Case 2:06-cv-01505-MJP Document 30 Filed 05/01/2007 Page 1 of 82
THE HONORABLE MARSHA J. PECHMAN
UNITED STATES DISTRICT COURT WESTERN DISTRICT OF WASHINGTON AT SEATTLE
Case No. 2:06-cv-01505-MJP
IN RE BP PRUDHOE BAY ROYALTY ) CONSOLIDATED AMENDED CLASS TRUST SECURITIES LITIGATION ) ACTION COMPLAINT
Court-appointed Lead Plaintiff, the Teramura Family Trust Group, on behalf of itself and all other persons similarly situated, by its undersigned attorneys, alleges upon personal knowledge as to itself and its own acts, and information and belief as to all other matters, based upon, inter alia, the investigation conducted by and through its attorneys, which included, among other things, a review of Defendants' public statements and announcements, United States Securities and Exchange Commission ("SEC") filings, wire and press releases published by Defendants, securities analysts' reports, interviews, news articles, and other readily obtainable information.
Lead Plaintiff believes that additional evidentiary support will exist for the allegations set forth herein after a reasonable opportunity for discovery. Zwerling, Schachter, & Zwerling, LLP CONSOLIDATED AMENDED COMPLAINT 1904 Third Avenue, Suite 1030 -1- Seattle, WA 98101-1170 Tel: (206) 223-2053 Fax: (206) 343-9636 No. C06-1505 MJP Case 2:06-cv-01505-MJP Document 30 Filed 05/01/2007 Page 2 of 82
NATURE OF THE ACTION
1. Lead Plaintiff brings this class action on behalf of itself and a Class (defined in ¶
265, infra) consisting of all other persons and entities that purchased the publicly-traded units
(the "Trust Units") of the BP Prudhoe Bay Royalty Trust (the "Trust"), which holds a Royalty
Interest (defined in ¶ 40-41, infra) in the production from the Prudhoe Bay oilfields located on
the North Slope of Alaska ("Prudhoe Bay"), during the period from March 31, 2005 through
and including February 5, 2007 (the "Class Period"), and suffered damages.
2. This action involves a class of investors that purchased Trust Units in the open
market and were misled by Defendants' representations regarding, among other things, the
maintenance, operation and the condition of the pipelines at Prudhoe Bay. Throughout the Class
Period, in SEC filings and public statements, Defendants represented to investors that they were
maintaining and operating Prudhoe Bay in accordance with good oil and gas field practices, and
that production from BP Exploration Alaska, Inc.'s (BPXA" or "BP Alaska") share of Prudhoe
Bay would exceed 90,000 barrels per day until at least 2012. Because the major attribute of an
investment in Trust Units is a quarterly distribution based on the amount of oil and condensate
produced at Prudhoe Bay, the price of Trust Units is largely dependent on both BPXA's ability
to produce oil and the amount of oil produced.
3. In fact, Defendants were aware for years before the Class Period that BPXA was
not adequately maintaining the pipelines at Prudhoe Bay and was not acting in accordance with
good oil and gas field practices, in violation of the Prudent Operator Standard (defined in ¶ 43,
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infra) and that BPXA's conduct created a material risk of pipeline leaks, environmental
disasters, lower production and a potential shutdown at Prudhoe Bay.
4. Among other things, Defendants failed to disclose to investors that: BPXA was
not regularly running a corrosion monitoring device called a "smart pig" through its pipelines,
and went approximately eight years without running a smart pig through the Prudhoe Bay
Western Operating Area ("PBWOA" or "WOA") pipelines, and knew that a smart pig had not
been run through the Prudhoe Bay Eastern Operating Area ("PBEOA" or "EOA") pipelines in
approximately fourteen years; BPXA did not conduct a regular maintenance pigging, or
cleaning, program for its pipelines; BPXA gave priority to budgetary guidelines over safety and
maintenance concerns; and BPXA had received repeated warnings from employees that its
inadequate corrosion monitoring program increased the likelihood of accidents and oil spills.
5. As a consequence of Defendants ' misconduct in connection with maintaining the
Prudhoe Bay pipeline, on March 2, 2006, a faulty pipeline in the PBWOA caused the largest oil
spill ever recorded on the North Slope of Alaska, totaling over 200,000 gallons. The pipeline
leak and resulting oil spill was determined to be due to internal corrosion caused by bacteria.
6. On April 30, 2007, a Congressional Committee said there was evidence that deep
cost cuts at BPXA may have been a major factor in pipeline corrosion that led to the March
2006 oil spill. In addition, the United States Government is conducting a criminal investigation
into BPXA' s pipeline maintenance practices and oil spills in Alaska.
7. BPXA's internal report regarding the oil spill stated that the use of a smart pig
could have discovered the internal corrosion. In response to the oil spill, the United States
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Department of Transportation ("DOT") issued a Corrective Action Order on March 15, 2006
(the "March 15th CAO") requiring that BPXA take remedial action, which included running a
smart pig in both the PBWOA and the PBEOA.
8. In response to reports about the spill, Defendants assured the public and investors
that its corrosion monitoring program was "aggressive" and "robust". However, BPXA's
undisclosed inadequate maintenance at Prudhoe Bay continued. On August 7, 2006, before the
stock market opened, BP p.l.c. ("BP plc") shocked investors by announcing that BPXA was
completely shutting down production at Prudhoe Bay following the discovery of a leak and an
oil spill from another corroded pipeline . BPXA only discovered the internal corrosion, which,
like the corrosion that led to the March 2006 oil spill, was thought to be caused by bacteria,
because it was conducting a smart pig run in order to comply with the March 15th CAO.
9. In response to this news, the price of Trust Units plummeted from $87.89 to
$76.85, a decline of approximately 14%.
10. Following the August 2006 shutdown announcement, Defendants repeatedly
assured the public that the problem was temporary and full production at Prudhoe Bay would
resume. Defendants also refuted public reports that the corrosion in the pipeline was severe and
reassured investors that production would soon return to normal levels. The Trust's Form 10-Q
for the third quarter of fiscal year ("FY") 2006 (the "Q3 FY 2006 1OQ") stated that "Prudhoe
Bay output was reported to have returned to its pre-shutdown level of over 400,000 barrels per
day by late October 2006." However, these statements were materially false and misleading
because Defendants knew, and failed to disclose, that due to the severity of the corrosion, the
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necessary repairs to the pipelines at Prudhoe Bay, among other things, would impact production
and that full production capacity at Prudhoe Bay was, admittedly, never achieved.
11. On February 5, 2007, in a drastic reversal from previous SEC filings and public
statements, the Trust issued a Form 8-K announcing that, due to "near term Integrity-driven
activity focused on field wide infrastructure renewal," the Trust Unit holders ' share of
production from Prudhoe Bay would fall below 90,000 barrels per day, beginning in 2007, five
years earlier then previously represented.
12. In reaction to this news, the price of Trust Units dropped almost 9%, from a
closing price of $73.70 on February 5, 2007 to a closing price of $67.10 on the following day.
13. In addition, the Trust's Form 10-K for FY 2006 (the "FY 2006 10-K"), filed on
March 1, 2007, disclosed that, despite Defendants' earlier statements, "Temporary oil transport
bypass lines, installed following the production disruptions of 2006, did not recover full
production capacity in the field."
14. During the Class Period, Defendants had actual knowledge of or recklessly
disregarded material facts and failed to disclose material information to the investing public
concerning the maintenance and operating condition of Prudhoe Bay. Defendants' conduct
operated as a fraud or deceit on Trust Unit purchasers and caused and maintained artificial
inflation in the price of Trust Units during the Class Period. When the full truth about the
condition of Prudhoe Bay was disclosed, the artificial inflation in the price of Trust Units was
removed and Class Members (defined in ¶ 265, infra) suffered damages.
Zwerling, Schachter, & Zwerling, LLP CONSOLIDATED AMENDED COMPLAINT - 1904 Third Avenue, Suite 1030 -5 Seattle, WA 98101-1170 Tel: (206) 223-2053 Fax: (206) 343-9636 No. C06-1505 MJP Case 2:06-cv-01505-MJP Document 30 Filed 05/01/2007 Page 6 of 82
JURISDICTION AND VENUE
15. This Court has jurisdiction over the subject matter of this action pursuant to
Section 27 of the Securities Exchange Act of 1934 (the "Exchange Act"), 15 U.S.C. §78aa and
28 U.S.C. § 1331.
16. Venue is proper in this District pursuant to Section 27 of the Exchange Act and 28
U.S.C. §1391(b). Many of the acts and transactions alleged herein occurred in substantial part in
this District. Moreover, BPXA and BP plc conduct business in this District.
17. In connection with the acts, transactions and conduct alleged herein, Defendants,
directly and indirectly, used the means and instrumentalities of interstate commerce, including
the United States mails, interstate telephone communications and the facilities of the national
securities exchanges.
THE PARTIES
18. Lead Plaintiff, the Teramura Family Trust Group, is made up of the Yoko
Teramura Family Insurance Trust, the Mami Teramura Family Insurance Trust and the Diana
Allen Life Insurance Trust. Each member of the Teramura Family Trust Group purchased Trust
Units during the Class Period, as evidenced by the attached certifications, and was damaged as a
result of the conduct complained of herein.
19. Defendant BP plc is a public limited company registered in England and Wales.
BP plc was created in 1998 as a result of a merger between the Amoco Corporation ("Amoco")
and the British Petroleum Company p.l.c. BP plc is a multi-national, integrated oil company
with three main operating business segments: exploration and production, refining and
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marketing, and gas, power and renewables. Approximately 40% of BP plc's fixed assets are
located in the United States, and BP plc markets petroleum products in the U. S. and in this
District under the BP and Amoco brands.
20. During the Class Period, BP plc made public statements regarding the operation of
Prudhoe Bay, the maintenance and condition of pipelines at Prudhoe Bay, and production at
Prudhoe Bay, which directly affected the interests of investors in Trust Units during the Class
Period. Defendant BP plc had a duty to promptly disseminate complete, truthful and accurate
information and to promptly correct any public statements that had become materially false or
misleading.
21. Defendant BPXA is a Delaware corporation with its principal place of business in
Anchorage, Alaska. BPXA conducts business in this District. BPXA is an indirect wholly-
owned subsidiary of BP plc and an indirect subsidiary of BP America, Inc. ("BP America")
22. BPXA holds oil and gas interests in Prudhoe Bay (the "BP Working Interests"),
which is located on the North Slope of Alaska, 250 miles north of the Arctic Circle. Prudhoe
Bay extends approximately 12 miles by 27 miles and contains nearly 150,000 productive acres.
Prudhoe Bay, which was discovered in 1968 by BP plc and others, has been in production since
1977.
23. BPXA shares control of Prudhoe Bay with other working interest owners. BPXA
currently holds approximately 26% of the oil and gas interests in Prudhoe Bay. Other large
stake holders include ExxonMobil and ConocoPhillips, each with an approximate 36% interest.
The operations of BPXA and the other working interest owners are governed by an agreement
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dated April 1, 1977 among the State of Alaska and such working interest owners establishing the
Prudhoe Bay Unit (the "Prudhoe Bay Unit Agreement") and an agreement dated April 1, 1977
among the working interest owners governing Prudhoe Bay Unit operations (the "Prudhoe Bay
Unit Operating Agreement")
24. Since July 1, 2000, BPXA has been solely responsible for Prudhoe Bay's
operations, including production and maintenance.
25. During the Class Period, BPXA made public statements regarding the operation of
Prudhoe Bay, the maintenance and condition of pipelines at Prudhoe Bay, and production at
Prudhoe Bay, which directly affected the interests of investors in Trust Units during the Class
Period. Defendant BPXA had a duty to promptly disseminate complete, truthful and accurate
information and to promptly correct any public filings or statements that had become materially
false and misleading, including public filings of the Trust.
26. BPXA was responsible for and, provided information to investors in the Trust
Units that was incorporated into the Trust's filings with the SEC. Defendant BPXA had a duty
to report to investors in the Trust complete, truthful and accurate information concerning the
Royalty Interest as well as matters affecting the Royalty Interest, in accordance with the Trust's
reporting and disclosure obligations pursuant to applicable law and the requirements of any
stock exchange on which the Trust Units were issued.
27. Defendant Steven Marshall ("Marshall") was President of BPXA from 2001
through 2006. As BPXA President, Marshall was in charge of the overall business and
operations in Prudhoe Bay. During the Class Period, Marshall made public statements regarding
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1 the operation of Prudhoe Bay, the maintenance of and condition of pipelines at Prudhoe Bay, 2 and production at Prudhoe Bay, which directly affected the interests of investors in Trust Units 3 during the Class Period. As BPXA President, Marshall had responsibility for public statements 4 issued by BPXA regarding Prudhoe Bay, as well as information, forecasts, projections and 5
6 representations made by BPXA to investors in Trust Units. Marshall had a duty to promptly
7 disseminate complete, truthful and accurate information and to promptly correct and public
8 statements that had become materially false or misleading. As President of BPXA, Defendant 9 Marshall was responsible for the information provided by BPXA pursuant to its reporting 10 obligations to the Trust, and for SEC filings made by the Trust. 11 28. Defendant Maureen L. Johnson ("Johnson") was, during the Class Period, BPXA's 12
13 Senior Vice President of the Greater Prudhoe Bay Unit. During the Class Period, Johnson made
14 public statements regarding the operation of Prudhoe Bay, the maintenance of and condition of 15 pipelines at Prudhoe Bay, and production at Prudhoe Bay, which directly affected the interest of 16 investors in Trust Units during the Class Period. Defendant Johnson had a duty to promptly 17 disseminate complete, truthful and accurate information and to promptly correct any public 18
19 statements that had become false or misleading. As Senior Vice President of BPXA, Defendant
20 Johnson was responsible for the information provided by BPXA pursuant to its reporting
21 obligations to the Trust, and for SEC filings made by the Trust. 22 29. Defendant Robert A. Malone ("Malone") was appointed Chairman and President 23 of BP America in 2006. Malone is BP plc's chief representative in the United States. During 24 the Class Period, Malone made public statements regarding the operation of Prudhoe Bay, the 25
26 Zwerling, Schachter, & Zwerling, LLP CONSOLIDATED AMENDED COMPLAINT - 9 - 1904 Third Avenue, Suite 1030 Seattle, WA 98101-1170 Tel: (206) 223-2053 Fax: (206) 343-9636 No. C06-1505 MJP Case 2:06-cv-01505-MJP Document 30 Filed 05/01/2007 Page 10 of 82
maintenance of and condition of pipelines at Prudhoe Bay, and production at Prudhoe Bay,
which directly affected the interests of investors in Trust Units during the Class Period.
Defendant Malone had a duty to promptly disseminate complete, truthful and accurate
information and to promptly correct any public statements that had become materially false or
misleading. As President of BP America, Defendant Malone was responsible for the information
provided by BPXA pursuant to its reporting obligations to the Trust, and for SEC filings made
by the Trust.
