In this episode, we will explore lessons from past bankruptcies in the fossil fuel sector, and what they might mean for Shell. While most people agree that Shell is not currently close to filing bankruptcy, bold climate policy and emissions targets set by governments might bring Shell closer to the edge. This is how we arrive at the question, would letting Shell go bankrupt be a reasonable strategy? Could letting big polluters go bankrupt finally facilitate a Just Transition away from fossil fuels? Or will they simply leave workers and impacted communities to fend for themselves in the midst of abandoned fossil infrastructure?

Future Beyond Shell
Going for Broke

In times of economic crisis, bankruptcy has been a frequent fate for struggling corporations. Given the troubled state of the fossil fuel sector, almost 250 oil and gas companies could file for bankruptcy protection in the US by the end of 2021. This ismore than the previous five years combined.

But what does filing for bankruptcy actually mean for a corporation? What patterns can we observe from fossil fuel companies that have declared bankruptcy in the past? What are key elements to consider in a restructuring process that might result from bankruptcy, like spin offs or asset sales? How do these issues stack up when we are looking at bankruptcy as a way to wind down the fossil fuel industry?

In this episode we will be speaking to Dr. Joshua Macey, assistant professor of law at the University of Chicago Law School. He specializes in environmental and energy law as well as in bankruptcy and financial regulation.

Show Notes

Joshua Macey and Jackson Salovaara’s paper on Bankruptcy in the coal sector:

Peabody case, where coal company Peabody Energy spun off obligations to workers and retirees under a new company, which was doomed to go bankrupt:

In September 2021, Shell sold a number of assets in the Permian basin (i.e. infrastructure) to Conoco Phillips, but these result in continued extraction:

More information on the Fieldwood case, where companies like BP and Chevron tried to evade obligations for clean-up:


A: So today, we have the pleasure of welcoming Joshua Macey, assistant professor of law at the University of Chicago Law School. He is a specialist in environmental energy law, as well as in bankruptcy and financial regulation. So welcome, Joshua. Thanks for joining us today.

J: Thanks for having me.

A: Could you tell us a little bit about yourself and the work that you’re doing?

J: Yeah, I study primarily energy law, climate and bankruptcy law. And so I’ve written about energy markets and how they affect global emissions and also about fossil fuel bankruptcies, focusing mostly on the coal industry, but increasingly on the oil and gas industry.

MS: Yeah, also from my side, thank you so much for joining us. You started already to talk a little bit about your work. What we are particularly interested in to start off is  if you could tell us a little bit more about past bankruptcies in the fossil fuel sector that you’ve studied. So what types of companies did this concern? And what were the conditions under which they were filing for bankruptcy?

