Note 10—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 and record
accruals for
environmental liabilities based on
management’s best estimates.
These estimates are based 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 September 30, 2021, our balance sheet included
a total environmental
accrual of $
191
$
180
million at December 31, 2020, 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.
Litigation and Other Contingencies
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, claims
of alleged
environmental contamination
from historic operations,
and other contract disputes.
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.
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 September 30, 2021, we had performance
obligations secured by letters
of credit of
$
281
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 unan
imously 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.
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.
On September 29, 2021,
the ICSID annulment committee lifted the
stay of enforcement
of the award.
The annulment proceedings have
been suspended as a result of Venezuela’s
non-payment of advances
to cover the costs of these proceedings.
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
billion under their 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.
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 has failed to cure
its breach.
As a result,
ConocoPhillips has resumed legal enforcement
actions.
To date,
ConocoPhillips has received approximately
$
766
million in connection with the ICC award.
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
$
33
million plus interest 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
and the ONRR entered into a settlement
agreement on March 23, 2021, to resolve
the dispute.
All orders and
associated appeals have been withdrawn
with prejudice.
Beginning in 2017, cities, counties, governments
and other entities in several states
in the U.S. have filed lawsuits
against oil and gas companies,
including ConocoPhillips, seeking compensatory
damages and equitable relief to
abate alleged climate change impacts.
Additional lawsuits with similar allegations are
expected to be filed.
The
amounts claimed by plaintiffs are
unspecified and the legal and factual issues
involved in these cases are
unprecedented.
ConocoPhillips believes these lawsuits
are factually and legally meritless and
are an inappropriate
vehicle to address the challenges associated
with climate change and will vigorously
defend against such lawsuits.
Several Louisiana parishes and the State
of Louisiana have filed
43
lawsuits under Louisiana’s
State and Local
Coastal Resources Management
Act (SLCRMA) against oil and gas
companies, including ConocoPhillips, seeking
compensatory damages for contamination
and erosion of the Louisiana coastline allegedly
caused by historical oil
and gas operations.
ConocoPhillips entities are defendants
in
22
of the lawsuits and will vigorously defend
against
them.
Because Plaintiffs’ SLCRMA theories are
unprecedented, there is uncertainty
about these claims (both as to
scope and damages) and we continue to
evaluate our exposure in these
lawsuits.
In October 2020, the Bureau of Safety
and Environmental Enforcement
(BSEE) ordered the prior owners of Outer
Continental Shelf (OCS) Lease P-0166,
including ConocoPhillips, to decommission
the lease facilities, including two
offshore platforms located
near Carpinteria, California.
ConocoPhillips is challenging this order.
This order was
sent after the current owner of OCS Lease P-0166
relinquished the lease and abandoned the lease platforms
and
facilities.
BSEE’s order to
ConocoPhillips is premised on its connection to
Phillips Petroleum Company,
a legacy
company of ConocoPhillips, which held a historical
25
percent interest in this
lease and operated these facilities,
but sold its interest approximately
30 years
ago.
ConocoPhillips continues to evaluate
its exposure in this matter.
On May 10, 2021, ConocoPhillips filed arbitration
under the rules of the Singapore International
Arbitration Centre
(SIAC) against Santos KOTN
Pty Ltd. and Santos Limited for
their failure to timely pay the $
200
upon FID of the Barossa development project
under the sale and purchase agreement.
Santos KOTN
Pty Ltd. and
Santos Limited have filed a counterclaim,
and the arbitration is underway.