30. Defendants Marshall, Johnson, and Malone are collectively referred to herein as
the "Individual Defendants."
31. BP plc, BPXA and the Individual Defendants are collectively referred to herein as
"Defendants."
32. BP plc and the Individual Defendants had the power to influence and cause (and
did cause) BPXA to engage in the unlawful conduct complained of herein.
33. Defendants had access to internal documents, reports and other information,
including adverse non-public information concerning Prudhoe Bay operations, maintenance and
business (as described herein) which directly affected the interests of investors in the Trust Units.
34. During the Class Period, Defendants made statements regarding the operation of
Prudhoe Bay, the maintenance of and condition of pipelines at Prudhoe Bay, and production at
Prudhoe Bay, which directly affected the interests of investors in Trust Units.
35. Each of the Defendants is liable as a participant in a fraudulent scheme and course
of business that operated as a fraud or deceit on purchasers of Trust Units by concealing and
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misrepresenting material adverse facts concerning the operations of Prudhoe Bay, the lack of
maintenance and deteriorating condition of the pipelines at Prudhoe Bay, and the material risk of
lower production resulting from the Defendants' gross recklessness in failing to properly
maintain the pipelines at Prudhoe Bay.
36. Each of the Defendants knew or recklessly disregarded that the omissions and
misrepresentations complained of herein would adversely affect the integrity of the market for
Trust Units and would cause the price of Trust Units to become artificially inflated. Each of the
Defendants acted knowingly or in such a reckless manner as to constitute a fraud and deceit
upon Lead Plaintiff and the other Class Members.
SUBSTANTIVE ALLEGATIONS
BACKGROUND OF THE TRUST
37. BP Prudhoe Bay Royalty Trust is a grantor trust, created as a Delaware business
trust pursuant to the BP Prudhoe Bay Royalty Trust Agreement dated February 28, 1989 (the
"Trust Agreement") among The Standard Oil Company ("Standard Oil") and BPXA, as
Grantors, and the Bank of New York as Trustee. Under the Trust Agreement, more fully
described below, Unit Holders are entitled to receive quarterly distributions from the BP
Working Interests in Prudhoe Bay.
38. The Trust is also based on a series of other agreements relating to the BP Working
Interests in Prudhoe Bay: the Overriding Royalty Conveyance; the Trust Conveyance; and the
Support Agreement (together with the Trust Agreement, collectively, the "trust agreements")
The Trust Agreement, Overriding Royalty Conveyance and Support Agreement were signed by
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1 BPXA and incorporated into the Trust's Forms 10-K and Forms 10-Q issued during the Class 2 Period. 3 Overriding Royalty Conveyance 4 39. The Overriding Royalty Conveyance, dated February 27, 1989, conveys Grantor 5
6 BPXA' s Royalty Interest in oil and condensate produced at Prudhoe Bay (defined in ¶ 40, infra)
7 to Grantee Standard Oil. This agreement was the necessary first step in establishing the Trust
8 and enabling Standard Oil to issue Trust Units to the public. 9 40. Accordingly, Standard Oil received the Royalty Interest "consisting of the right to 10 receive a Per Barrel Royalty for each Barrel of Royalty Production..." 11 41. The Royalty Production was defined as "16 .4246% of the lesser of (1) the first 12
13 90,000 Barrels of [BPXA's] actual average daily production of Oil for such quarter and (2)
14 [BPXA's] actual average daily production of Oil for such quarter." 15 42. The Overriding Royalty Conveyance further set forth the method for computing 16 the Royalty Payment: 17 Section 3.1 Payment. The aggregate payments from [BPXA] to [Standard Oil] 18 under the Royalty Interest for any calendar quarter will equal ... the sum of the 19 product for each day of such calendar quarter of (1) the Royalty Production and (2) the Per Barrel Royalty; provided, that the total payment under the Royalty 20 Interest for any calendar quarter ... shall not be (1) less than zero or (2) more than the aggregate value of the total production of Oil for such calendar quarter, 21 net of [the State of Alaska's] Royalty and less the value of any applicable payments made the [affiliates of BPXA]. 22 to
23 43. Section 7.1 of the Overriding Royalty Conveyance obligates BPXA to operate
24 Prudhoe Bay according to the "Prudent Operator Standard": 25 Section 7.1 Prudent Operator Standard. [BPXA] agrees, to the extent it has the 26 Zwerling, Schachter, & Zwerling, LLP CONSOLIDATED AMENDED COMPLAINT 1904 Third Avenue, Suite 1030 -12- Seattle, WA 98101-1170 Tel: (206) 223-2053 Fax: (206) 343-9636 No. C06-1505 MJP Case 2:06-cv-01505-MJP Document 30 Filed 05/01/2007 Page 13 of 82
legal right to do so under the Prudhoe Bay Unit Agreement, the Prudhoe Bay Unit Operating Agreement, the Leases and applicable law affecting or pertaining to the 2 Subject Interests, that it will conduct and carry on the development, exploration, 3 production, maintenance and operation of the Subject Interests with reasonable and prudent business judgment, in accordance with the provisions of this Article 4 Seven and good oil and gas field practices, as a reasonable and prudent operator, and without regard to the existence of the Royalty Interest or any other royalty, 5 overriding royalty, or other interest created subsequent to the Effective Date (the 6 "Prudent Standard").
7 44. In addition, the Overriding Royalty Conveyance provides:
8 Section 7.2 Assurances. (1) [BPXA] agrees, to the extent it has the legal right to 9 do so under the terms of the Prudhoe Bay Unit Agreement, the Prudhoe Bay Unit Operating Agreement, the Leases and applicable law affecting or pertaining to the 10 Subject Interests, that it will perform all material obligations to be performed by it...under all material contracts and agreements applicable to the Subject Interests 11 and the production and transportation to market of Oil (including, without limitation, the Prudhoe Bay and will use its best efforts (by taking such action as is 12 available to it by contract, at law, or in equity) to enforce the performance under 13 such contracts and agreements of the other parties thereto.
14 Trust Agreement 15 45. The Trust Agreement creates the Trust, and states that Trust Unit holders are 16 express beneficiaries of the Trust. Accordingly, purchasers of Trust Units understand that they 17 are investing in a security which entitles them to receive distributions based on the amount of oil 18
19 produced by the BP Working Interests in Prudhoe Bay and the price of oil per barrel at that time
20 less certain fixed costs.
21 46. The Trust Agreement provides: 22 Section 2.02 Purposes. The purposes of the Trust are (a) to convert the Royalty 23 Interest to cash either (1) by retaining the Royalty Interest and collecting the proceeds from production in accordance with the terms of the Conveyance until 24 production has ceased permanently or the Royalty Interest has otherwise terminated or (2) by selling or otherwise disposing of the Royalty Interest (within 25 the limits stated herein); and (b) to distribute such cash, net of amounts for 26 Zwerling, Schachter, & Zwerling, LLP CONSOLIDATED AMENDED COMPLAINT 1904 Third Avenue, Suite 1030 - 13 - Seattle, WA 98101-1170 Tel: (206) 223-2053 Fax: (206) 343-9636 No. C06-1505 MJP Case 2 : 06-cv-01505-MJP Document 30 Filed 05/01/2007 Page 14 of 82
payment of expenses and liabilities of the Trust, to the Unit Holders as provided herein. 2
3 47. Pursuant to the Trust Agreement, BPXA is obligated to provide certain
4 information to the Trustee for disclosure to investors in the Units:
5 Section 4.05 Information to be Supplied by [BPXA]. [BPXA] shall provide to 6 the Trustee on a timely basis upon request such information not known or otherwise available to the Trustee concerning the Royalty Interest (including 7 information with respect to the properties burdened by the Royalty Interest) as shall be necessary to permit the Trustee to comply with respect to the Trust with 8 the reporting obligations of the Trust pursuant to the Securities Exchange Act of 9 1934, as amended, the requirements of any stock exchange on which the Units are listed and this Agreement and for any other reasonable purpose of the Trust. 10 48. BPXA, along with the Trustee, is responsible for the representations and content 11 of the Trust's SEC filings. Section 6.01 of the Trust Agreement states: 12
13 [BPXA] and the Trustee are hereby authorized make and shall be responsible for all filings on behalf of the Trust with the Securities and Exchange Commission 14 required by the Exchange Act and with the Securities and Exchange Commission or such other governmental authorities required by applicable law or regulation 15 with respect to the Units as may be specified from time to time in an Officer's 16 Certificate delivered to the Trustee.
17 49. Further, Section 12.01 states:
18 The Trustee, or its authorized representative, shall have the right during reasonable 19 business hours at the cost and expense of the Trust to inspect the Company's books and records relating to the properties burdened by the Royalty interest and 20 to discuss with representatives of the Company the affairs, finances and accounts of the Company relating to the properties burdened by the Royalty Interest. 21
22 Trust Conveyance
23 50. The Trust Conveyance, dated February 28, 1989, conveys Standard Oil's Royalty
24 Interest in oil and condensate produced at Prudhoe Bay (which it had received from BPXA 25 under the Overriding Royalty conveyance) to the Trust: 26 Zwerling, Schachter, & Zwerling, LLP CONSOLIDATED AMENDED COMPLAINT 1904 Third Avenue, Suite 1030 -14- Seattle, WA 98101-1170 Tel: (206) 223-2053 Fax: (206) 343-9636 No. C06-1505 MJP Case 2:06-cv-01505-MJP Document 30 Filed 05/01/2007 Page 15 of 82
1 [Standard Oil], ... does hereby bargain, sell, grant, convey, transfer, assign, set over and deliver unto [the Trust], its successors and assigns the Royalty Interest 2 and all rights and benefits to which Overriding Royalty Conveyance Grantee is 3 entitled under or pursuant to the Overriding Royalty Conveyance (including, without limitation, the rights and benefits arising out of the covenants, 4 representations, warranties and indemnities made by Overriding Royalty Conveyance Grantor to or for the benefit of Overriding Royalty Conveyance 5 Grantee pursuant to the Overriding Royalty Conveyance), to have and to hold 6 forever. [Section 2]
7 Thus, Trust Units holders are entitled to the Royalty Payments described in ¶¶ 40-42, supra.
8 51. In consideration of the grant of the Royalty Interest, the Bank of New York 9 delivered certificates representing an aggregate of 21,400,000 Trust Units to Standard Oil. 10 These Trust Units were sold to institutional investors and to the public, in an initial public 11 offering on or about May 24, 1989. The Trust Units are listed and presently trade on the New 12
13 York Stock Exchange.
14 Support Agreement 15 52. The Support Agreement between BP plc, BPXA, Standard Oil and the Trust, 16 dated February 28, 1989, states that BP plc agrees to provide financial support to BPXA and 17 Standard Oil if BPXA and Standard Oil are unable to make the required royalty payments to the 18
19 Trust.
20 53. Specifically, Section 2 of the Support Agreement states that:
21 Subject to the terms hereof BP shall... (i) cause [BPXA] to perform its payment obligations under the Royalty Interests pursuant the 22 to Conveyance and (ii) cause [BPXA] and [Standard Oil] to satisfy their 23 respective payment obligations to the Trustee, Transfer Agent and Registrar and their respective payment obligation to the Trust under the 24 Royalty Trust Agreement (including without limitation, the obligation to make payments as indemnification), including, in each case, without 25 limitation, contributing to [BPXA] or [Standard Oil] or causing to be 26 Zwerling, Schachter, & Zwerling, LLP CONSOLIDATED AMENDED COMPLAINT 1904 Third Avenue, Suite 1030 - 15 - Seattle, WA 98101-1170 Tel: (206) 223-2053 Fax: (206) 343-9636 No. C06-1505 MJP Case 2:06-cv-01505-MJP Document 30 Filed 05/01/2007 Page 16 of 82
contributed to [BPXA] or [Standard Oil] by an affiliate of BP such funds as are necessary to make such payments. BP's obligations under the foregoing undertaking are unconditional.
Operation of the Trust
54. The Trust is a passive entity. The Trust property consists exclusively of the
Royalty Interest. The Trust's share of oil production from Prudhoe Bay is calculated based on
BPXA's ownership interest in the oil rim participating area of 50.56 percent as of February 28,
1989, regardless of any subsequent reductions in BPXA's oil rim ownership or increase in gas
condensate ownership.
55. The Trustee collects and distributes the revenues from the Royalty Interest and
pays liabilities and expenses of the Trust. Generally, the Trust has no source of liquidity and no
capital resources other than the revenue attributable to the Royalty Interest that it receives from
time to time.
56. BPXA makes quarterly payments to the Trust of the amounts due with respect to
the Trust's Royalty Interest on the fifteenth day following the end of each calendar quarter or, if
the fifteenth is not a business day, on the next succeeding business day. The Trust Agreement
requires the Trustee to pay the quarterly distribution to Trust Unit holders on the fifth day after
the Trustee's receipt of the amount paid by BPXA. Because the Trust Units are registered
pursuant to Section 12(g) of the Exchange Act and are publicly traded, the Trust files quarterly
and annual reports pursuant to SEC rules.
BPXA'S OPERATION OF PRUDHOE BAY
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57. The royalty payments to investors in the Trust Units directly affect the market 2 price of the Trust Units and are, in large part, dependent upon BPXA's operation of Prudhoe 3 Bay in an efficient and productive manner. Accordingly, the trust agreements state that BPXA 4 will use "good oil and gas field practices," and operate the oilfield as "a reasonable and prudent 5
6 operator."
7 58. It is well-accepted within the oil and gas industry that good oil and gas field
8 practices require, among other things, a regular program of pigging pipelines in order to clear 9 them of debris and detect corrosion. 10 59. A "pig" is the oil industry term for a tool, usually shaped like a cylinder, pushed 11 through a pipeline. There are two types of pigging practiced in the industry - maintenance 12
13 pigging and "smart" pigging for inspection of pipelines.
14 60. As stated in the "Overview of Corrosion Prevention Programs" fact sheet available 15 on BP plc's website: 16 Maintenance pigging is the term for using a mechanical tool to clean the inside of a 17 pipeline. The tool comes in various configurations depending on the application (e.g. foam, disc, cup or brush). Typically the tool is used with fluids remaining in 18 the line. The pressure of the fluids (oil, gas and/or water) acts as the drive 19 mechanism for moving the pig from point to point. Maintenance pigging removes undesirable material, debris (liquid or solid) e.g., wax, paraffin, scale, sediment and 20 water, corrosion cells from accumulating.