J: So one of my first papers was about the slate of coal mining bankruptcies that swept the United States between 2015 and 2017. And a co author, and I found a few things but we were especially interested in looking at how bankruptcy or how companies used bankruptcy or restructured before bankruptcy such that they could try to get out of environmental and labor obligations. And so it with the US Bankruptcy Code, there’s a list of priorities and payments should go out under that list of priorities and environmental and labor obligations typically do not receive first priority, but they’re not. They’re also not at the bottom of the pile. And yet, what we found over and over again, was that environmental and labor was getting a much lower payout than you would have expected. If you’ve just gone down this list of priorities. And the reason for that is that coal mining companies, instead of simply paying out the money that they had to the various stakeholders would undergo strategic restructurings so that they could separate their the assets that they felt still were worth something from the liabilities associated with coal mines that were no longer productive. So to give an example, a company called Peabody, in 2007, actually spun off quite a few of what seemed to be unproductive mines, and it in 2007, and it put 97% of a certain type of labor obligation in associated with those mines, so pension obligations, and retirement obligations, along with a couple 100 million and cleanup obligations. And the sort of predictable outcome, it took about 10 to 12 years was that labor and cleanup obligations received pennies on the dollars and other creditors came out much better even though you would have expected had Peabody simply follow the the hierarchies of the bankruptcy code to pay the labor and the environmental obligations, more than at least some of the creditors. And and you see this strategy over and over again, with coal mining companies. And increasingly, it’s been happening with oil and gas, where the circumstances are slightly different, for a variety of reasons, but the idea that you essentially put environmental and labor obligations into either a subsidiary or an affiliate, and divest yourself from that, or spin it off, and then that company files for bankruptcy has, where sometimes it doesn’t even need to file for bankruptcy, it can just stop operating. And because it has no assets, it doesn’t do anything, it becomes much more difficult to to collect on those obligations. Now, there are in theory, in in every bankruptcy jurisdiction in the country, there should be a mechanism for stopping this. It’s called fraudulent conveyance or fraudulent transfer law. Which, when, which in theory it entitles people who are harmed, basically, you’re not the theory underlying fraudulent conveyance law is that if you have two creditors, one is your grandmother, and one is the bank, you have $100 you owe each of them $100, presumably, both should get paid $50. And if you give your grandmother $100, we might think that this that you’re, you know, three weeks before filing for bankruptcy, we might think you’re trying to favor one creditor over another, and you’re supposed to be able to claw the money back from your grandmother so that you pay each $50. This looks a lot like what’s going on in the fossil fuel industry that fossil fuel companies are paying shareholders and financial creditors much, much more than they’re paying other interests, and the ones I care most about are our environmental and labor interests. And so in theory, those interests, whether through the government or environmental plaintiffs, or labor, sort of former employees of these companies should be able to sue the people who received a higher payout and recover what they are owed. That has not happened for a couple reasons. One is that there’s a fraudulent conveyance law, it doesn’t really provide deterrent. So a company at the best case scenario, the environmental labor gets what it’s owed. But that doesn’t deter a company from doing this anyway, at worst, they have to pay a little bit of money back, whereas I think there should be punitive damages. But more importantly, there’s a statute of limitations on fraudulent conveyance off, and it’s typically four years. So as four years pass, and no suit is brought, then you lose your right to sue under fraudulent conveyance law. And so, in some of the more egregious instances of the sort of spin offs I’ve been talking about, companies would actually support the company that they spun off so that it would not file for bankruptcy for four years. And just after that four years, expires, that company would liquidate, and then there would be no ability to sue.

MS: Yeah, I think it’s really interesting what you already mentioned about sort of the risks of filing bankruptcy and I think we will delve into that a little bit more in just a second. Maybe before going there, I was wondering, so what is the process that you’ve described now, I think they’re quite US specific. And considering that Shell, our main target of our podcast is a multinational corporation, we were wondering how the process of filing bankruptcy maybe looks like in in different countries and other countries and whether you can speak a little bit to that.

J: Yes, European bankruptcy law is very complicated and the reason is that each member state has a separate bankruptcy law. And those differences can be pretty significant. And Shell is especially complicated because it has substantial assets across the world. But the way that a bankruptcy involving Shell would play out is that in Europe, there would be a center of main interests are this, the company and its stakeholders would have to identify the jurisdiction in which Shell has its primary place of interest or operations, which would probably be the Netherlands, and that a court in the Netherlands would deal with most of the issues involving the bankruptcy, but there may be sort of side proceedings in other countries where that company has significant assets. And each jurisdiction or venue in which a bankruptcy is occurring, would have to would apply the law relevant to whatever credit agreement or business in that jurisdiction, which can get extremely complicated and itself be, it may be an additional reason why it would be preferable to have a sort of government intervention that would guide the resolution of the company, because it’s very hard to think that a bankruptcy court in the Netherlands or a court in the Netherlands, it might not be a bankruptcy court would have the expertise to think about, you know, 20 to 30, different insolvency or resolution regimes, while simultaneously allowing certain parts of the bankruptcy to happen in other countries. Now, it may be that there’s a voluntary agreement to have it all done in the Netherlands but the two major issues are that there would be different types of law applied to different parts of the Shell company and there may be disputes about whether to resolve certain parts of the company in the Netherlands or in a different country. And that that itself can add significant complications to a resolution of a company like Shell.

A: So what you’re saying is with the preference for government as a guided resolution for a company like Shell that is a multinational that one government should assume the responsibility as opposed to work because it’s too complicated to collaborate across countries basically?

