Oil bankruptcies leave environment cleanup to California taxpayers
Oil shaped modern Southern California. With dreams of black gold and not content to merely drill on land, a company called Atlantic Richfield built a 2.3-acre artificial island in the late 1950s just off the coast of Ventura County. Today, surfers skim past Rincon Island’s crown of palm trees and 50 oil wells near Mussel Shoals — but the site will never pump oil again.
Over the years, production on Rincon Island waxed and waned, the manmade polygon changing hands multiple times. A 2002 bankruptcy sale ultimately handed it off to Greka Energy Corp., which restarted production through a subsidiary called Rincon Island Limited Partnership (RILP).
But the boom years were drawing to a close. Rincon Island would erode, rust and fall into disrepair, eventually becoming a sign of the Golden State’s declining oil industry — and a lesson in how taxpayers are on the hook for cleanup costs.
Poor management, severe corrosion and a winter storm rendered the island’s 3,000-foot pier and the attached oil pipeline unusable, and Greka pumped the final molecules of hydrocarbons off the island in 2008. Tensions grew as state officials cited RILP for myriad violations on issues ranging from fire hazards to worker safety.
“They were just not conducting basic maintenance out there,” said Joe Fabel, a senior attorney with the California State Lands Commission. Finally, the commission told RILP it had 90 days to comply, or the state would consider terminating the company’s leases on Aug. 9, 2016, forever removing the possibility of restarting production on the island.
One day before that deadline, RILP filed for bankruptcy in Texas with less than $28,000 in its bank account.
Since then, the state has been working to decommission Rincon Island and an associated oil field on the coast, plugging oil wells and tearing down infrastructure. Thanks to RILP’s bankruptcy — and subsequent maneuvers by other entities within the Greka group of companies — taxpayers have had to foot $27 million of the $45 million cleanup cost so far. The state got several million from Greka and another former operator.
Another Greka oil business called HVI Cat Canyon was RILP’s long-time general partner, but in 2019 it too filed for bankruptcy, this time in New York, and orphaned many of its wells.
“(Greka) is a perennial bad actor in the state of California who walked off and left everything to the state,” Seth Blackmon, chief counsel for the State Lands Commission, said of Rincon Island at a 2020 conference. “So, we as state taxpayers here are covering that cost from the general fund.”
But RILP and HVI Cat Canyon are just two of more than 260 oil and gas exploration and production companies that have filed for Chapter 11 bankruptcy in North America since 2015, according to law firm Haynes and Boone. Also among them was California Resources Corp., one of the state’s three major oil and gas producers. In Chapter 11 bankruptcies, companies try to restructure and resume operations, but some are ultimately converted to Chapter 7 bankruptcies where their businesses are liquidated.
Those roughly 260 bankrupt businesses combined to carry more than $175 billion in aggregate debt into the filings, most of it unsecured. In the Greka bankruptcies, court records reveal how some local companies that contracted with RILP and HVI Cat Canyon never got paid and how Switzerland-based UBS bank claims it is owed north of $100 million.
More such bankruptcies are likely on the horizon, especially in the Golden State where a once-booming oil industry has been declining for decades. Older oil fields are tapped out, others contain low-quality crude and the state is looking to address climate change by shifting away from fossil fuels. Between 1985 and 2020, California’s oil production fell 63% and its natural gas production fell 66%, according to the U.S. Energy Information Administration.
Many environmental activists and researchers, along with some lawmakers, say oil and gas producers use the bankruptcy code to shed environmental liabilities, leaving taxpayers in the lurch. Once wells become orphaned, the state must either pay to clean them up or leave them unplugged, risking leaks of oil, polluted water and climate-warming methane.
A 2020 report from the California Council on Science and Technology identified 5,540 wells across the state that had no viable operator and that could cost $500 million to clean up. The study noted an additional 69,425 “idle and marginal wells” facing the end of their useful lives.
Typically, oil and gas drillers would pay to clean these up via cash generated by new production, said Robert Schuwerk, a former assistant attorney general in New York who now runs the North American office of Carbon Tracker, a London-based think tank. “If that’s coming to an end,” he asked, “what’s going to happen to these liabilities?”
A ‘pioneer’ with a global pedigree
The international businessman behind the constellation of Greka companies, Randeep Singh Grewal, calls himself “a pioneer in the oil and gas industry.” He said he learned to respect the environment during his childhood in Zambia, where his father worked as a mining geologist.
“I grew up in the bush in Africa,” Grewal told The Desert Sun. “I’m the closest person you’ll meet in this industry to the environment, and what I can assure you – and I think you have that factually in my track record – there is not a single situation in which any allegation — quote — led to environmental harm in conclusion because there hasn’t been any. Ever.”
