A decade ago, the Enron scandal caused a $65 billion company to collapse in bankruptcy, leaving investors, including state pension funds, employees, and electric consumers, holding the bag. Now, Chesapeake Energy is following in Enron's footsteps. Ohio Attorney General Mike DeWine should step in to protect Ohioans from this company.
Enron and Chesapeake are alike in three ways: an entrenched and unaccountable management and board, little effective federal or state regulation and a collapsed business model. Oklahoma-based Chesapeake Energy extracts oil and gas from shale using horizontal drilling and hydraulic fracturing ("fracking"), injecting water and toxic chemicals underground to fracture the rock. Chesapeake Energy is the dominant driller in Ohio, with lease rights to 1.5 million acres and 74 percent of the drilling permits issued since 2010.
The Legislature just passed Gov. John Kasich's new law opening up regulations for Chesapeake and companies like it. Under the law, Ohioans do not have the right to know what toxic chemicals Chesapeake is injecting into the ground, and we do not have the right to say "no" if we don't want Chesapeake's drilling rigs in our local communities. Considering Chesapeake Energy's dominance of shale drilling in Ohio, Kasich is hinging his economic strategy on a single company that is coming apart at the seams: Natural gas prices have dropped from $10.79 in 2008 to $2.39 today, and Chesapeake is hard-pressed to earn enough cash to continue operations, let alone pay down debt.
The Securities and Exchange Commission and the Internal Revenue Service are both investigating Chesapeake. Ratings agencies Standard & Poor's, Moody's and Fitch have all recently downgraded the company. Chesapeake investors have lost more than half the value of their stocks since last August. Chesapeake's largest shareholder recently urged the company to sell assets or consider selling the entire company.
State attorneys general have an important role to play in Enron-like situations. Then-Ohio Attorney General Betty Montgomery sued Enron, charging that securities fraud caused losses to Ohio's public employee and state teachers retirement funds. DeWine's immediate predecessor, Richard Cordray, managed lawsuits against Wall Street firms implicated in the 2008 financial free-fall: AIG, Bank of America, Fannie Mae, Freddie Mac and Merrill Lynch. DeWine himself recently sued British Petroleum, on behalf of the state's pension systems, for misrepresenting information about its safety practices before the Deepwater Horizon explosion and then falsifying the size of the spill.
As the state's chief law enforcement officer, DeWine can get to the bottom of questions like these: The company has a shameful record of disclosure to investors and government. Given what Chesapeake Energy officials have been concealing from their own board, what financial information have they been concealing from Ohio landowners, regulators and investors? Isn't it necessary, at the least, given the revelations of corporate dysfunction, to scrutinize the representations made by Chesapeake to Ohio government officials? Are not the company's documented failures thus far a sufficient red flag to state officials to warrant a probe of Chesapeake's activities? Given what we have recently learned about Chesapeake's finances and governance, why is the state not scrutinizing their existing permits and freezing pending permits?
It is a real question whether Chesapeake has the money necessary to carry out activities in our state and comply with the law. Why would the state continue to issue permits to a company that may not survive the year? Ohio's pension funds hold Chesapeake stock, which has lost more than half its value since last summer. Should Ohio pension funds be in court seeking to recover the money they lost due to actions of Chesapeake managers?
Chesapeake Energy has entered into roadway use and maintenance agreements with local governments in shale regions of Ohio.
In them, Chesapeake said it would pay for maintenance and repair of roads and bridges to their pre-drilling activity condition and the strengthening and upgrading of the roads and bridges. Did Chesapeake give these assurances in good faith?
If Chesapeake goes bankrupt or is sold, how can the state protect Ohio investors, landowners and local governments?
(Buchanan is the executive director of the nonpartisan Ohio Citizen Action.)