J: So two things, so there’s the question about how to resolve it outside of bankruptcy or to us, it would be better for one jurisdiction to deal with any potential bankruptcy. But even within bankruptcy, there are I think, additional issues that you have. Parts of Shell would be subject to Nigerian insolvency law, parts to Dutch insolvency law, parts to insolvency law within the United States. And so I agree also as an administrative matter that it would be even better for a single country to manage it, but I suspect that there would be even ignoring bankruptcy issues. Countries might not look at that too kindly if their own interests are being managed by a different country. But as a bankruptcy matter, it could be really disastrous and problematic to have multiple courts resolving parts of Shell and individual courts, faced with the responsibility of teaching themselves different insolvency laws that can look very different for different parts of Shell.

A: And just for our listeners, resolving a company means basically deciding what will happen once it’s declared for bankruptcy?

J: So resolving the company does not mean the company goes away or its operations goes away. It can mean a few things. It can mean the company reorganizes so it just restructures its debt. And in fact, the purpose of bankruptcy is often understood not to help make sure that companies sort of stop operating, but to ensure that they continue to operate. And with the fossil fuel industry, I think that’s that general purpose is problematic because there are a lot of situations in which it would be much better to have a guided resolution where resolution means keeping oil and gas and coal in the ground. But the sort of three things resolution means is one, the company for all intents and purposes stays the same, but it reorganizes with a different capital structure and balance sheet and gets rid of some burdensome debt. Option 2 the company’s operations continue, but it doesn’t really look very different. So these are usually thought of as bankruptcy sales. And so for example, if Shell is ordered to liquidate by a court in the Netherlands, it’s possible that this would simply result in a bunch of asset sales, like the one that occurred this week to ConocoPhillips in which Shell’s shareholders make a great deal of money and all that’s happening is a oil and gas assets that were being operated by Shell are now being operated by a different company. And so the assets are still being used to drill oil and gas. And the third outcome is that the court or the stakeholders recognize that. So sorry, the second outcome is one in which the company is sold for parts, but those parts continue to operate. So the company no longer really exists, but its operations for all intents and purposes do. And the third outcome is that the company effectively goes away, and the things that it was doing are no longer happening. So that might be a liquidation in which there are no buyers of the assets. And so when I think about how a bankruptcy should facilitate a dramatic reduction in fossil fuels, I think that it would be helpful to try to ensure not only that the corporate entity itself goes away, but also that whatever assets it was operating, to bring hydrocarbons out into the world are no longer doing that.

A: Right, so we put a definitive end to production. I want to shift gears a little bit to focus a little bit more on Shell, and we’re wondering, how likely is bankruptcy for Shell? Do you think we can just wait for it to happen? Or does it necessitate some action by a government or other actors for it to occur?

J: I think bankruptcy is unlikely in the absence of government action, and also probably undesirable, because Shell right now has a lot of assets that are worth a great deal of money. And so faced with a legal obligation to become carbon neutral in the relatively near future shows just if that obligation is enforced, Shell’s going to sell those assets for a great deal of money. And it may also spin off what would likely be assets that involve significant cleanup obligations. And so that is the sort of second category I was describing, in which Shell, in this case outside of bankruptcy, just gives assets that continue to produce fossil fuels to other companies. It makes billions of dollars from doing so. But the resolution is not a net reduction in emissions. In the event that every jurisdiction starts taking their Paris commitments seriously, then I think a bankruptcy is more likely, but even then, I think it’s undesirable because the bankruptcy is unlikely to provide a mechanism for getting Shell to clean up its environmental obligations, but rather it will be a forum or a venue in which to pay financial creditors and financial shareholders and when starting to think about whether we want to make it more expensive for capital markets to lend, or provide capital in some other form to fossil fuel companies, I think having the worst outcome be that those investors have a way of getting paid before all other interests, makes it less likely that they’re not as likely to sort of be deterred from investing in fossil fuels, as they would be if there was a sort of global or multi jurisdictional way to resolve the company in which it was very clear that whatever value was left would go towards the company’s workers and environmental interest. And so I think if Shell has noticed that it is going to have to change its operations, it has the ability to sell its assets, which has the problematic outcome of just allowing Shell to sell oil and gas assets to companies that will continue producing oil and gas. Whereas I think a more ambitious approach would be to have a way of telling Shell that it can’t, if it’s going to sell its assets, it those that can result in additional oil and gas drilling, which is would be likely to block sort of recent sales Shell has done and so if you look at the ConocoPhillips example, I believe Shell announced that it would provide a dividend to shareholders of $7 billion, and it would reuse another 2 billion to restructure its balance sheet, which looks like it means pay back creditors. So here you a have a an asset sale, that A) doesn’t stop the production of oil and gas, and B) the proceeds of that sale are going to be used to pay off Shell’s financial interests, but not its environmental and labor interests. And so in the event that Shell’s environmental obligations become more serious, or that its regulators become more exacting about determining how Shell should resolve itself those $9 billion that it got from the ConocoPhillips deal will already have gone to stakeholders who are not its employees and not committed to cleaning up its environmental obligations.