21 61. The Overview of Corrosion Prevention Programs also explains smart pigging: 22 For mechanical integrity, specialty tools like "Smart Pigs" rigged with Magnetic 23 Flux Leakage (MFL) and Ultrasonic Thickness testing (UTT) modules are used for accurate inspections of the wall of pipelines. Smart pigs can also perform mapping 24 with GPS technology and detecting cracks from stress corrosion. Smart pigs and other automated techniques are helpful in identifying locations that should be more 25 closely monitored using one of the point inspection methods (e.g. visual; 26 Zwerling, Schachter, & Zwerling, LLP CONSOLIDATED AMENDED COMPLAINT 1904 Third Avenue, Suite 1030 -17- Seattle, WA 98101-1170 Tel: (206) 223-2053 Fax: (206) 343-9636 No. C06-1505 MJP Case 2:06-cv-01505-MJP Document 30 Filed 05/01/2007 Page 18 of 82
ultrasonic; radiographic).
62. Smart pigs can indicate the presence or absence of cracks and corrosion and pitting
within a pipeline, among other things.
63. Smart pigs can quickly process data showing the extent of corrosion along
intervals as small as one-tenth of an inch along a pipeline.
64. In an August 13, 2006 Anchorage Daily News article, Kirk Langford, head of
transmission pipeline inspection for oil services firm Baker Hughes Inc, stated "Regular pigging
is good business.... The better pipeline operators have always done this."
65. In the same article, Tom Miesner, a Houston-based pipeline consultant, stated
"smart pigging is the ideal .... They are about the only thing you can run through a pipe in order
to find anomalies."
66. The article also stated that a study conducted by the Association of Oil Pipe Lines
found that the use of smart pigs can significantly reduce pipeline spills. "The study, which
covered 1999-2004, showed the overall number of spills on pipeline segments tested with smart
pigs dropped approximately 50 percent."
67. In an August 13, 2006 Houston Chronicle article, Jack Smart, a Houston
consulting engineer who specializes in pigging, stated "most companies would consider using
pigs regularly good operating practice."
68. Rick Eckert, a corrosion expert with CC Technologies Services and author of
Field Guide for Investigating Internal Corrosion of Pipelines, stated in the article that "Pigging
is really the No. 1 way of removing debris and preventing internal corrosion."
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69. As described below, for many years BPXA did not, in a manner consistent with
good oil and gas field practices, either maintenance pig or smart pig the Prudhoe Bay pipelines.
In addition, BPXA elevated cutting costs above maintenance and safety of the pipeline
infrastructure.
DEFENDANTS' MATERIALLY FALSE AND MISLEADING STATEMENTS
The Trust's FY 2004 Form 10-K
70. On March 31, 2005, the Trust filed its Form 10-K for FY 2004 (the "FY 2004 10-
K") with the SEC. According to the FY 2004 10-K, the BP Working Interests produced an
average of 121.1 thousand barrels per day of oil and condensate in 2004.
71. The Trust distributed $1.304 per Trust Unit in the fourth quarter of 2004, and
distributed a total of $3.818 per Trust Unit for FY 2004, an increase of approximately 49% from
FY 2003. The Trust's total royalty revenue for FY 2004 was $82,682,000 , an increase of
approximately 48% from FY 2003.
72. Pursuant to Section 6.01 of the Trust Agreement, BPXA, along with the Trustee,
is "authorized to make and shall be responsible for all filings on behalf of the Trust with the
Securities and Exchange Commission required by the Exchange Act...." The FY 2004 10-K
stated that under the terms of the trust agreements, BPXA is required to provide the Trust with:
Such information concerning the Royalty Interest as the Trustee may need and to which [BPXA] has access to permit the Trust to comply with any reporting or disclosure obligations of the Trust pursuant to applicable law and the requirements of any stock exchange on which the Units are issued.
73. A similar statement of BPXA's responsibility for and obligations to investors
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regarding disclosures in SEC filings is included in each of the Trust's Forms 10-K and Forms 10-
Q filed during the Class Period described herein.
74. Included with and incorporated by reference into the FY 2004 10-K as Exhibits
were the trust agreements, including the Overriding Royalty Conveyance, which states that
BPXA will comply with the Prudent Operator Standard.
75. Therefore, as represented to investors in Exhibit 4.2 to the FY 2004 10-K, BPXA
would "conduct and carry on the development, exploration, production, maintenance and
operation of [the Trust's Interests] with reasonable and prudent business judgment, in
accordance with... good oil and gas field practices, as a reasonable and prudent operator...."
(Overriding Royalty Conveyance, § 7.1.)
76. However, at the time the FY 2004 10-K was filed, this statement was materially
false and misleading. Defendants failed to disclose to investors that: (i) for years BPXA had
failed to implement good oil and gas field practices in maintaining the Prudhoe Bay pipelines; (ii)
BPXA's gross recklessness in failing to maintain the pipelines created a material risk of pipeline
leaks, shutdowns, environmental disasters and lower production; (iii) BPXA had ignored
numerous warnings that its maintenance of the pipelines violated the Prudent Operator Standard;
(iv) BPXA' s corrosion monitoring efforts had been reduced, delayed, or eliminated due to severe
budget constraints; and (v) BPXA knowingly ended numerous practices that prudent operators
and regulators in the industry considered necessary to properly operate and maintain the pipeline.
Defendants knew and failed to disclose the following material facts:
• BPXA had discontinued smart pigging and maintenance pigging in the Western Operating Area pipeline at Prudhoe Bay in 1998;
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• The Eastern Operating Area pipeline at Prudhoe Bay had not been smart pigged or maintenance pigged since 1992; 2 • BPXA did not have a regular internal inspection or maintenance pigging program 3 for its pipelines; 4 • BPXA's corrosion strategy was developed in 1999 for the Western side of 5 Prudhoe Bay and had not been updated since then; no corrosion strategy was created or designed for the Eastern half of Prudhoe Bay; 6 • BPXA was operating certain pipelines at decreased pressure because of known 7 corrosion problems within those pipelines;
8 • Following cost cuts implemented in 1999 and thereafter, BPXA cut spending on a corrosion inhibitor in its Alaska pipelines; 9 • As of October 2001, BPXA internal documents indicated that BPXA management 10 was not adequately addressing employee concerns regarding the integrity of the 11 equipment at Prudhoe Bay;
12 • As early as 2001, BPXA internal documents indicated that BPXA management gave priority to budgetary guidelines over safety concerns; critical safety systems 13 needed urgent maintenance or significant upgrades; and it was not addressing long- term [pipeline] integrity concerns and preventative maintenance; 14 • As early as 2001, the Prudhoe Bay pipeline was experiencing leaks and spills due 15 to excessive corrosion; 16 • In May 2003, a pipeline at Prudhoe Bay leaked 6,000 gallons of oil and oily water 17 due to internal corrosion;
18 • In May 2004, a number of allegations regarding the management of BPXA's Corrosion, Inspection and Chemicals Group ("CIC"), which was tasked with 19 monitoring and preventing corrosion at Prudhoe Bay, were brought to the attention of senior BPXA management and BP plc. Walter E. Massey, chairman 20 of the environment committee of BP plc's non-executive board, learned about 21 workers' concerns regarding health, safety, and environmental ("HSE") threats at Prudhoe Bay. Massey was informed that the employees and workers "seek to see 22 the corrosion problem addressed and corrective action undertaken without further delay...."; 23 • Prior to and during the Class Period, BPXA received repeated warnings from its 24 employees that cutbacks in routine pipeline maintenance and inspections had 25 increased the likelihood of accidents or oil spills;
26 Zwerling, Schachter, & Zwerling, LLP CONSOLIDATED AMENDED COMPLAINT 1904 Third Avenue, Suite 1030 -21- Seattle, WA 98101-1170 Tel: (206) 223-2053 Fax: (206) 343-9636 No. C06-1505 MJP Case 2:06-cv-01505-MJP Document 30 Filed 05/01/2007 Page 22 of 82
• In 2004, an internal investigation conducted by outside counsel found that Richard C. Woollam ("Woollam"), manager of CIC, had a management style that had a chilling effect on the reporting of HSE concerns and recommended a "thorough audit" of the corrosion program data systems;
• The report also found that Woollam's "overbearing management style" resulted in managers "forcing the adoption" of Woollam's decisions, "regardless of their reservations over them and line worker complaints about them."; and
• CIC was operating without key personnel. The CIC Team Leader and the Senior Corrosion Engineer both left the company at the end of 2004 and had not been replaced.
77. The FY 2004 10-K also represented to investors that: "[BPXA] anticipates that
net production from current proved reserves... will exceed 90,000 barrels per day until the year
2013."
78. This representation was based on a BPXA report signed by Defendant Johnson
and sent to the Trust.
79. The expected net production of proved reserves at the 90,000 barrels per day level
until 2013 (and later at lower levels) formed, in part, the basis for the market price of Trust Units
and the basis for expected distributions to investors in future years. Further, although
production declines are normal as fields age, here the production decline curve during the Class
Period allowed investors to understand that until 2013 production for the BP Working Interests
would meet or exceed 90,000 barrels per day on average.
80. However, Defendants knew that BPXA's representation of net production
exceeding 90,000 barrels per day until 2013 was a materially false and misleading statement at
the time it was made because Defendants knew, but failed to disclose, that the improper
maintenance of the Prudhoe Bay pipelines created a material risk that a shutdown of production
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1 at Prudhoe Bay would be necessary, and that net production would, as a result, fall below 2 90,000 barrels per day prior to 2013. BPXA's annual production rates as represented to 3 investors ignored the known and undisclosed risks set forth in ¶ 76, supra. 4 81. The FY 2004 10-K also failed to disclose the following material risks to investors: 5
6 • That Prudhoe Bay oil production could be shut down partially or entirely as a result of BPXA's maintenance failures and damage to or failure of pipelines or 7 equipment, which could have an adverse effect on future royalty payments; and
8 • That field-wide infrastructure repairs, pipeline replacements and other well- related activities necessitated by BPXA's years of neglect could result in significant 9 downtime and have a material adverse effect on production levels. 10 82. The FY 2004 10-K also stated: 11 In general, BP Alaska's oil and gas activities are subject to existing federal, state 12 and local laws and regulations relating to health, safety, environmental quality and pollution control. BP Alaska believes that the equipment and facilities currently 13 being used in its operations generally comply with the applicable legislation and regulations. 14
15 83. The foregoing statement (¶ 82) was materially false and misleading because
16 Defendants knew that the improperly maintained pipelines at Prudhoe Bay and BPXA's violation 17 of the Prudent Operator Standard created a material risk that BPXA was in violation of local 18 laws relating to health, safety, environmental quality and pollution control, and in the event of an 19 oil spill, BPXA would be exposed to a shutdown of the pipeline due to such environmental 20
21 violations and further, that such events could subject BPXA to criminal liability and further limit
22 production from Prudhoe Bay.
23 84. On the day the FY 2004 10-K was filed, the closing price for Trust Units was 24 $69.80. 25 The Trust's FY 2005 Forms 10-Q 26 Zwerling, Schachter, & Zwerling, LLP CONSOLIDATED AMENDED COMPLAINT 1904 Third Avenue, Suite 1030 - 23 - Seattle, WA 98101-1170 Tel: (206) 223-2053 Fax: (206) 343-9636 No. C06-1505 MJP Case 2:06-cv-01505-MJP Document 30 Filed 05/01/2007 Page 24 of 82
Q 1 FY 2005 Form 10-Q
85. The Trust filed its Form 10-Q for the first quarter of FY 2005 on May 10, 2005
(`Q1 FY 2005 10-Q"). The Trust distributed $1.544 per Trust Unit in the first quarter, an
increase of approximately 130.4% from the same quarter in the previous fiscal year. The Trust's
total royalty revenue for Q1 FY 2005 was $33,197,000, an increase of approximately 126.4%
from Q 1 FY 2004.
86. Included with and incorporated by reference into the Q1 FY 2005 10-Q as Exhibits
were the trust agreements, including the Overriding Royalty Conveyance, which states that
BPXA will comply with the Prudent Operator Standard.
87. Therefore, as represented to investors in Exhibit 4.2 to the Q1 FY 2005 10-Q,
BPXA would "conduct and carry on the development, exploration, production, maintenance and
operation of [the Trust's Interests] with reasonable and prudent business judgment, in
accordance with... good oil and gas field practices, as a reasonable and prudent operator...."
(Overriding Royalty Conveyance, § 7.1.)
88. Consistent with the FY 2004 10-K, the Q1 FY 2005 10-Q reiterated BPXA's
representation that its average daily net production from the BP Working Interests would
continue to exceed 90,000 barrels per day until the year 2013.
Q2 FY 2005 Form 10-Q
89. The Trust filed its Form 10-Q for the second quarter of FY 2005 on August 9,
2005 ("Q2 FY 2005 10-Q"). The Trust distributed $1.545 per Trust Unit in the second quarter,
an increase of approximately 82.6% from the same quarter in the previous fiscal year. The
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Trust's total royalty revenue for Q2 FY 2005 was $33,413,000, an increase of approximately
82.17% from Q2 FY 2004.
90. Included with and incorporated by reference into the Q2 FY 2005 10-Q as Exhibits
were the trust agreements, including the Overriding Royalty Conveyance, which states that
BPXA will comply with the Prudent Operator Standard.
91. Therefore, as represented to investors in Exhibit 4.2 to the Q2 FY 2005 10-Q,
BPXA would "conduct and carry on the development, exploration, production, maintenance and
operation of [the Trust's Interests] with reasonable and prudent business judgment, in
accordance with... good oil and gas field practices, as a reasonable and prudent operator...."
(Overriding Royalty Conveyance, § 7.1.)
92. Consistent with prior SEC filings, the Q2 FY 2005 10-Q reiterated BPXA's
representation that its average daily net production from the BP Working Interests would
continue to exceed 90,000 barrels per day until the year 2013.
93. In September and October of 2005, BPXA's inspection of the transit line that
delivers oil to the trans-Alaska pipeline from Gathering Center 2 in the Prudhoe Bay WOA
evidenced increasing corrosion.
Q3 FY 2005 Form 10-Q
94. The Trust filed its Form 10-Q for the third quarter of FY 2005 on November 9,
2005 ("Q3 FY 2005 10-Q"). The Trust distributed $1.728 per Trust Unit in the third quarter, an
increase of approximately 73.2% from the same quarter in the previous fiscal year. The Trust's
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total royalty revenue for Q3 FY 2005 was $37,357,000, an increase of approximately 73.2%
from Q3 FY 2004.
95. Included with and incorporated by reference into the Q3 FY 2005 10-Q as Exhibits
were the trust agreements, including the Overriding Royalty Conveyance, which states that
BPXA will comply with the Prudent Operator Standard.
96. Therefore, as represented to investors in the Exhibit 4.2 to Q3 FY 2005 10-Q,
BPXA would "conduct and carry on the development, exploration, production, maintenance and
operation of [the Trust's Interests] with reasonable and prudent business judgment, in
accordance with... good oil and gas field practices, as a reasonable and prudent operator...."
(Overriding Royalty Conveyance, § 7.1.)