Grewal eventually came to California, where he attended the now-defunct Northrop University in Inglewood, a school founded to train aeronautical engineers and mechanics. According to various biographies he posted online and in corporate filings, Grewal spent a little more than a decade in management roles at airlines and an Israeli defense contractor before transitioning to oil and gas in 1997.
Although he’s now based in Hong Kong, Grewal, who’s in his fifties, still owns a Santa Barbara County winery named in homage to himself: Ca’ Del Grevino, which is supposed to be an Italian play on “house of Grewal family wines.”
Grewal is adamant about his environmental bona fides, but county records document repeated issues with his companies. Between 2003 and 2007, for example, Greka Energy spilled more than 452,000 gallons of various substances, according to Santa Barbara County Fire Department data presented to the county’s board of supervisors in 2008. The company accounted for 82% of all oil field releases in the county during that period, although it owned just 55% of the wells there.
The 2008 report also showed that responding to calls at Greka facilities cost the fire department as much as $1.8 million over the preceding decade. At the time, the fire department said only 17% of Greka facilities that required permits under the fire code had them. In its response presentation, Greka said some of the county data was flawed.
HVI Cat Canyon — another Greka oil company that drilled in Santa Barbara County — had just as bad of a compliance history, according to a report about violations that was prepared by the county’s planning and development department and covered 2015 through 2018.
In those four years, the fire department cited HVI Cat Canyon 392 times. The Santa Barbara County Air Pollution Control District handed the company 125 notices of violation for failing to maintain equipment, keep records, operate with a permit or monitor operations for emissions. The company also had 20 spills in those four years, leaking more than 5,500 gallons of crude oil and more than 1,500 gallons of produced water, a byproduct of drilling that can contain salts and chemicals.
Grewal said HVI Cat Canyon was producing heavy tar sands that were so viscous that the spilled product didn’t soak into the soil and could be picked up by hand and with shovels, meaning it didn’t get into waterways. He also said that a spill in late 2007 might have been caused by sabotage and was not his company’s fault.
Tomas Rebecchi, the Central Coast senior organizer for environmental group Food and Water Watch, said operators like Grewal navigate deftly around citations and other sanctions. “These oil companies, they know how to work around the laws,” he said. “In the long run, we’re the ones picking up the costs.”
A health scare and financial moves
Faced with accusations that his companies exploited bankruptcy to put these issues in the past, Grewal said he remembered it differently.
The beginning of the end of his fossil fuel empire dates back to 2007, when a severe blood clot cut off circulation through one of his legs. Grewal was told he had 90 days to live, and he set about restructuring his finances and wiping out debt so he could transfer his wealth to his family. He struck a $161.5 million deal with UBS, the bank, to wipe out debt in exchange for a cut of future oil sales from his California companies, including RILP and HVI Cat Canyon.
Grewal survived his near-death experience and said he eventually made “a decision in 2018 to essentially retire and exit globally extraction businesses.” He planned to accomplish this through bankruptcy, as the use of bankruptcy to sell companies — typically known as a 363 sale — is both legal and common.
In response to the state pressuring him to comply with rules and regulations, though, Grewal had already begun the process two years earlier when RILP kicked off his string of bankruptcies in 2016. Then in 2019, HVI Cat Canyon filed for bankruptcy. G3 Exploration, his coalbed methane company drilling in China, followed suit, filing for liquidation later that year in the Cayman Islands.
Researchers who reviewed Grewal’s bankruptcies questioned whether he was looking for friendlier courts by filing these cases in jurisdictions far from where his companies operated. They also pointed to a complex web of subsidiaries linking Grewal’s various entities, perhaps as layers of shell companies to shield Grewal and other management from liability during the bankruptcies.
Grewal said that his companies filed for bankruptcy protection where they were incorporated or where their creditors operated. He said he set up holding companies because it would make it easier to sell pre-packaged pieces of his companies through the bankruptcy process.
One of RILP’s lawyers when the company filed for bankruptcy was Robert O’Brien, a Los Angeles-based attorney. His law firm also represented HVI Cat Canyon. Two months after HVI Cat Canyon filed for bankruptcy in 2019, O’Brien became national security advisor to then-President Donald Trump. He did not respond to requests for comment.
Grewal acknowledged that entering bankruptcy protection had the benefit of shielding his family from liability, something that simply selling the companies might not do, but he said his businesses had enough assets to pay every creditor in full. Much of what he counted as assets, however, was oil that was still in the ground and might never be economically recoverable.
Multiple creditors claim they were stiffed by Grewal’s companies, and entities ranging from the state of California to UBS allege that they have unpaid debts and claims worth as much as several hundred million dollars.
Bob Grayson Jr., president of Rival Well Services, a Bakersfield-based oil field services company, did contract work for several Greka companies, where he said he ran into consistent difficulty getting paid. Court records show he lost more than $85,000 through the RILP bankruptcy alone.