A; So basically, we need some form of legislation or policymaking that ensures that  this can’t happen, that you can’t disperse these funds or spin off subsidiaries. But in your eyes, Shell is not too big to fail?

J: Well, too big to fail can mean a lot of different things. Too big to fail can mean would lead to a global economic collapse, I don’t think that’s the case with Shell, too big to fail can also mean the failure of a company would impose substantial costs, on certain communities, and that gives regulators an incentive to prolong that sort of corporations activities, even if they impose a net cost on society. And so they’re sort of examples from not the companies that are smaller than Shell, but that have reorganized where so for example, some coal companies in Wyoming owed about $30 million in taxes to the State of Wyoming. And in my opinion, one of the reasons Wyoming was so eager to accommodate the reorganization of coal companies that have laid off 1000s of workers and are at risk of abandoning coal mines and imposing tremendous costs on communities is that they fund their schools through the tax royalties coal mines provide. Similarly, an oil and gas company in Pennsylvania, which is not nearly as big as Shell was found to have so many cleanup obligations that if it defaulted on them, the state of Pennsylvania would impose hundreds of millions of dollars and cleanup obligations on the state of Pennsylvania, there’s no way the company can pay all of these obligations. But because Pennsylvania didn’t want to have to impose those costs on the taxpayers immediately, it reached a deal where the company would clean up five to 10 – would close five to 10 wellheads a year, which is it would take hundreds of years for it to perform all the cleanup, it has a legal obligation to retire. But that too seems like a type of too big to fail in which the failure of the company would impose such substantial costs on the regulator that they have an incentive not to do that. And I think one of the reasons the lack of of government help with Shell is problematic is that I do think there are situations like that where Shell does have cleanup obligations, if we find it can’t immediately pay for them, it would impose real costs on local communities, it might not perform all of the cleanup obligations, and it would be easier to have a way of thinking about what what money can we get out of Shell and how can it best be used to minimize the environmental impacts while simultaneously providing whatever government funds are needed to sort of ensure that that liquidation actually occurs. And that sort of local regulators or policymakers that would object, don’t try to make sure that Shell continues to operate to avoid the what could be pretty dramatic costs imposed by a bankruptcy if there’s no way of of providing funds for cleanup and for adversely affected communities.

A:So we were curious about important lessons that we can take from past examples of bankruptcy, but I think you’ve enumerated quite a few already. Namely, legislation or policy to prevent the spin offs. And there may be situation in which these companies have so many cleanup obligations that some restructuring needs to happen. But are there any other lessons that we should take forward from these past examples that you have studied, and then maybe with a view to drawbacks and limitations, and maybe positive things?