97. However, in each of the Forms 10-Q for FY 2005, Defendants made materially
false and misleading statements as set forth in ¶¶ 87, 91, 96, supra. In each of those statements,
Defendants failed to disclose to investors that: (i) for years BPXA had failed to implement good
oil and gas field practices in maintaining the Prudhoe Bay pipelines; (ii) BPXA's gross
recklessness in failing to maintain the pipelines created a material risk of pipeline leaks,
shutdowns, environmental disasters and lower production; (iii) BPXA had ignored numerous
warnings that its maintenance of the pipelines violated the Prudent Operator Standard; (iv)
BPXA' s corrosion monitoring efforts had been reduced, delayed, or eliminated due to severe
budget constraints ; (v) BPXA knowingly ended numerous practices that prudent operators and
regulators in the industry considered necessary to properly operate and maintain the pipeline.
Defendants knew and failed to disclose the following material facts:
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• BPXA had discontinued smart pigging and maintenance pigging in the Western Operating Area pipeline at Prudhoe Bay in 1998; 2 • The Eastern Operating Area pipeline at Prudhoe Bay had not been smart pigged or 3 maintenance pigged since 1992; 4 • BPXA did not have a regular internal inspection or maintenance pigging program 5 for its pipelines;
6 • BPXA's corrosion strategy was developed in 1999 for the Western side of Prudhoe Bay and had not been updated since then; no corrosion strategy was 7 created or designed for the Eastern half of Prudhoe Bay;
8 • BPXA was operating certain pipelines at decreased pressure because of known corrosion problems within those pipelines; 9 • Following cost cuts implemented in 1999 and thereafter, BPXA cut spending on a 10 corrosion inhibitor in its Alaska pipelines; 11 • As of October 2001, BPXA internal documents indicated that BPXA management 12 was not adequately addressing employee concerns regarding the integrity of the equipment at Prudhoe Bay; 13 • As early as 2001, BPXA internal documents indicated that BPXA management 14 gave priority to budgetary guidelines over safety concerns; critical safety systems needed urgent maintenance or significant upgrades; and it was not addressing long- 15 term [pipeline] integrity concerns and preventative maintenance; 16 • As early as 2001, the Prudhoe Bay pipeline was experiencing leaks and spills due 17 to excessive corrosion;
18 • In May 2003, a pipeline at Prudhoe Bay leaked 6,000 gallons of oil and oily water due to internal corrosion; 19 • In May 2004, a number of allegations regarding the management of CIC, which 20 was tasked with monitoring and preventing corrosion at Prudhoe Bay, were brought to the attention of senior BPXA management and BP plc. Walter E. 21 Massey, chairman of the environment committee of BP plc's non-executive board, 22 learned about workers' concerns regarding HSE threats at Prudhoe Bay. Massey was informed that the employees and workers "seek to see the corrosion problem 23 addressed and corrective action undertaken without further delay...."
24 • Prior to and during the Class Period, BPXA received repeated warnings from its employees that cutbacks in routine pipeline maintenance and inspections had 25 increased the likelihood of accidents or oil spills; 26 Zwerling, Schachter, & Zwerling, LLP CONSOLIDATED AMENDED COMPLAINT 1904 Third Avenue, Suite 1030 -27- Seattle, WA 98101-1170 Tel: (206) 223-2053 Fax: (206) 343-9636 No. C06-1505 MJP Case 2:06-cv-01505-MJP Document 30 Filed 05/01/2007 Page 28 of 82
1 • In 2004, an internal investigation conducted by outside counsel found that Woollam, manager of CIC, had a management style that had a chilling effect on the 2 reporting of HSE concerns and recommended a "thorough audit" of the corrosion 3 program data systems;
4 • The report also found that Woollam's "overbearing management style" resulted in managers "forcing the adoption" of Woollam's decisions, "regardless of their 5 reservations over them and line worker complaints about them."; and
6 • CIC was operating without key personnel. The CIC Team Leader and the Senior Corrosion Engineer both left the company at the end of 2004 and had not been 7 replaced. 8 98. Consistent with prior SEC filings, the Q3 FY 2005 10-Q reiterated that BPXA's 9 representation that its average daily net production from the BP Working Interests would 10 continue to exceed 90,000 barrels per day until the year 2013. 11
12 99. Defendants knew that BPXA's representation of net production exceeding 90,000
13 barrels per day until 2013, made in each of the Forms 10-Q for FY 2005, as set forth in ¶¶ 88, 92
14 and 98 was materially false and misleading at the time it was made because Defendants knew, 15 but failed to disclose, that the improper maintenance of the Prudhoe Bay pipelines created a 16 material risk that a shutdown of production at Prudhoe Bay would be necessary, and that net 17 production would fall below 90,000 barrels per day prior to 2013. BPXA's annual production 18
19 rates as represented to investors ignored the known risks set forth in ¶ 97, supra.
20 100. The Forms 10-Q for FY 2005 also failed to disclose the following material risks to 21 investors: 22 • That Prudhoe Bay oil production could be shut down partially or entirely as a 23 result of damage to or failure of pipelines or equipment and have an adverse effect on future royalty payments; and 24 • That field-wide infrastructure repairs, pipeline replacements and other well- related 25 activities could result in significant downtime and have a material adverse effect on 26 Zwerling, Schachter, & Zwerling, LLP CONSOLIDATED AMENDED COMPLAINT 1904 Third Avenue, Suite 1030 -28- Seattle, WA 98101-1170 Tel: (206) 223-2053 Fax: (206) 343-9636 No. C06-1505 MJP Case 2:06-cv-01505-MJP Document 30 Filed 05/01/2007 Page 29 of 82
production level.
THE MARCH 2006 OIL SPILL
101. On March 2, 2006, BPXA discovered a large oil spill, totaling over 200,000
gallons, in the Prudhoe Bay WOA. The oil spill was not detected by BPXA' s leak detection
systems.
102. The oil spill was caused by a leak in a major pipeline carrying crude oil away from
Gathering Center 2.
103. According to an investigative report prepared by BP and the State of Alaska, the
leak probably went undetected for at least five days, "and probably much longer." The oil spill
was the largest recorded spill of crude oil on the North Slope.
104. On March 3, 2006, the Anchorage Daily News reported that, due to the leak, an
oil-processing plant and about 245 wells were shut down, cutting North Slope production by 12
percent, or 100,000 barrels per day. The article went on to state:
Neither state officials nor BP spokesman Daren Beaudo could say how much oil was spilled.
Because of its size, the leaky pipeline can accommodate a pig, which is a bullet- shaped device that slides down pipes to sense for weak spots in the steel wall or other problems.
The line had been pigged, but Beaudo could not provide details on whether any problems had been found.
105. The price of Trust Units was unaffected by the news of the oil spill, because
production did not fall below the Trust Unit holders ' maximum Royalty Interest level (an
average of 90,000 barrels per day), and Defendants provided no disclosure regarding known
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maintenance problems, corrosion levels and deterioration of the pipeline, which threatened
continued production in Prudhoe Bay, and did not disclose that a further shutdown could lower
production and place distributions to investors in the Trust Units at risk.
106. On March 3, 2006, the day that news of the oil spill was first reported, the closing
price of Trust Units was $68.60, up from a closing price of $68.10 on March 1, 2006, the day
before the oil spill.
107. Defendants knew that a smart pig had not been run through the faulty pipeline
since 1998 . On March 4, 2006, the Anchorage Daily News reported:
Beaudo revealed that the big pipeline... had known interior and exterior corrosion damage.
Because of this, BP had downgraded the maximum pressure allowed within the line to help guard against rupturing its steel walls, he said....
BP can test the integrity of pipelines by sending a bullet-shaped sensor known as a smart pig through the pipe. The last time a smart pig slid through the 34-inch pipe was 1998, Beaudo said. It was scheduled for pigging this summer, he said.
108. However, undisclosed to investors was the fact that BPXA had not conducted any
maintenance pigging as well.
109. On March 8, 2006, the Anchorage Daily News reported that BP and the Alaska
Department of Environmental Conservation ("ADEC") had jointly announced that the source of
the leak was a hole at the bottom of the steel pipe inside a culvert underneath a caribou crossing,
caused by internal corrosion.
110. The cause of the March oil spill was identical to the cause of a May 2003 oil spill
at Prudhoe Bay, totaling 6,000 gallons of oil and oily water, which also occurred at a caribou
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1 crossing. 2 Defendants' Statements Regarding the March 2006 Oil Spill 3 111. In response to numerous press reports regarding the spill, Defendants attempted to 4 minimize the severity of corrosion problems. On March 9, 2006, the Los Angeles Times 5
6 reported that BP spokesman Beaudo had stated, "We have a very aggressive, robust corrosion
7 monitoring program."
8 112. On March 15, 2006, The New York Times reported that: 9 The oil company blamed for the North Slope's largest oil spill said Tuesday its 10 inspectors were aware of corrosion in a pipeline months before it burst, but believed the threat to be "manageable." 11 An inspection last fall revealed corrosion in the line and led officials to step up 12 their schedule of inspections, said Maureen Johnson, BP Exploration Alaska's 13 senior vice president of the Greater Prudhoe Bay Unit.
14 Johnson said corrosion was seen in the 34-inch oil transit line in a September inspection but it appeared to be occurring at a "low manageable corrosion rate." 15
16 A leak was discovered March 2 and now covers two acres of remote and frozen tundra on Alaska's north coast near the Beaufort Sea. As of Monday, crews had 17 recovered about 60,000 gallons of an estimated 201,000 to 267,000 gallons of spilled crude. 18
19 Spill investigators found significant damage--especially in low spots of the pipe-- that likely occurred within the last six to nine months. 20 Similar problems have not been found in other lines downstream and elsewhere in 21 Prudhoe Bay, and Johnson said it appears the highly corrosive conditions were unique that line. 22 to
23 "We can assure you we are taking action on all the possible causes out there," Johnson said. 24 113. For the reasons set forth in ¶ 76, supra, the statements by Beaudo and Johnson in 25
26 Zwerling, Schachter, & Zwerling, LLP CONSOLIDATED AMENDED COMPLAINT 1904 Third Avenue, Suite 1030 -31- Seattle, WA 98101-1170 Tel: (206) 223-2053 Fax: (206) 343-9636 No. C06-1505 MJP Case 2:06-cv-01505-MJP Document 30 Filed 05/01/2007 Page 32 of 82
1 ¶¶ 111-112 were materially false and misleading and failed to disclose material facts. 2 114. Defendants' efforts at minimizing the problems proved successful. On March 13, 3 2006, AG Edwards issued an analyst report for the Trust that noted "the relatively predictable 4 nature of underlying production volumes" and stated "Assuming production continues along this 5
6 [well-established exponential decline] curve, production from the interests underlying the trust
7 would drop below 90,000 bbls/day in the second half of 2012." Thus, investors in Trust Units
8 continued to be misled regarding the problems in Prudhoe Bay and the risks related to the level 9 of production and distributions. 10 115. As a result of the oil spill, on March 15, 2006, the DOT issued the March 15t'` 11 CAO, which was sent to BPXA with a cover letter addressed to Defendant Johnson. The March 12
13 15t'` CAO emphasized BPXA' s lengthy failure to pig pipelines at Prudhoe Bay, finding that,
14 among other things: 15 [BPXA' s] leak detection system was not effective in recognizing and identifying 16 failure.
17 The probable cause of the failure is internal corrosion. There is evidence of 18 bacterial corrosion... 19
20 The PBWOA is one of three similar low-stress pipelines operated by [BPXA].... The other two pipelines are the Prudhoe Bay East Operating Area 21 (PBEOA) and the Lisburne Pipeline. All three pipelines were constructed around the same time, operate in similar environmental conditions, transport the same 22 quality crude oil that contributed to the cause of internal corrosion in PBWOA, and are operated and maintained in similar manner [BPXA]. 23 a by
24 Respondent's failure investigation had identified at least six additional anomalies 25 on the PBWOA segment between GC-2 and GC-1. Internal corrosion has been observed at several of those anomalies. The worst noted anomaly had a remaining 26 Zwerling, Schachter, & Zwerling, LLP CONSOLIDATED AMENDED COMPLAINT 1904 Third Avenue, Suite 1030 -32- Seattle, WA 98101-1170 Tel: (206) 223-2053 Fax: (206) 343-9636 No. C06-1505 MJP Case 2:06-cv-01505-MJP Document 30 Filed 05/01/2007 Page 33 of 82
wall thickness of 0.04 inches.
An internal inspection of PBWOA was last performed in 1998 using high- resolution magnetic flux leakage (MFL) tool. [BPXA] has not established a regular internal inspection or maintenance pigging (cleaning program) program.
I find that the continued operation of Respondent's PBWOA, PBEOA, and Lisburne hazardous liquid pipelines without corrective measures will be hazardous to life, property, and the environment.
116. The March 15t1 CAO required BPXA to take remedial action, including
3. Perform an internal inspection using a calibrated smart pig on the PBWOA pipeline within 3 months of placing the pipeline back in service.
4. Develop and submit for approval a plan for running maintenance pigs (cleaning pigs) on the PBWOA, PBEOA, and Lisburne pipelines at regular intervals.... Until that plan has been approved and implemented, run maintenance pigs on those pipelines on a weekly basis.
7. Perform an internal inspection using a calibrated smart pig on the PBEOA and Lisburne pipelines within 3 months of receipt of this Order.
The Trust ' s FY 2005 Form 10-K
117. The Trust filed its Form 10-K for FY 2005 on March 16, 2006 (the "FY 2005 10-
K"). According to the FY 2005 10-K, the BP Working Interests produced an average of 113.2
thousand barrels of oil and condensate per day in 2005.
118. The Trust distributed $2.282 per Trust Unit in the fourth quarter of 2005, and
distributed a total of $7.098 per Trust Unit for FY 2005, an increase of approximately 86% from
FY 2004. The Trust's total royalty revenue for FY 2005 was $152,978,000, an increase of
approximately 85% from FY 2004.
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119. Included with and incorporated by reference into the FY 2005 10-K as Exhibits
were the trust agreements, including the Overriding Royalty Conveyance, which states that
BPXA will comply with the Prudent Operator Standard.
120. Therefore, as represented to investors in Exhibit 4.2 to the FY 2005 10-K, BPXA
would "conduct and carry on the development, exploration, production, maintenance and
operation of [the Trust's Interests] with reasonable and prudent business judgment, in
accordance with... good oil and gas field practices, as a reasonable and prudent operator...."
(Overriding Royalty Conveyance, § 7.1.)
121. However, at the time the FY 2005 10-K was filed, this statement was materially
false and misleading and failed to disclose material facts as set forth in ¶ 76, supra.
122. The FY 2005 10-K stated:
BP Alaska has estimated that net production from current proved reserves allocated to the BP Working Interests will exceed 90,000 barrels per day until the year 2012.
123. This representation was based on a BPXA report signed by Defendant Johnson
and sent to the Trust. Defendants knew that BPXA's representation of net production
exceeding 90,000 barrels per day until 2012 was materially false and misleading at the time it
was made because Defendants knew and failed to disclose the facts set forth in ¶¶ 76, 80, supra.