“(Grewal) was always twisting things to make sure he got money and nobody else did,” Grayson said. “Even though I was a secured creditor with a lien, it didn’t make any difference.”
Grewal said there was nothing strange about carrying trade debt into bankruptcy and that there was not enough cash flow at the time of the filing to pay everyone. But, he said, selling company assets should’ve yielded enough money to pay back every creditor through the bankruptcy process, something that is yet to happen.
As for UBS, Grewal said the bank aggressively pushed its initial deal on him and earned many millions of dollars throughout the course of his companies’ operations.
A UBS spokesperson declined to comment on the record, but court records show UBS sued a Greka entity called Greka Integrated in October 2019 to recover funds. The bank claimed it was owed $100 million plus interest, fees and other costs. A federal judge dismissed Greka’s claims in the case on multiple occasions, and in May ruled that UBS still needed to be paid.
“We are 100% comfortable with the truth and the facts, and we are also extremely confident that nobody can change the historical facts,” Grewal said. “There can be a lot of allegations, there can be a lot of perceptions, there can be false pretenses, but you cannot change the truth and a historical fact.”
Clark Williams-Derry, an energy finance analyst at the Institute for Energy Economics and Financial Analysis, an Ohio-based think tank, was critical of loopholes in the bankruptcy code.
“You borrow money at an exorbitant rate to run your company, you pay yourself with the money you borrowed and then you go bankrupt. That’s how you become a millionaire,” he said.
The bankruptcy judge handling HVI Cat Canyon’s case, Martin Barash, also raised questions about Grewal. According to a transcript from an October 2019 hearing, Barash said Grewal’s testimony “was not at all persuasive” and “demonstrated a lack of candor.”
Grewal, though, remained adamant that HVI Cat Canyon and RILP together were worth more than $250 million due to their oil reserves and insisted that an independent auditor had checked that number. He said it was the bankruptcy trustee’s fault — or perhaps the fault of UBS, the main secured creditor — that the remnants of his companies were sold for less than that sum in the bankruptcy.
Josh Macey, an assistant professor who researches bankruptcy law at the University of Chicago Law School, said such valuation disputes often arise in bankruptcy. “At the end of the day,” Macey said, “if the assets were worth $250 million, then somebody would’ve bought them for $250 million.”
If that had happened, more creditors like Grayson could’ve been paid. He believes Greka represents the worst of the oil industry.
“There’s always those others like cockroaches that scatter when the light is shined on them,” Grayson said of Greka.
Environmental costs: ‘Everyone’s now opening their eyes’
David Zdunkewicz is the Texas lawyer who filed RILP’s 2016 bankruptcy petition. He laid out a simple maxim of bankruptcy: “When there’s no money, there’s no money,” he told The Desert Sun.
That means that, by the time a company enters bankruptcy, it’s already too late for many creditors — often including government agencies responsible for environmental claims.
“It’s much better to have the money before the bankruptcy than trying to get it during the bankruptcy,” agreed Schuwerk from Carbon Tracker. “The creditors want the money and don’t have an interest for the state to get it.”
In the case of restructuring bankruptcies, environmental liabilities usually pass through the process unchanged. But when a company enters liquidation, all bets are off. To account for this, the federal government, states and cities can require oil and gas producers to put up money in advance in what’s called a bond. Simply put, it’s a security deposit. If operators clean up after they’re done drilling, they get the money back. But, if they walk away and leave a mess, the government uses that money for reclamation.
The problem is these bonds are woefully inadequate, incentivizing companies to walk away.
The 2020 California Council on Science and Technology report found that California’s onshore oil wells only had about $110 million in bonding with the state, even though the total cleanup bill was predicted to stretch into the billions.
Fabel of the State Lands Commission acknowledged that the government is only just coming to grips with the fact that it incorrectly calculated bonds for years. “Everyone’s now opening their eyes to, ‘Oh my, this isn’t a $20 million removal. It’s maybe a $200 million removal,’” he said of a hypothetical cleanup.
In the case of the Rincon Island bankruptcy, Fabel said the commission’s first priority was to quitclaim the leases — meaning the state would take control of them and get Greka off the island. That happened in December 2017.
Through the bankruptcy, California did consider going after either Grewal himself or other Greka entities, but State Lands Commission staff saw that as a difficult proposition for several reasons. First, UBS had the largest secured claim; second, it would’ve taken additional resources to investigate Greka’s corporate structure; and third, RILP’s long-time general partner and the obvious next target, HVI Cat Canyon, itself filed for bankruptcy in 2019.
So, taxpayers picked up the tab.
The first phase of decommissioning — making Rincon Island and the onshore leases safe, plugging the oil wells and tearing down infrastructure — cost $45 million. The state had $10 million in cleanup bonds from RILP and recovered $8 million from ARCO, the current iteration of original operator Atlantic Richfield. Still, California taxpayers have already paid $27 million.