J: So one lesson that I think was really surprising to me was that there was this idea that insurance would solve everything with legacy environmental obligations, that if you have companies take out insurance, such that in the event that the company is unable to honor its cleanup obligations, the insurance company provides funds to do so that would be a solution to all of the problems with retiring legacy fossil fuel assets. The problem with that approach is that if everyone got in a car crash, tomorrow, every insurance company would go bankrupt. And with some fossil fuel industries, the insurance industry seems to be aware that there’s a high likelihood that they will have to basically provide and, you know, honor the insurance obligation of every single claim in and that’s not a sustainable business model. And what’s going on in a few in parts of the coal industry, for example, is that all good by which I mean, well capitalized, insurance companies are leaving the market, and the companies that remain don’t seem to have the capital or, or ability to finance or honor their obligations once coal mining companies, liquidate. And so um, I think that when we, if we, if we think, okay, we are going to have to set aside a tremendous amount of money to do clean up in the next five to 10 years, then I think it’s much more important to try to identify the pot of assets that companies have now to do those obligations and make them set aside that money. Because if you rely on insurance, you have a moral hazard problem, where insurance companies leave the market. If you don’t do anything, that company simply uses the money that’s coming into the firm now to pay off other interests. And so my own view is that if a company has $100 in assets, or $100, in cash that it expects to make in the next year, in two years, it would expect to incur $80 of environmental obligations. And it also has, I don’t know $80 in obligations to financial creditors and shareholders or just financial creditors, the company is worth nothing. It’s a liability, not an asset. But if it doesn’t have to pay its environmental obligations now, it pays its financial creditors. There’s no money left to pay those environmental creditors. And so the more individual countries are willing to say, you have to fully fund your cleanup obligations immediately. The more we know that on, we’re unlikely to have sort of offshore oil spills because the company has not dealt with cleanup the way that it’s supposed to. And so my biggest concern is that we’ll rely on insurance, because it seems easy. But that’ll be a way of sort of pre textually compliant with cleanup obligations, when in fact, it doesn’t ensure that that companies will actually do cleanup.

MS: Maybe in relation to what you just said. I know in your work you often call bankruptcy, you coined it as a bailout. Maybe you can tell us a little bit more about that.

J: Yeah, so what I mean is more the investors in the company and its creditors and its shareholders. Right now companies are able to sell oil an gas and think of it as revenue positive. And what was somewhat dramatic in some of the examples in the fossil fuel company that might also be, that are probably applicable to Shell, that if you assume that the company has to pay its environmental obligation then they would have to be doing a lot less mining or drilling than that they are currently doing. And the reason is that you don’t expect a corporation to operate when its liability is greater than its assets. That means that the company is no longer valuable as a growing concern and it shouldn’t be making money. So if a company has 100 of billions of clean up obligations and it is paying money to its financial creditors, then I think of it as a bailout because bankruptcy and the sort of spin offs bankruptcy adjacent kind of behaviour that we were talking about earlier is a mechanism for the company to get out of regulatory obligations. And my own view is that if you are expected to do clean ups whether it is either to plug wells or do reclamations in communities where you have actually blown up mountains in order to access hydrocarbons then i think the premise of these regulations is that you have a requirement, a legal obligation to perform that clean up in exchange for selling the oil, gas or coal you extract. And yet if you are not actually required to pay out those obligations you’re allowing the investors in the company, the creditors and the shareholders to receive whatever payment would be made as though those other payments and regulations do not exist. Because they get paid before the company sets aside money to fund its clean up obligations and the results of that that the clean up obligations dont happen and it is a bail out because there was a payment that the company should have made before paying its financial creditors and it doesnt make that payment. And those payments can be enormous and so creditors and share holders have an incentive to invest in a company as though it actually doesnt have to perform clean up. And i think that that is a bailout because as a government obligation that essentially every party that determines the costs of business for a company no longer pays. So that entirely eliminates the incentive for the company to follow through on its environmental obligations and its labour obligations. Since if you lend money to a company you, not only do you not care if the company does clean up you actually don’t want it to do clean up because doing clean up means that there is less money for you to get. And my own view is that there is that sort of social contract we have with these companies that they should only be permitted to operate if they perform the legal obligations that require them to do clean up and if the sort of set up behavior that proceeds bankruptcy and occurred during bankruptcy that led those investors to make sure that they  get payed before environmental claimants then we have effectively bailed companies out of the obligation of doing environmental clean up.

MS:  Yeah, I think that is all super interesting to hear and as a sort of last question before we will wrap up I am curious to hear or to talk a little bit more about Nigeria as a particular case in relation to Shell. Of course thinking about  bankruptcy or in general the transition away from fossil fuels  for  countries that are largely dependent on oil production I think it  is a huge task and challenge in the upcoming years. So what I was curious about when I read your work is what you described coal companies that even if they don’t file for bankruptcy they do spin offs and  that those spin offs often file for bankruptcy after a couple of years. And I think this is a similar  scenario we might  be seeing happening right now with Shell in Nigeria where Shell is being forced through court cases to restructure its business. It has now sold off shares from its Nigerian subsidiary, so yeah I am curious to hear your analysis for risks of bankruptcy there or risks for shedding obligations for environmental clean ups, which of course has been a long issue, particularly in Nigeria.

