PDVSA recognized the ICC award
as a judgment in
various jurisdictions, and ConocoPhillips agreed
to suspend its legal enforcement actions.
ConocoPhillips sent
notices of default to PDVSA on October 14 and November
12, 2019, and to date PDVSA failed to cure its
breach.
As a result, ConocoPhillips has resumed legal enforcement
actions.
ConocoPhillips has ensured that
the settlement and any actions taken in enforcement
thereof meet all appropriate U.S. regulatory
requirements,
including those related to any applicable sanctions
imposed by the U.S. against Venezuela.
In 2016, ConocoPhillips filed a separate and independent
arbitration under the rules of the ICC against
PDVSA under the contracts that had established the
Corocoro project.
On August 2, 2019, the ICC Tribunal
awarded ConocoPhillips approximately $
55
million under the Corocoro contracts.
ConocoPhillips is seeking
recognition and enforcement of the award in various
jurisdictions.
ConocoPhillips has ensured that all the
actions related to the award meet all appropriate
U.S. regulatory requirements, including those related
to any
applicable sanctions imposed by the U.S. against
Venezuela.
The Office of Natural Resources Revenue (ONRR) has conducted
audits of ConocoPhillips’ payment of
royalties on federal lands and has issued multiple
orders to pay additional royalties to the federal
government.
ConocoPhillips has appealed these orders and strongly
objects to the ONRR claims.
The appeals are pending
with the Interior Board of Land Appeals, except
for one order that is the subject of a lawsuit
ConocoPhillips
filed in 2016 in New Mexico federal court after
its appeal was denied by the Interior Board
of Land Appeals.
Beginning in 2017, cities, counties, and state governments
in California, New York, Washington,
Rhode
Island, Maryland and Hawaii, as well as the Pacific
Coast Federation of Fishermen’s Association, Inc., have
filed lawsuits against oil and gas companies,
including ConocoPhillips, seeking compensatory
damages and
equitable relief to abate alleged climate change impacts.
ConocoPhillips is vigorously defending against
these
lawsuits.
The lawsuits brought by the Cities of San Francisco,
Oakland and New York were dismissed by
federal district courts.
The New York dismissal remains on appeal.
The Ninth Circuit ruled that the San
Francisco and Oakland cases (and other California
cases) should proceed in state court, with that
decision
subject to appeal.
Lawsuits filed by the cities and counties in California,
Washington, and Hawaii are
currently stayed pending resolution of the Ninth Circuit
appeals.
Lawsuits filed in Maryland and Rhode Island
are proceeding in state court while rulings in those
matters, on the issue of whether the
matters should proceed
in state or federal court, are on appeal.
Several Louisiana parishes have filed lawsuits against
oil and gas companies, including ConocoPhillips,
seeking compensatory damages in connection
with historical oil and gas operations in Louisiana.
The lawsuits
are stayed pending an appeal with the Fifth Circuit
on the issue of whether they will proceed in federal
or state
court.
ConocoPhillips will vigorously defend against
these lawsuits.
In 2016, ConocoPhillips, through its subsidiary, The Louisiana Land and Exploration
Company LLC,
submitted claims as the largest private wetlands owner in Louisiana
within the settlement claims
administration process related to the oil spill
in the Gulf of Mexico in April 2010.
In July 2020, the claims
administrator issued an award to the company which,
after fees and expenses, totaled approximately
$
90
million.