124. In addition, the FY 2005 10-K also failed to disclose to investors the material risks
set forth in ¶ 81 , supra.
125. The FY 2005 10-K stated:
In general, BP Alaska's oil and gas activities are subject to existing federal, state and local laws and regulations relating to health, safety, environmental quality and
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pollution control. BP Alaska believes that the equipment and facilities currently being used in its operations generally comply with the applicable legislation and regulations.
126. The foregoing statement (¶ 125) was materially false and misleading because
Defendants knew that the improperly maintained pipelines at Prudhoe Bay and BPXA's violation
of the Prudent Operator Standard created a material risk that BPXA was in violation of local
laws relating to health, safety, environmental quality and pollution control and in the event of an
oil spill, BPXA would be exposed to a shutdown of the pipeline due to such environmental
violations and further, that such events could subject BPXA to criminal liability and further limit
production from Prudhoe Bay.
127. On the day the FY 2005 10-K was filed, the price of Trust Units closed at $62.44.
Additional Reports Regarding The March 2006 Oil Spill
128. On April 6, 2006, The Wall Street Journal reported that U. S. environmental
regulators were conducting a criminal investigation into BPXA' s management of pipelines in
Alaska's North Slope.
129. BPXA prepared an internal report regarding the oil spill, "GC-2 Transit Line Spill
Prudhoe Bay Western Operating Area March 2, 2006 Incident Investigation Report," dated
April 14, 2006. The report found that the pipeline leaked due to bacterial corrosion that could
only have been detected through use of a smart pig, and pointed out that corrosion inhibiting
chemicals injected into the pipeline may not have reached the corroded area:
Smart pig runs were conducted in 1990 and 1998.
Based on an estimated mean spill volume of 4800 barrels of oil, the leak would have been going on for at least five days and probably much longer.
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With the exception of smart pig runs, there isn't a way to directly monitor internal corrosion inside of cased pipe (road and caribou crossings) without having to evacuate the crossing and remove the outer casing from the pipe.
Facts suggest that the increase in corrosivity in this line may be due to increased bacteria activity from growth in GC-2 and lack of sufficient inhibitor carryover.
130. Therefore, the report further emphasized the risks that BPXA was taking by failing
to smart pig its pipelines, in accordance with good oil and gas field practices, as required by the
Prudent Operator Standard.
The Trust 's Q1 FY 2006 Form 10-Q
131. Notwithstanding the pipeline leak, the Trust continued to receive royalty revenues
at levels equal to the maximum amount of Trust Unit holders' interest in the royalty production
- i.e., 90,000 barrels per day. The Trust filed its Form 10-Q for the first quarter of FY 2006 on
May 10, 2006 (`Q1 FY 2006 10-Q"). The Trust distributed $2.114 per unit in the first quarter,
an increase of approximately 36.9% from the same quarter in the previous fiscal year. The
Trust's total royalty revenue for Q1 FY 2006 was $45,383,000, an increase of approximately
36.7% from Q1 FY 2005.
132. The continued production of oil at Prudhoe Bay at levels that exceeded Trust Unit
investors ' Royalty Interest was particularly important to the investors, because the price of oil
continued to rise in early 2006. As oil prices increased, so did the amount of the distributions to
Trust Unit holders, as production (related to the Royalty Interest) was not falling or represented
to fall until many years later (2012). Accordingly, the price of Trust Units traded on the New
York Stock Exchange continued to rise into the summer of 2006.
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133. Included with and incorporated by reference into the Q1 FY 2006 10-Q as Exhibits
were the trust agreements, including the Overriding Royalty Conveyance, which states that
BPXA will comply with the Prudent Operator Standard.
134. Therefore, as represented to investors in the Exhibit 4.2 to Q1 FY 2006 10-Q,
BPXA would "conduct and carry on the development, exploration, production, maintenance and
operation of [the Trust's Interests] with reasonable and prudent business judgment, in
accordance with... good oil and gas field practices, as a reasonable and prudent operator...."
(Overriding Royalty Conveyance, § 7.1.)
135. However, at the time the Q1 FY 2006 10-Q was filed, this statement was
materially false and misleading for the reasons set forth in ¶ 76, supra.
136. Consistent with the Trust's FY 2005 10-K, the Q1 FY 2006 10-Q stated that
BPXA represented that the average daily net production from the BP Working Interests would
continue to exceed 90,000 barrels per day until the year 2012, despite the March 2006 oil spill
and the findings in the March 15th CAO.
137. Defendants knew that BPXA's representation of net production exceeding 90,000
barrels per day until 2012 was materially false and misleading at the time it was made because
Defendants knew and failed to disclose the facts alleged in ¶¶ 76, 80, supra. The Q1 FY 2006
10-Q also failed to disclose the material risks to Trust Unit investors set forth in ¶ 81, supra.
138. On the day the Q1 FY 2006 10-Q was filed, the price of Trust Units closed at
$74.70.
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1 139. Following the March oil spill, Defendants sought to explain the reasons for the
2 reported corrosion and attempted to calm the public and investors by describing BPXA's 3 purported efforts to properly maintain the pipelines, while failing to disclose years of neglect, 4 improper maintenance, and known health, safety and environmental hazards. 5
6 140. In an interview with Petroleum News published on May 14, 2006, Johnson stated
7 that instead of pigging pipelines, BP had been monitoring Prudhoe Bay oil transit lines for
8 corrosion by using exterior ultrasonic testing, which uses an ultrasonic device to measure the 9 thickness of the pipeline wall, and corrosion coupons, which are small metal plates placed inside 10 the pipeline and inspected for corrosion every 90 days. 11 141. The interview also stated that: 12
13 BP has committed to ratchet up its corrosion prevention program by running maintenance pigs through its oil transit pipelines at regular intervals, by increasing 14 the frequency of smart pigging and by injecting corrosion inhibitors into the lines - in effect the company will apply similar corrosion prevention measures to its oil 15 transit lines as it already applies to its water systems. 16 142. In a further effort to assuage the public, regulators and investors, Defendant 17 Johnson stated that in response to the March oil spill and the March 15t'` CAO, BP was taking a 18
19 series of steps to ensure that another pipeline leak did not occur, stating that, "We've looked at
20 all of the oil transit lines... none other has the same combination of factors... bacteria in the
21 facility, low flow rate and low corrosion inhibitor carry over.... Going forward we'll pig out oil 22 transit lines on a regular basis and we'll look at our pigging practices on all our pipelines and say 23 `Does this make sense?"' 24 143. Johnson also stated, regarding long term strategy, "You can count on us to not 25
26 Zwerling, Schachter, & Zwerling, LLP CONSOLIDATED AMENDED COMPLAINT 1904 Third Avenue, Suite 1030 -38- Seattle, WA 98101-1170 Tel: (206) 223-2053 Fax: (206) 343-9636 No. C06-1505 MJP Case 2:06-cv-01505-MJP Document 30 Filed 05/01/2007 Page 39 of 82
1 only do the reactive things we've done already - the inspections, the additional inhibitor, 2 maintenance things, the smart pigging, the solids removal... (But) the response will be bigger and 3 more connected than that." 4 144. Johnson's statements (¶¶ 140-143) were materially false and misleading for the 5
6 reasons set forth in ¶ 76, supra. Significantly, Johnson's comments regarding BPXA's
7 purported new efforts to improve maintenance simply misled investors regarding the existing
8 damage to pipelines from prior undisclosed maintenance failures and the fact that new efforts 9 would not necessarily prevent another spill, shutdown or reduced production. 10 145. In contrast to Johnson' s assurances, Deputy Secretary of Transportation Maria 11 Cino, in a June 5, 2006 letter to Congress, stated that the department "has not received a 12
13 reasonable explanation why BP has not scraper-pigged these lines over approximate 14-year
14 period." The letter went on to state that "[i]n our opinion, based on current information, this 15 length of time does not represent sound management practices for internal corrosion control." 16 146. In response to the March 2006 oil spill, BP plc prepared an internal report titled, 17 "Alaska Transit Pipeline Technology Review, 10th - 12th April 2006 Final Report," dated June 7, 18
19 2006, which would be used as an exhibit at Congressional hearings that took place in September
20 2006. The report criticized BPXA's corrosion monitoring methods, and noted that only smart
21 pigging could identify certain types of corrosion: 22 Pigging facilities are present in the GPB oil transit lines; although a regular 23 maintenance pigging program was not in place to provide routine displacement of any sediment and water that may have accumulated in low spots. 24 Apart from smart pigging the pipelines the current corrosion inspection regime 25 does not provide the capability to detect dispersed pitting corrosion in buried cased 26 Zwerling, Schachter, & Zwerling, LLP CONSOLIDATED AMENDED COMPLAINT 1904 Third Avenue, Suite 1030 -39- Seattle, WA 98101-1170 Tel: (206) 223-2053 Fax: (206) 343-9636 No. C06-1505 MJP Case 2:06-cv-01505-MJP Document 30 Filed 05/01/2007 Page 40 of 82
pipe locations.
147. One of the "Key Findings" of the report was that BPXA's corrosion monitoring
methods would not necessarily prevent another oil spill from occurring: "The current inspection
and leak detection regime will not necessarily minimise the likelihood of another significant
hydrocarbon spill."
148. One of the "Key Recommendation[s]" of the report emphasized the importance of
pigging the pipelines: "Smart pig the oil transit lines and other low velocity pipelines on a risk
prioritised basis to ascertain where dispersed pitting corrosion exists."
149. Another "Key Finding" of the Report was that BPXA had been without a Senior
Corrosion Engineer for over a year before the March oil spill: "The CIC Team Leader and
Senior Corrosion Engineer both left BPXA at the end of 2004. A replacement Team Leader was
recruited in Q1 of 2005 but was not able to take up the post until Q3. The Senior Corrosion
Engineer post remains vacant."
150. One of BP plc's "Key Recommendation[s]" was that: "There is an urgent need
to.. Recruit and rapidly induct a successor for the vacant Senior Corrosion Engineer position in
CIC".
151. On June 12, 2006, Citigroup issued an analyst report for the Trust with a "Buy"
rating. The report agreed with BPXA's representation of future representations of production,
stating that "BP Prudhoe Bay does not face the challenge of declining production. Indeed, we
estimate that net production allocated to the trust should be constant at 5.4 million barrels a year
at least through 2012." The report also stated that "based on current estimates... net production
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1 of oil and condensate from proved reserves will continue at an average rate exceeding 90,000 2 barrels a day through year 2012." 3 152. On July 14, 2006, the closing price of Trust Units reached an all time high, $90.01, 4 closely tracking the rise in oil prices in July 2006. 5
6 THE AUGUST 2006 SHUTDOWN OF PRUDHOE BAY
7 153. Pursuant to the March 15t'` CAO, BPXA was to comply with the CAO's
8 requirements by June 15, 2006. Four months after the issuance of the March 15t' CAO, BPXA 9 still had not fully complied with the order. As a consequence, on July 20, 2006, the DOT issued 10 Amendment No. 1 to its March 15t'` CAO ("CAO Amendment No. 1"), which was sent to 11 BPXA with a cover letter addressed to Defendant Johnson. CAO Amendment No. 1 stated that, 12
13 despite the DOT's original order:
14 BP has not run cleaning and maintenance pigs on the OT-21 segment [the location of the March 2006 oil spill] or on the connecting segments of WOA, as required by 15 Items 3 and 4 of the March 15, 2006 CAO. 16 I continue to find that the presence of hazardous conditions on the specified 17 pipelines... without the implementation of corrective measures, would result in likely serious harm to life, property or the environment. BP has failed to meet its 18 continuing responsibility to pursue all available options for meeting the 19 requirements of items 3, 4 and 7 of the March 15, 2006 CAO...
20 154. BPXA's failure to fully comply with the March 15t'` CAO, which only required
21 BPXA to engage in activities considered good oil and gas field practices, further increased the 22 risk of damaged pipelines, serious oil spills and/or a shut down at Prudhoe Bay resulting in a 23 substantial decrease in production coupled with lower distributions to investors in the Trust 24 Units. Barely two weeks after the CAO' s finding of hazardous conditions on the pipelines, that 25
26 Zwerling, Schachter, & Zwerling, LLP CONSOLIDATED AMENDED COMPLAINT 1904 Third Avenue, Suite 1030 -41- Seattle, WA 98101-1170 Tel: (206) 223-2053 Fax: (206) 343-9636 No. C06-1505 MJP Case 2:06-cv-01505-MJP Document 30 Filed 05/01/2007 Page 42 of 82
is exactly what occurred. 2 155. On August 7, 2006, BP plc issued a press release announcing the shutdown of 3 production at Prudhoe Bay. The press release stated that: 4 BP Exploration Alaska, Inc. has begun an orderly and phased shutdown of the 5 Prudhoe Bay oil field following the discovery of unexpectedly severe corrosion 6 and a small spill from a Prudhoe Bay oil transit line. Shutting down the field will take days to complete. Over time, these actions will reduce Alaska North Slope 7 Oil production by an estimated 400,000 barrels per day.
8 The decision follows the receipt on Friday, August 4, of the data from a smart pig run completed in late July. Analysis of the data revealed 16 anomalies in 12 9 locations in an oil transit line on the eastern side of the oil field. 10 In response to the inspection data, BP conducted follow up inspections of 11 anomalies where corrosion-related wall thinning appeared to exceed BP criteria for continued operation. It was during these follow up inspections that BP personnel 12 discovered a leak and small spill estimated at 4 to 5 barrels. 13 The spill has been contained and the clean up effort is underway. The pipeline was 14 shutdown at 6:30 am Sunday morning. BP has notified state and federal officials of the decision and will work closely with the U. S. Department of Transportation 15 and the Alaska Department of Environmental Conservation, among others.
16 "We regret that it is necessary to take this action and we apologize to the nation and the State of Alaska for the adverse impacts it will cause," said BP America 17 Chairman and President Bob Malone. "However, the discovery of this leak and 18 the unexpected results of this most recent smart pig run have called into question the condition of the oil transit lines at Prudhoe Bay. We will not resume operation 19 of the field until we and government regulators are satisfied that they can be operated safely and pose no threat to the environment." 20 BP is identifying and mobilizing additional resources from across Alaska and North 21 America in order to speed inspection of remaining Prudhoe Bay oil transit lines. 22 BP operates 22 miles of oil transit pipeline at Prudhoe Bay. Smart pigging inspection has been completed over about 40 percent of that length. 23 BP previously announced plans to replace a three-mile segment of pipeline 24 following inspections conducted after a large spill discovered on March 2, 2006. 25 156. Thus, after years of improper maintenance of the pipelines, the effects of BPXA's 26 Zwerling, Schachter, & Zwerling, LLP CONSOLIDATED AMENDED COMPLAINT 1904 Third Avenue, Suite 1030 -42- Seattle, WA 98101-1170 Tel: (206) 223-2053 Fax: (206) 343-9636 No. C06-1505 MJP Case 2:06-cv-01505-MJP Document 30 Filed 05/01/2007 Page 43 of 82
1 misconduct resulted in another oil spill and this time, a pipeline shutdown.