J: No the Nigerian case is really interesting and really concerning. So my understanding of Nigeria and I have looked at this somewhat closely but I  haven’t really looked into the court cases with excruciating detail. But my understanding is that Shell has committed or is  thought to have incurred substantial environmental liability from its Nigerian oil business. And particular oil mineral release and pollution in Nigerian rivers and it faces serious court sanctions and Shell’s response was not to renew its leases in Nigeria and it  announced that it will leave Nigeria and so this looks to me  like, the sort of lack of a structured government overseeing reorganization means, Shell was  faced with significant liability but if Shell leaves Nigeria it will be  much more difficult to enforce and to  pursue Shell  for previous environmental obligations. It is not impossible. There are situations and I should have mentioned this where companies have been held responsible for the liabilities incurred by the predecessors. There was  recently an  oil offshore bankruptcy involved in a company called Fieldwood in which BP and EXXON and Shell were all required to pay a couple of  100 million dollars, but by leaving Nigeria it seems like Shell has likely decided it would be better for the company to get out of the  Shell oil business whether it is because it doesnt want to pay its environmental obligations in Nigeria or whether it is  because  it is being consistent with its announced climate goals. But once again this suggests that someone else will be left paying  for  what could be really significant  and damaging environmental  harms  and that could be tax payers in  Nigeria that could be delta  of local communities  in  the  event that  clean up doesn’t happen. And I think  it is not  exactly the  kind of spinoff behavior I was talking about but it looks to raise the same issues where a  company is  abandoning  extremely large environmental obligations. And  it may have to pay some of it  in the future and so I should be very clear that Shell’s decision to leave may not fully absolve it of its environmental obligation but it may and it will certainly make it  more  difficult and lean to more protective litigation and I  have to imagine one of Shell’s motivations was not simply because it felt that its Nigerian assets were incompatible with  its  climate goals  but  also that the  environmental litigation that it has been facing for, i think quite a few years, was just  not worth the head ache and it would rather exit its operations in  Nigeria and reduce the likelihood that it would have to fully or even at all honor those obligations.

A: Thanks Joshua, I think that was really a very in  depth discussion so thanks so much and  we were just wondering as a sort of final question how do you envision  phasing Shell out or how do you envision a future beyond Shell? What role can bankruptcy play in this and do you think there are other tools in this that you think are essential?

J: So one possible model is actually how asbestos was treated in the US where we realized we actually have to stop building things with asbestos. And also that asbestos has caused cancer in people that have been exposed to asbestos. And so what happened was that a lot of companies started to be .. what bankruptcy became a  vehicle for turning the company into a trust to pay out to the  people that had enormous health care claims against the company. And so my view is that to the extent that Shell has assets that are going to be productive for a few years rather than selling it to a company that is going to increase production in the Permian or in Nigeria it would be better to say, we are going to  make clean up and labour obligation and maybe investments in climate litigation, those are going to be the effective owners of the company in the future. And the way to resolve it is to say we are going to  determine, we are going to reduce production to this level or eliminate it all together, whatever assets Shell has will be used to pay out as much as possible to the environmental and labour and whatever other obligations are really crucial and that would unlikely to be paid out in a normal bankruptcy and have that sort of overseen understanding that the purpose of this company is not or of this reorganized company is not to sell oil and gas to the highest bidder but to balance very rapid carbon  reductions with payments  to the stakeholders who really experienced harms as a result of Shell’s past behaviour and so if that means additional production that’s likely incompatible with climate but I think there are some assets of Shell that are valuable or that at least will be productive in the near future  where Shell at the very least Shell has cash on hand and the  goals should be to think of the company as a  trust for the environmental claimance and labour claimance such that it can’t use tools to restructure in a way that A) doesn’t reduce the climate footprint it has on the assets and B) doesnt resolve in environmental clean up and only has the goal of getting rid of the corporate entity. You know the corporate entity Shell is starting to do all these great things like renewables but at the  same time the assets it owned in 2021 are still producing oil and gas and not necessarily performing clean up.

A: Thanks Joshua, we are so glad to have had you.