It’s unknown how much the next step will cost, but there’s no more money from RILP. The state still must remediate outstanding environmental concerns and repurpose the island. The final end-use is yet undetermined, but Fabel said a study found it could cost more than $8 million just to remove the causeway leading to the island, should that be required.
In addition to Rincon Island, the state’s main oil regulator is in the process of collecting a single $1 million bond from HVI Cat Canyon to clean up some of its infrastructure.
Several members of the California Legislature who have long histories with Rincon Island are now looking to reform oil and gas cleanup.
Assemblymember Steve Bennett, D-Ventura, was a Ventura County supervisor when RILP entered bankruptcy. “We’re in a different world,” he said. “We’re in a world of more wells shutting down, and these wells being late in their life cycles with profits not being high, the companies are often smaller, not as capitalized and not as capable of handling the cleanup.”
Bennett recalled that, when he was a county supervisor, Greka’s issues would surface when there was a spill or when activists made enough noise, but “very rarely would it come up through government channels.”
“As I look back on it now,” he said, “I wish we had more proactive monitoring.”
Bennett is now shepherding a bill, AB 896, to begin addressing bankruptcy loopholes. The piece of legislation, which is not opposed by the California Independent Petroleum Association, would allow the state’s key oil regulator to impose a lien on idle well property if an operator doesn’t pay fees on time or if the state begins incurring costs to deal with it. Bennett said the bill would advance the state’s place in line in the event of a bankruptcy, putting it on more equal footing with other creditors.
He’s working alongside state Sen. Monique Limon, D-Santa Barbara, who said she’s taken colleagues to Rincon Island to explain to them the need to address under-funded oil and gas cleanup. She’s the author of SB 47, which would increase how much the money the state can spend annually cleaning up orphaned wells. Those funds would come from fees on industry.
In a May budget revision, Gov. Gavin Newsom proposed spending $200 million to plug wells. The state has a pot of money called the Hazardous and Idle-Deserted Well Abatement Fund that’s paid into by industry and meant to fund some cleanup work, but last year, $10 million was taken from the then-$13 million fund to help balance COVID-19-related budget shortfalls.
“There’s no doubt that there are companies that cause more concern than others and that are bad actors,” Limon said. But, she added, oil and gas producers sticking California with the cleanup tab “absolutely is a systemic issue.”
Judson Boomhower, an environmental economist and assistant professor at the University of California, San Diego, said end-of-life wells are more likely to be operated by small outfits that won’t have much money once they enter bankruptcy protection.
“What’s really different about polluting industries is the ability to avoid these big liabilities through bankruptcy creates a financial incentive to be less safe than a fully accountable firm would be,” he said, meaning that often “little companies can be a little more fast and loose.”
A future after oil on Rincon?
Robert “RB” Brunner has lived in Mussel Shoals for 49 years, so he acts as the “so-called mayor.” A retired building contractor, Brunner worked on Rincon Island’s causeway in the 1970s. “I actually have some blood on that island,” he said.
He convened an informal community meeting one recent morning at the foot of the pier, with residents sharing what they knew of the state’s decommissioning progress and discussing potential future uses for the island. A major telecom company is eyeing it for cell towers (residents oppose the idea); a state university is considering a research station (residents approve); and the state is mulling a marine preserve (residents also approve).
“There’s so many pelicans and seals out there, it’s unbelievable,” Brunner said. At an April public meeting, Ann Scarborough Bull, a scientist at the Marine Science Institute at the University of California, Santa Barbara, said fish species, horn sharks, lobsters, kelp and four types of soft corals known as sea fans had moved in, making the island a biodiversity hot spot.
A state contractor is now conducting a feasibility study to help determine the island’s fate.
But one thing is clear — it’s up to Brunner and his neighbors, Fabel and the state bureaucracy. Grewal doesn’t get to choose what happens next at Rincon Island, but he likely holds little to no further liability for its decommissioning either. Still, Grewal’s presence won’t be far away.
Just inland from the Central Coast, low rolling hills dominate the landscape, some yellow from drought, some blanketed in neat, green rows of grapevines. Grewal’s Ca’ Del Grevino winery sits here, pinot noir grapes growing from picturesque vines. Two miles from his vineyard, rigs rumble through an oil field where nauseating fumes hang in the air.
Some pump jacks in this field still bob slowly up and down, drawing oil to the surface, while others sit rusty and disused. Many once belonged to HVI Cat Canyon, the Greka company, but they were sold or abandoned through bankruptcy. Just like Rincon Island, they’re no longer Grewal’s problem. He can retire from the business.
Mark Olalde covers the environment. Follow him on Twitter at @MarkOlalde.