2 157. In reaction to the day's news and the shutdown of production at Prudhoe Bay, the 3 price of Trust Units dropped from $87.89, its closing price on August 4, 2006, to a low of 4 $69.00, on August 7, 2006, closing at $76.85, a decline of over 14%, on extremely heavy 5
6 volume.
7 158. On the following day, the Trust filed a Form 8-K dated August 8, 2006, describing
8 the shutdown for investors in the Trust: 9 The magnitude of the effect on the Trust's revenues and distributions will depend 10 upon when production from the Prudhoe Bay field, or parts of the field, resumes. To the extent that the shutdown of the Prudhoe Bay field results in the average 11 daily net production of oil and condensate from the BP Working Interest falling below 90,000 barrels per day during the current quarter ending September 30, 12 2006 and any subsequent quarter, the Trustee anticipates that there will be an 13 adverse effect on the royalty revenues receivable by the Trust, and a decrease in funds available for distribution to Unitholders, which may be material, with respect 14 to those periods. If the Prudhoe Bay field should remain completely shut down during the entire fourth quarter of 2006 and any subsequent quarter, the Trust 15 would receive no revenues with respect to those periods. 16 159. On August 8, 2006, Malone announced at a press conference that "it has been 17 necessary to take this drastic action of an orderly and planned shutdown of the Prudhoe Bay oil 18
19 field" and that BP plc has "taken the decision to replace the main oil transit lines at Prudhoe
20 Bay" in order to ensure "the integrity of the field." No time-line for the completion of repairs
21 was given. 22 160. An Associated Press article dated August 8, 2006 quotes Malone as saying, 23 regarding recent events at BP, "I'm not able to see a systemic issue ...I can say with comfort I'm 24 seeing a high level of focus on safety and operation integrity." 25
26 Zwerling, Schachter, & Zwerling, LLP CONSOLIDATED AMENDED COMPLAINT 1904 Third Avenue, Suite 1030 - 43 - Seattle, WA 98101-1170 Tel: (206) 223-2053 Fax: (206) 343-9636 No. C06-1505 MJP Case 2:06-cv-01505-MJP Document 30 Filed 05/01/2007 Page 44 of 82
161. The price of Trust Units dropped further after the day's news, closing at $73.61 on
August 8, 2006, from a closing price of $76.85 on August 7, 2006, on significantly heavy
volume.
162. Malone appeared on the ABC Evening News on August 9, 2006. ABC reporter
Betsy Stark asked Malone "Were you ever warned about a serious corrosion problem at
Prudhoe Bay?" Malone replied, "Not that I'm aware of." Stark asked again, "You were never
warned by BP technicians or by any outside source about a corrosion problem at Prudhoe Bay?"
Malone responded, "Not that I recall."
163. BP plc's press release and Defendants' statements (¶¶ 155, 158-160, 162) were
materially false and misleading because they did not fully disclose the depth of known problems
regarding the condition of the Prudhoe Bay pipelines, the risks to maintaining represented levels
of oil production at an average of 90,000 barrels per day, and the significant repairs and
downtime due to Defendants' poor maintenance practices that could result in reduced levels of
production and distributions to investors. Indeed, Defendants failed to state that BPXA was
conducting the "smart pig" testing that revealed the severe corrosion only because it was
required to by the March 15t'` CAO, and that the faulty pipeline had not been pigged since
approximately 1992.
164. In addition, Defendants' statements were materially false and misleading for the
reasons set forth in ¶ 76, supra.
165. Defendants also knew, no later than June 7, 2006, that BP plc had concluded and
failed to disclose that BPXA's corrosion management program would "not necessarily minimise
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the likelihood" of another oil spill.
POST-SHUTDOWN EVENTS
166. On August 7, 2006, The New York Times reported that BP officials could not
determine how long production would be offline and that Tom Williams, BP's senior tax and
royalty counsel, did not "even know how long it's going to take to shut [Prudhoe Bay] down."
According to the article, BP spokesman Daren Beaudo said that safety standards require at least
70 percent of the steel walls of the oil transit pipe to be intact and that inspections found
corrosion had reduced wall thickness below that standard.
167. Also on August 7, 2006, The Wall Street Journal reported that the shutdown of
the Prudhoe Bay oil field would "occur over several days" and result in a "curtailment of an
estimated 400,000 barrels a day." This curtailment amounts to almost half of the total daily
production from Alaska's North Slope. The article also noted that State of Alaska and Federal
regulators had launched investigations into the corrosion along BPXA's oil transit network
including a criminal probe by the Environmental Protection Agency.
168. On August 9, 2006, the Christian Science Monitor reported that BPXA had relied
on exterior ultrasonic testing of pipelines instead of a regular pigging program. The article noted
that "Mr. Marshall now acknowledges that ultrasound is not a foolproof safety device."
169. On the same day, MSNBC.com reported that a criminal investigation was
underway to determine whether BP has "deliberately shortchanged maintenance and falsified
records to cover it up." In the article, Phil Flynn, an energy analyst with Alaron Trading Corp.,
stated, "I think this was predictable and preventable."
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170. Thomas Barrett, administrator of the DOT's Pipeline and Hazardous Materials
Safety Administration ("PHMSA"), is quoted in the article as saying he was "disappointed" with
BP's "failure to maintain these lines to an accepted industry level of care." Federal regulators
assessing the damage observed that the "walls of the pipes were so corroded that they were
almost paper-thin."
171. An article in the Financial Times, published on August 9, 2006, quoted an
anonymous veteran worker as stating "If BP had a valve maintenance programme, pipe
maintenance repair and replacement programme, well repair programme and a decent inspection
programme for the last 15 years, we wouldn't be in this condition; we wouldn't have to shut the
entire Prudhoe Bay field."
172. BP plc also reported that it would replace 16 miles of pipeline at Prudhoe Bay;
however, Defendants made no disclosure that the repairs would lower production in future years
and adversely affect distributions to investors in Trust Units.
Q2 FY 2006 Form 10-Q
173. The Trust filed its Form 10-Q for the second quarter of FY 2006 on August 9,
2006 ("Q2 FY 2006 10-Q"). The Trust paid royalty distributions of $2.208 per Trust Unit for
the quarter ended June 30, 2006, an increase of approximately 42.9% from the same quarter in
the previous fiscal year. The Trust's total royalty revenue for Q2 FY 2006 was $47,539,000, an
increase of approximately 42.3% from Q2 FY 2005.
174. Included with and incorporated by reference into the Q2 FY 2006 10-Q as Exhibits
were the trust agreements, including the Overriding Royalty Conveyance, which states that
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1 BPXA will comply with the Prudent Operator Standard. 2 175. Therefore, as represented to investors in Exhibit 4.2 to the Q2 FY 2006 10-Q, 3 BPXA would "conduct and carry on the development, exploration, production, maintenance and 4 operation of [the Trust's Interests] with reasonable and prudent business judgment, in 5
6 accordance with ... good oil and gas field practices, as a reasonable and prudent operator...."
7 (Overriding Royalty Conveyance, § 7.1.)
8 176. However, at the time the Q2 FY 2006 10-Q was filed, this statement was 9 materially false and misleading, for the reasons set forth in ¶ 76, supra. 10 177. Despite the shutdown and related disclosures described in the Q2 FY 2006 10-Q 11 (¶ 180, infra), BPXA' s estimate for oil production in the future remained the same . The Q2 FY 12
13 2006 10-Q reiterated BPXA's representation that its average daily net production from the BP
14 Working Interests would continue to exceed 90,000 barrels per day until the year 2012. 15 178. Defendants knew that BPXA's representation of net production exceeding 90,000 16 barrels per day until 2012 was materially false and misleading at the time it was made because 17 Defendants knew that the necessary repairs at Prudhoe Bay created a material risk that net 18
19 production would fall below 90,000 barrels per day prior to 2012. This representation assumed
20 annual production rates which ignored the known risks set forth in ¶ 76, supra.
21 179. The Q2 FY 2006 10-Q noted the post-June 30t'` subsequent event of the Prudhoe 22 Bay pipeline shutdown: 23 The shutdown is expected to result in average daily net production from the 24 Prudhoe Bay Unit falling below 90,000 barrels per day during the third quarter of 2006 and, possibly, during subsequent periods. Suspension or reduction of 25 production from the Prudhoe Bay Unit is expected to have a material adverse 26 Zwerling, Schachter, & Zwerling, LLP CONSOLIDATED AMENDED COMPLAINT 1904 Third Avenue, Suite 1030 -47- Seattle, WA 98101-1170 Tel: (206) 223-2053 Fax: (206) 343-9636 No. C06-1505 MJP Case 2:06-cv-01505-MJP Document 30 Filed 05/01/2007 Page 48 of 82
1 effect on the Trust's results of operations for the fourth quarter of 2006 and any subsequent periods affected. 2
3 180. In addition, the Q2 FY 2006 10-Q set forth the following "Risk Factor" for
4 investors in Trust Units:
5 Item IA. Risk Factors... The shutdown of the Prudhoe Bay oil field may result in 6 materially reduced distributions or no quarterly distributions to Unitholders for an indefinite period. 7 On August 7, 2006, BP announced that BP Alaska had commenced a shutdown of 8 the Prudhoe Bay Field. The shutdown followed the discovery of unexpectedly 9 severe corrosion and a small spill from an oil transit line in the Prudhoe Bay Field.... 10 Based on the information available at the date of this report, the Trustee is unable 11 to estimate the magnitude or duration of the effect that the shutdown of the Prudhoe Bay Field will have on the Trust's royalty revenues and its cash 12 distributions. 13 181. The Q2 FY 2006 10-Q provided only minimal partial disclosure regarding the 14 extensive problems at Prudhoe Bay and expected production at Prudhoe Bay. Despite the 15
16 statement in the Q2 FY 2006 10-Q regarding the possibility that production might fall below
17 90,000 barrels per day during the third quarter and possibly in subsequent periods, in the days
18 and weeks immediately following the shutdown, Defendants assured investors that the shutdown 19 was merely temporary, full production was expected to resume by the fourth quarter, and there 20 would be no long term impact on production or their investment in the Trust. 21 182. The Q2 FY 2006 10-Q also failed disclose investors the material risk that 22 to to
23 field-wide infrastructure repairs, pipelines replacements and other well-related activities could
24 result in significant downtime and have a long-term material adverse effect on production levels. 25 Partial Resumption of Production at Prudhoe Bay 26 Zwerling, Schachter, & Zwerling, LLP CONSOLIDATED AMENDED COMPLAINT 1904 Third Avenue, Suite 1030 -48- Seattle, WA 98101-1170 Tel: (206) 223-2053 Fax: (206) 343-9636 No. C06-1505 MJP Case 2:06-cv-01505-MJP Document 30 Filed 05/01/2007 Page 49 of 82
1 183. An Anchorage Daily News article dated August 9, 2006 reported that Marshall 2 stated that production rates should come back fairly strongly with no deterioration in 3 performance. 4 184. In response to the August 2006 oil spill, the DOT issued Amendment No. 2 to its 5
6 March 15, 2006 CAO on August 10, 2006 ("CAO Amendment No. 2"). Among other things,
7 CAO Amendment No. 2 stated:
8 On or about July 22, 2006, 37 days after the deadline established under the March 9 15, 2006 CAO (as extended), BP performed smart pigging of the FS2-FS1 segment of the EOA pipeline. 10 These reports identified sixteen (16) anomalies (representing wall loss in excess of 11 70 percent, including two (2) over 80 percent) at twelve (12) separate areas on the FS2-FS 1 segment of EOA pipeline. 12
13 On or about August 5, 2006... BP discovered a location where crude oil apparently had leaked through the pipe wall and onto the insulation material. 14 [T]he morning of August 6, 2006...BP personnel discovered crude oil leaking 15 from a different location on the FS2-FS 1 segment of the EOA pipeline. According 16 to BP, field inspection of the leak sit revealed multiple holes in the pipe wall at a single location.... 17 Since August 6, 2006, BP reportedly has discovered pinhole leaks on at least four 18 additional locations on the FS2-FS 1 segment of the EOA pipeline. 19 To date, BP has not performed cleaning or smart-pigging operations on either 20 segment of the WOA pipeline.
21 I continue to find that the presence of hazardous conditions on the EOA, Lisburne, and WOA pipelines, without the implementation of corrective measures, would 22 result in likely serious harm to property or the environment. 23 185. On August 11, 2006 BP plc issued a press release, "BP to continue production 24 from western Prudhoe Bay": "BP Exploration Alaska, Inc. today announced that it will continue 25
26 Zwerling, Schachter, & Zwerling, LLP CONSOLIDATED AMENDED COMPLAINT 1904 Third Avenue, Suite 1030 -49- Seattle, WA 98101-1170 Tel: (206) 223-2053 Fax: (206) 343-9636 No. C06-1505 MJP Case 2:06-cv-01505-MJP Document 30 Filed 05/01/2007 Page 50 of 82
production of oil from the western side of the Prudhoe Bay oil field. Current production is
150,000 barrels per day, including natural gas liquids, and is expected to increase to 200,000
barrels per day as Gathering Center 1 ramps up to full production after completion of a planned
maintenance shutdown...."
186. On August 12, 2006, the Financial Times reported that Colin Smith, an oil analyst
at Dresdner Kleinwort, stated, "The direct financial consequence of the Prudhoe Bay shutdown
is likely to be very limited indeed... [t]here is clearly a degree of reputational damage, the cost of
which is difficult to assess . But it is unlikely to be sufficient to warrant the recent
underperformance of BP [plc]'s shares."
187. On August 13, 2006, Citigroup issued a research report relating to the Trust
stating, "Generally, we would view news indicating a full restart prior to January 2007 or a
greater ramp up in production than we expect as positive .... we continue to view the shutdown
as a near term issue and believe once production is fully restored the long term value proposition
for an investment in BP Prudhoe Bay Trust is intact."
188. On August 14, 2006, the Associated Press reported that "As of Monday, 150,000
barrels of crude and natural gas were flowing from the western side of the field. BP spokesman
Daren Beaudo said there is no timetable in place, but the company intends to ramp production
up to about 200,000 barrels or half of normal production."
189. In fact, investors in the Trust continued to be told that the shutdown was
temporary and full production could occur sooner than anticipated. On August 29, 2006, the
Anchorage Daily News reported that, according to John Norman, chairman of the Alaska Oil
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1 and Gas Conservation Commission, production from Prudhoe Bay would ultimately recover 2 from the shutdown: 3 Norman told a joint meeting of the Legislature's House and Senate Resources 4 committees this month that BP Exploration (Alaska) Inc., which runs Prudhoe, has told the commission it plans to take action that will maintain or even enhance the 5 pressure where the oil is underground. 6 That should result in a period of higher production rates when wells are brought 7 back on line, he said.
8 Norman told legislators that while it is possible that one or more wells may not 9 come back at the same production level as before, "we don't think that that will result in any decrease in ultimate recovery." 10 190. On August 31, 2006, Dow Jones Newswire reported that "David Peattie, a vice 11 president at London-based BP PLC (BP), said the company hopes to begin constructing the new 12
13 pipeline system early next year and complete it in several months. But he said full production, to
14 400,000 barrels a day, might resume earlier than that." 15 191. Significantly, Defendants sought to minimize reports of pipeline corrosion and, in 16 fact, directly refuted statements claiming the pipeline problems were widespread. On August 31, 17 2006, The Wall Street Journal reported that Peattie had stated, "The idea that there was 18
19 widespread corrosion simply was not correct." Thus, investors in the Trust Units were
20 reassured by BP plc that the shutdown in production was not due to any widespread problem
21 and that the fields would start producing at full strength again shortly. 22 192. Because Defendants denied the fact that there was widespread corrosion in the 23 pipeline and assured the public and investors that full production would begin shortly, BP plc's 24 statements (¶¶ 190-191) were materially false and misleading. Defendants' statements were also 25
26 Zwerling, Schachter, & Zwerling, LLP CONSOLIDATED AMENDED COMPLAINT 1904 Third Avenue, Suite 1030 -51- Seattle, WA 98101-1170 Tel: (206) 223-2053 Fax: (206) 343-9636 No. C06-1505 MJP Case 2:06-cv-01505-MJP Document 30 Filed 05/01/2007 Page 52 of 82
1 materially false and misleading for the reasons set forth in ¶ 76, supra. 2 193. Within weeks, investors were further assured that BP plc would have Prudhoe Bay 3 fully operational in a short time . On September 7, 2006, Dow Jones Newswires reported that 4 "BP PLC (BP) plans to bring the entire Prudhoe Bay field back on line by the end of October, 5
6 provided it gets the green light from the U. S. Department of Transportation, BP Alaska
7 President Steve Marshall said Thursday."
8 194. On September 9, 2006 the Anchorage Daily News reported that "BP has increased 9 Prudhoe Bay production to 250,000 barrels a day, and officials on Friday said they are 10 increasingly optimistic the oil field can be returned to full production before the company 11 replaces corroded transit lines next year." 12
13 195. On September 13, 2006, BP plc asked the DOT for permission to restart
14 production in the eastern half of Prudhoe Bay. 15 196. On September 22, 2006, BPXA announced in a press release that it received DOT 16 clearance to re-start a portion of the Eastern Operating Area of Prudhoe Bay. As reported by 17 the Dow Jones Newswires: 18
19 BP PLC (BP) said Friday it had received permission to restart the eastern half of Alaska's Prudhoe Bay oil field to clean and test pipelines there. 20 The restart approval - which the company says may bring the field up to 400,000 21 barrels a day within a week - is earlier than many in the market had originally 22 expected....
23 BP spokesman Daren Beaudo told Dow Jones Newswires the company expects to have the eastern part of the field producing 150,000 barrels a day `within about 24 seven days.' 25 This would bring oil output at Prudhoe Bay, which was partially shut down in 26 Zwerling, Schachter, & Zwerling, LLP CONSOLIDATED AMENDED COMPLAINT 1904 Third Avenue, Suite 1030 -52- Seattle, WA 98101-1170 Tel: (206) 223-2053 Fax: (206) 343-9636 No. C06-1505 MJP Case 2:06-cv-01505-MJP Document 30 Filed 05/01/2007 Page 53 of 82
1 early August after the discovery of severe pipeline corrosion, to 400,000 barrels a day from the current 250,000, which is flowing only from the western side. 2
3 If BP succeeds in returning the field to early normal flows next week, it would be months ahead of early estimates that called for resumption of full 4 production no earlier than the beginning of 2007.
5 (Emphasis added.) 6 197. On September 23, 2006, the Anchorage Daily News published an article reporting 7 "BP spokesman Daren Beaudo said the company is confident the pipe is safe, and that Prudhoe 8
9 will ramp up full production and stay there. `We have a high degree of confidence in the
10 integrity of the line because we've inspected thousands of feet of pipe,' he said."
11 198. The foregoing statements (¶¶ 193-194, 196-197) were materially false and 12 misleading assurances to the market and purchasers of Trust Units that there would be no long- 13 term impact on production due to the August 2006 shutdown and that lower production was just 14 a temporary short-term event. Defendants failed to disclose that the necessary repairs to 15
16 Prudhoe Bay pipelines and downtime associated with infrastructure repairs and reconstruction of
17 sixteen miles of pipeline would substantially affect future production from the BP Working
18 Interests and, as a consequence distributions to investors in Trust Units and, even if Prudhoe 19 Bay returned to full production, it would not be able to maintain production at the pre-shutdown 20 level once BPXA began necessary repairs to the pipelines and wells at Prudhoe Bay. Defendants 21 knew, regarding BPXA, that: (i) for years it had failed implement oil and field 22 to good gas
23 practices in maintaining the Prudhoe Bay pipelines; (ii) its gross recklessness in failing to
24 maintain the pipelines created a material risk of pipeline leaks, shutdowns, environmental 25 disasters and lower production; (iii) it had ignored numerous warnings that its maintenance of 26 Zwerling, Schachter, & Zwerling, LLP CONSOLIDATED AMENDED COMPLAINT 1904 Third Avenue, Suite 1030 - 53 - Seattle, WA 98101-1170 Tel: (206) 223-2053 Fax: (206) 343-9636 No. C06-1505 MJP Case 2:06-cv-01505-MJP Document 30 Filed 05/01/2007 Page 54 of 82
the pipelines violated the Prudent Operator Standard; (iv) its corrosion monitoring efforts had 2 been reduced, delayed, or eliminated due to severe budget constraints; and (v) it knowingly 3 ended numerous practices which prudent operators and regulators in the industry considered 4 necessary to properly operate and maintain the pipeline. BP plc's statements were also 5
6 materially false and misleading for the reasons set forth in ¶ 76, supra.
7 Congressional Hearings Regarding the Prudhoe Bay Shutdown
8 Hearings Before the House of Representatives 9 199. On September 7, 2006, several BP executives appeared before the United States 10 House of Representatives at a hearing before the Subcommittee on Oversight and Investigations 11 of the Committee on Energy and Commerce to testify concerning the shutdown of Prudhoe Bay. 12
13 200. Richard C. Woollam, former manager of the CIC program at BPXA, refused to
14 testify under oath. He invoked the Fifth Amendment and refused to answer questions: 15 MR. WALDEN .... Mr. Woollam, you were formerly in charge of the Corrosion 16 Inspection and Chemicals Group at BP Exploration Alaska, Incorporated. You were the decision-making manager and engineer responsible for all operations 17 related to corrosion control and monitoring of the pipelines operated by BP at Prudhoe Bay. The subcommittee has learned from several sources that numerous 18 red flags were raised about the integrity of the Prudhoe Bay pipelines while you 19 were in charge of the CIC group including the 2000 final draft Coffman report. Yet in 2002 you initiated and implemented a plan to reduce the manpower of a key 20 pipeline corrosion monitoring team by 25 percent. So my question, Mr. Woollam, when did you become aware of the pipeline integrity problems faced by the 21 Prudhoe Bay Transmission lines including concerns about accelerated localized corrosion, microbial corrosion and that the failure send maintenance pigs or 22 to smart pigs down the transmission lines was placing those pipelines at high risk of 23 failure.
24 MR. WOOLLAM. Mr. Chairman, based upon the advice of counsel, I respectfully will not answer questions based upon my right under the Fifth Amendment of the 25 U. S. Constitution. 26 Zwerling, Schachter, & Zwerling, LLP CONSOLIDATED AMENDED COMPLAINT 1904 Third Avenue, Suite 1030 -54- Seattle, WA 98101-1170 Tel: (206) 223-2053 Fax: (206) 343-9636 No. C06-1505 MJP Case 2:06-cv-01505-MJP Document 30 Filed 05/01/2007 Page 55 of 82
201. BPXA placed Woollam on paid leave on September 7, 2006, before the hearing 2
3 before the House of Representatives took place.
4 202. At the hearing, Marshall testified "I am responsible for all of BP ' s activities in
5 Alaska." He went on to state, "Clearly in retrospect, we should have pigged these lines, and 6 going forward, we absolutely commit to a full program of very frequent maintenance pigging and 7 smart pigging." 8
9 203. During the hearing, Marshall testified that BPXA did not even consider pigging its
10 Eastern pipeline until after the March 2006 oil spill:
11 MR. STUPAK. I am still on the eastern one, because last time you pigged that was 1992. It is the major line. I mean, we had to shut that down. So how can 12 you sit here today and say you have a good integrity management plan of its pipes 13 when you do not know the true condition of the pipes or the volume of the solids they contain and the last time it was pigged was 1992? So I see a contradiction 14 here. It sounds like you didn't really explore it until you got the corrective order from the Department of Transportation in March of 2006. 15
16 MR MARSHALL. It was certainly the spill that caused us to consider what might be the implications of pigging those lines. 17 204. Also at the hearing, PHMSA Administrator Barrett testified regarding BP's failure 18
19 to properly maintain its pipelines:
20 It was as a result of the pigging that we ordered that BP discovered the wall loss and leaks on a line segment in the eastern operating area that led to the production 21 shutdown on 6 August. 22 [O]perators' management of the lines in the years leading up to the March 23 incident and their initial response to our orders was disappointing. Frankly, we do not understand why BP did not more aggressively address the 24 corrosion problems that led to these leaks. Given the multiple risk factors for corrosion in the Prudhoe Bay environment and the low velocities on these 25 lines, it is mystifying that BP did not run cleaning pigs regularly on these 26 Zwerling, Schachter, & Zwerling, LLP CONSOLIDATED AMENDED COMPLAINT 1904 Third Avenue, Suite 1030 - 55 - Seattle, WA 98101-1170 Tel: (206) 223-2053 Fax: (206) 343-9636 No. C06-1505 MJP Case 2:06-cv-01505-MJP Document 30 Filed 05/01/2007 Page 56 of 82
transit lines. Most pipeline operators demonstrate a higher standard of care than this regardless of whether they are federally regulated or not. 2
3 Until recently, BPXA has not moved as swiftly as we would have expected to comply with key requirements of our orders - namely, the requirements to clean 4 and smart pig its low stress lines. We provided an extension in March to allow BPXA to collect more information, and a second extension in April, pushing the 5 first deadline to June 12, 2006, more than three months after the spill. Soon after 6 we issued the order BPXA advised PHMSA that it would not be able to comply with the requirements to "smart pig" the lines within the specified time period, the 7 critical step in meeting our objective of having the best possible understanding of the condition of the pipelines. 8
9 On July 22, 2006, 37 days after the deadline established in our March order, BPXA performed the smart pigging ordered by PHMSA.... 10 when that pig run came back, about 16 spots with significant wall loss, but if you 11 looked a little broader, you would see, I think the number I saw was about 187 spots with wall loss approaching 50 percent. This was not an isolated couple of 12 spots. This was a number of spots where you had a substantial problem, and 13 frankly, they had no explanation.
14 the fundamental problem was, they were simply not running cleaning pigs, they were not running inline inspection tools. 15
16 Frankly, the problems we see on these lines are not replicated elsewhere, even in Prudhoe Bay or elsewhere in the industry.... typically up on the North Slope and 17 generally in the industry, you would see maintenance pigs every couple of weeks, certainly every couple of months, but not never on lines of this type. 18
19 205. Kevin Hostler, President and CEO of Alyeska Pipeline Service, testified regarding
20 BPXA's deviation from industry-wide pigging practice. His testimony discussed the importance
21 of pigging low-stress lines like the ones that leaked at Prudhoe Bay, where oil moves slowly, 22 giving sludge and attendant bacteria an opportunity to form and grow: 23 MR. STEARNS. As a pipeline operator, would you expect to see regular pigging 24 of low- stress lines where the oil moves at a slower velocity? 25 MR. HOSTLER. In the low-stress lines, yes, sir. 26 Zwerling, Schachter, & Zwerling, LLP CONSOLIDATED AMENDED COMPLAINT 1904 Third Avenue, Suite 1030 -56- Seattle, WA 98101-1170 Tel: (206) 223-2053 Fax: (206) 343-9636 No. C06-1505 MJP Case 2:06-cv-01505-MJP Document 30 Filed 05/01/2007 Page 57 of 82
1 MR. STEARNS. Okay. Are you aware of any crude oil pipeline that is not pigged as part of a regular corrosion maintenance program, leaving aside lines that may 2 not be piggable due to sharp turns in the line or other structural obstacles? 3 MR. HOSTLER. Leaving aside those lines that have those types of problems, no, 4 sir, I am not aware of any that are not pigged as a routine maintenance program.
5 Senate Hearing
6 206. On September 12, 2006, Defendants Malone and Marshall appeared before the 7 United States Senate at a hearing before the Committee on Energy and Natural Resources. 8 207. At the hearing, PHMSA Administrator Barrett testified further regarding BP's 9
10 responsibility for the oil spills at Prudhoe Bay:
11 I think it happened because BP fundamentally didn't understand the conditions of their lines, these low-stress lines on the North Slope, and didn't maintain them 12 properly. I think the operator is quite simply accountable for what happened. And we do not see conditions like this replicated in other lines on the North Slope or 13 typically on other lines in the national pipeline transportation system. 14 208. In addition, President and CEO of Alyeska Pipeline Service Hostler testified 15 regarding Alyeska' s pigging program: "we run a maintenance or cleaning pig every 7 to 14 days 16
17 and we run an intelligent pig every 3 years."
18 209. In response to a question from Senator Domenici, Malone stated:
19 In retrospect, BPXA's program had a gap that allowed the corrosion in the oil 20 transit lines to escape discovery until it resulted in the leaks in March and August. BPXA's corrosion monitoring programs will, therefore, be supplemented with 21 additional use of cleaning and intelligent pigs in the future.
22 210. In response to a question from Senator Thomas, Marshall stated: 23 BPXA did not believe a pig run of the Eastern Operating Area was necessary. 24 Even with this increased scrutiny, in retrospect, and in light of what we have learned from this incident, we regret that we did not schedule a baseline pig run 25 when BPXA assumed operations in 2001. 26 Zwerling, Schachter, & Zwerling, LLP CONSOLIDATED AMENDED COMPLAINT 1904 Third Avenue, Suite 1030 -57- Seattle, WA 98101-1170 Tel: (206) 223-2053 Fax: (206) 343-9636 No. C06-1505 MJP Case 2:06-cv-01505-MJP Document 30 Filed 05/01/2007 Page 58 of 82
Resumption of Full Production at Prudhoe Bay
211. On September 27, 2006 the Anchorage Daily News reported that "Oil giant BP
restarted the eastern side of the Prudhoe Bay oil field - shut down since August when a leak was
found - and expects production to reach 150,000 barrels a day by the weekend, a BP spokesman
said Tuesday."
212. The Trust filed a Form 8-K on October 18, 2006 regarding a new Alaska oil tax
statute. In the Form 8-K, the Trust reported on its decreased production due to the shutdown at
Prudhoe Bay:
BP Alaska reports that actual average daily net production from the BP Working Interests during the quarter ended September 30, 2006 was approximately 59,300 barrels per day.
213. On October 30, 2006, Dow Jones Newswires reported that "BP PLC (BP) said
Monday its Alaska Prudhoe Bay output has returned to its pre-shutdown August level of over
400,000 barrels a day."
214. BP plc's statement (¶ 213) was materially false and misleading because it knew
that the temporary oil transport bypass lines, installed following the production disruptions of
2006, did not recover full production capacity at Prudhoe Bay. As a result of Defendants'
representations regarding the resumption of full production, investors were led to believe that
distributions for the Trust would soon be back to previous levels.
215. On October 31, 2006, The Wall Street Journal reported that: "BP PLC (BP)
Tuesday announced that it was replacing the head of its troubled Alaska division.... Under the
shift, current BP Alaska president Steve Marshall will leave the division.... Doug Suttles,
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1 currently leading BP's work in the Sakhalin Island in Russia, will take over as the president of 2 BP Alaska." 3 The Trust 's Q3 FY 2006 Form 10-Q 4 216. The Trust filed its Form 10-Q for the third quarter of FY 2006 on November 9, 5
6 2006 ("Q3 FY 2006 10-Q"). The Trust paid cash distributions of $2.595 per Trust Unit for the
7 quarter, an increase of approximately 50.2% from the same quarter in the previous fiscal year.
8 The Trust's total royalty revenue for Q3 FY 2006 was $55,797,000, an increase of 9 approximately 49.4% from Q3 FY 2005. 10 217. The Q3 FY 2006 10-Q stated: 11 The partial shutdown of the Prudhoe Bay Field reduced average daily production 12 from the field to approximately half of normal output. Actual average daily net 13 production from the BP Working Interests during the quarter ended September 30, 2006 was approximately 59,300 barrels per day. Clearance from the U.S. 14 Department of Transportation to restart production in the Eastern Operating Area was received in September 2006 and Prudhoe Bay output was reported to have 15 returned to its pre-shutdown level of over 400,000 barrels per day by late October 16 2006.
17 218. The Q3 FY 2006 10-Q completely eliminated any reference to a "Risk Factor"
18 similar to the one set forth in the Q2 FY 2006 10-Q (¶ 180, supra), that distributions could be 19 "materially reduced" for an "indefinite period" due to the shutdown of Prudhoe Bay. Indeed, the 20 Q3 FY 2006 10-Q specifically supplemented the previously-stated Risk Factor with information 21 regarding the return of full production Prudhoe Bay. 22 at
23 219. As a result of Defendants' representations regarding the resumption of full
24 production, and the complete deletion of the Q2 FY 2006 warning that some future production 25 levels might drop, investors were misled into believing that distributions for the Trust would 26 Zwerling, Schachter, & Zwerling, LLP CONSOLIDATED AMENDED COMPLAINT 1904 Third Avenue, Suite 1030 -59- Seattle, WA 98101-1170 Tel: (206) 223-2053 Fax: (206) 343-9636 No. C06-1505 MJP Case 2:06-cv-01505-MJP Document 30 Filed 05/01/2007 Page 60 of 82
soon be back to previous levels.
220. Included with and incorporated by reference into the Q3 FY 2006 10-Q as Exhibits
were the trust agreements, including the Overriding Royalty Conveyance, which states that
BPXA will comply with the Prudent Operator Standard.
221. Therefore, as represented to investors in Exhibit 4.2 Q3 FY 2006 10-Q that,
BPXA would "conduct and carry on the development, exploration, production, maintenance and
operation of [the Trust's Interests] with reasonable and prudent business judgment, in
accordance with... good oil and gas field practices, as a reasonable and prudent operator...."
(Overriding Royalty Conveyance, § 7.1.)
222. However, at the time the Q3 FY 2006 10-Q was filed, this statement was
materially false and misleading for the reasons set forth in ¶ 76, supra.
223. Consistent with prior SEC Filings, the Q3 FY 2006 10-Q reiterated BPXA's
representation that average daily net production from the BP Working Interests will exceed
90,000 barrels per day until 2012. This representation was particularly significant to investors in
light of the elimination of the Risk Factor discussed in ¶ 218, supra.
224. Defendants knew that BPXA's statement regarding net production exceeding
90,000 barrels per day until 2012 was materially false and misleading at the time it was made
because Defendants knew but failed to disclose that the repairs necessary following the
shutdown of Prudhoe Bay would cause net production to fall below 90,000 barrels per day prior
to 2012.
225. The 10-K also failed to disclose to investors the material risks that field-wide
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infrastructure repairs, pipelines replacements and other well- related activities could result in 2 significant downtime and have a material adverse effect on long-term production levels. 3
4 226. On December 17, 2006, the Financial Times reported: 5
6 Looking back over some 20 years with BP, Mr. Kovac gave his perspective. "Fifteen years ago, we were replacing valves and patching wells," Mr. Kovac said. 7 "Over the years, oil production has gone down, so BP had responded by cutting back, deferring maintenance, changing policies or not following policies. The issue 8 has always been on production." 9 Tony Hayward, BP's chief executive for exploration and production worldwide, 10 criticized the penny-pinching in a December 11 2006 report on BP's closed intranet, where he noted: "We have a management style that has made a virtue out 11 of doing more for less. The mantra of more-for-less says that we can get 100 per cent of the task completed with 90 per cent of the resources which in some senses 12 is OK and might work, but it needs to be deployed with great judgment and 13 wisdom. When it isn't, you run into trouble."
14 Disclosure of the Full Impact of Defendants' Misconduct on Investors 15 227. Unknown to investors was the fact that purported full production at Prudhoe Bay 16 was either merely temporary or illusory and could not be sustained until 2012, as investors had 17 been previously informed. 18
19 228. The Trust filed a Form 8 -K on February 5, 2007 . In a drastic reversal from
20 previous SEC filings and statements during the Class Period, the 8-K announced that BPXA
21 estimated that production from the BP Working Interests would fall below an average of 90,000 22 barrels per day, beginning in 2007-five years earlier than previously represented. 23 229. This was a material downward adjustment, after the Trust' s repeated assurances 24 that production would be up and running again at full throttle and would continue to meet the 25
26 Zwerling, Schachter, & Zwerling, LLP CONSOLIDATED AMENDED COMPLAINT 1904 Third Avenue, Suite 1030 -61- Seattle, WA 98101-1170 Tel: (206) 223-2053 Fax: (206) 343-9636 No. C06-1505 MJP Case 2:06-cv-01505-MJP Document 30 Filed 05/01/2007 Page 62 of 82
90,000 barrel per day threshold until 2012. Indeed, there was no material reduction in the
Trust's allocation of estimated proved reserves in Prudhoe Bay - in fact, BPXA's estimate of
reserves actually increased by 697,000 barrels in FY 2006 - minus the production for the year.
230. The 8-K stated:
Our 2006 estimates and calculations support a change in forecasting operating efficiency in Prudhoe Bay. As a result of near term Integrity-driven activity focused on field wide infrastructure renewal, our estimates show Royalty Production will fall below the 90,000 barrel a day threshold, on an average annual basis, beginning in 2007. While some quarters may continue to have average production in excess of 90,000 barrels a day, seasonal and operational effects may result in quarters when average production is less than 90,000 barrels a day.
(Emphasis supplied.)
231. Simply put, BPXA's prior undisclosed maintenance failures and gross neglect of
the pipeline infrastructure required such extensive repairs to the pipeline and field, as well as a
loss in operating efficiency, that full production from the BP Working Interests was expected to
never again be achieved on a consistent basis.
232. On this news, the price of Trust Units dropped almost 9%, from a closing price of
$73.70 on February 5, 2007 to a closing price of $67.10 on the following day.
233. On February 15, 2007, Jim Cramer, host of CNBC's "Mad Money" program,
advised Trust Unit holders to sell their Trust Units.
234. In the days following Jim Cramer's recommendation, the price of Trust Units
plunged from a closing price of $63.07 on February 15, 2007 to a closing price of $55.49 on
February 21, 2007.
The Trust's FY 2006 10-K
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1 235. The Trust filed its FY 2006 10-K on March 1, 2007. According to the FY 2006 2 10-K, the BP Working Interests produced an average of 84.1 thousand barrels per day of oil and 3 condensate in 2006. 4 236. The Trust paid cash distributions of $1.675 per Trust Unit for the fourth quarter of 5
6 2006.
7 237. Contrary to previous public statements, the FY 2006 10-K disclosed that BPXA
8 never achieved full production at Prudhoe Bay after the August shutdown : "Temporary oil 9 transport bypass lines, installed following the production disruptions of 2006, did not 10 recover full production capacity in the field. This condition is expected to continue into 11 2007." 12
13 238. The FY 2006 10-K expanded upon the February 5, 2007 8-K's statements
14 regarding decreased production: 15 BP Alaska has undertaken a program of field-wide infrastructure renewal, pipeline 16 replacement, and mechanical improvements to wells. As a consequence of these activities and their required downtime, BP Alaska anticipates that its average net 17 production of oil and condensate from proved reserves will be below 90,000 barrels per day in certain quarters of future years and will fall below 90,000 barrels 18 per day on an annual average basis beginning in 2007. 19 As a result of the [August 2006] shutdown, average net production from the BP 20 Working Interests fell below 90,000 barrels per day in both the third and fourth quarters of 2006 and royalty payments received by the Trust from BP Alaska in 21 October 2006 and January 2007 were adversely affected. 22 239. In addition, the FY 2006 10-K was the first SEC filing from the Trust to include a 23 "Risk Factor" for Trust Unit investors stating that Prudhoe Bay oil production could be "shut in" 24 due to damaged or failed pipelines or equipment and that royalty payments could be adversely 25
26 Zwerling, Schachter, & Zwerling, LLP CONSOLIDATED AMENDED COMPLAINT 1904 Third Avenue, Suite 1030 - 63 - Seattle, WA 98101-1170 Tel: (206) 223-2053 Fax: (206) 343-9636 No. C06-1505 MJP Case 2:06-cv-01505-MJP Document 30 Filed 05/01/2007 Page 64 of 82
affected.
240. Despite Defendants' knowledge of the serious maintenance problems in the
pipeline, no such prior risk disclosure was made to investors - even in the face of the shutdown
in August 2006, and the failure to reach full production after the shutdown.
LOSS CAUSATION/ECONOMIC LOSS
241. During the Class Period, Defendants engaged in a course of conduct that
artificially inflated the price of the Trust Units and operated as a fraud or deceit on purchasers of
the Trust Units and caused Lead Plaintiff and other Class Members to suffer damages. When
Defendants' materially false and misleading statements were disclosed and became apparent to
the market, the price of the Trust Units fell precipitously as the prior artificial inflation came out
of the price of the Units. As a result of their purchases of Trust Units, Lead Plaintiffs and Class
Members suffered economic loss, i.e. damages, under the federal securities laws.
242. By issuing materially false and misleading statements regarding the maintenance
and operating condition of Prudhoe Bay, Defendants presented a misleading picture of the
Trust's financial performance and financial condition. Defendants' assertions of operating
Prudhoe Bay in compliance with the Prudent Operator Standard while, in fact, they improperly
maintained the pipeline, caused and maintained the artificial inflation in the price of the Trust
Units during the Class Period until the whole truth of the operating condition and deterioration
of the pipeline was accurately revealed to the market.
243. The price decline of Trust Units, as detailed herein, was a direct result of the
nature and extent of material false and misleading statements being revealed to investors and the
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market. Such decline began immediately after BP plc's first partial disclosure, on August 7,
2006, regarding shutdown of the pipelines at Prudhoe Bay. After BP plc's announcement that it
would be forced to shut down Prudhoe Bay, the price of Trust Units dropped from $87.89, its
closing price on August 4, 2006, to a low of $69.00 on August 7, 2006, closing at $76.85, a
decline of over 14%.
244. Defendants continued to maintain inflation in the price of the Trust Units by
representing that production at Prudhoe Bay would shortly return to pre-shutdown production
levels. The price decline of Trust Units continued again only after the Trust's disclosure, on
February 5, 2007, that production from the BP Working Interests would fall below an average of
90,000 barrels per day beginning in 2007, five years earlier than the previously represented date
of 2012. In response to that news, the price of Trust Units dropped almost 9%, from a closing
price of $73.70 on February 5, 2007 to a closing price of $67.10 on the following day.
ADDITIONAL SCIENTER ALLEGATIONS
245. The facts alleged herein compel a strong inference that Defendants acted with
scienter in their failure to disclose and misrepresentation of material information to the investing
public concerning the maintenance and operating condition of Prudhoe Bay's pipelines and
infrastructure and expected production. Defendants knowingly and substantially participated or
acquiesced in the suppression and misrepresentation of such information as primary violators of
the federal securities laws. Indeed, internal reports, regulatory findings and Defendants'
admissions create a strong inference that Defendants knew the statements alleged to be
misleading were materially false or omitted material information.
Zwerling, Schachter, & Zwerling, LLP CONSOLIDATED AMENDED COMPLAINT 1904 Third Avenue, Suite 1030 -65- Seattle, WA 98101-1170 Tel: (206) 223-2053 Fax: (206) 343-9636 No. C06-1505 MJP Case 2:06-cv-01505-MJP Document 30 Filed 05/01/2007 Page 66 of 82
1 246. In addition to the reports, statements, and admissions described above, a series of 2 news articles confirm Defendants' knowing violation of good oil and gas field practices in the 3 maintenance of Prudhoe Bay and thus their failure to disclose such problems to investors and the 4 impact on production in Prudhoe Bay and distributions to investors. 5
6 247. On March 20, 2006, The New York Times reported that, according to a BPXA
7 employee, BPXA was repeatedly warned of the likelihood of an oil spill due to improper pipeline
8 maintenance: 9 [O]ne of the company's longtime employees, a mechanic and local union official 10 who has participated in the spill cleanup, said in a telephone interview that he and his colleagues had repeatedly warned their superiors that cutbacks in routine 11 maintenance and inspection had increased the chances of accidents or spills. 12 In the interview, Marc Kovac, who is an official of the United Steelworkers union, 13 which represents workers at the BP facility, said he had seen little change in BP's approach despite the warnings. 14 248. The Financial Times reported on August 7, 2006, "BP given earlier warning of 15
16 corrosion":
17 On May 22 2004, Chuck Hamel, and advocate for BP workers in Alaska, took the charges directly to Dr. Walter E. Massey, chairman of the environment committee 18 of BP's non-executive board of directors. 19 In the letter, Mr. Hamel told Dr Massey that in the previous four years BP 20 employees and contract workers had brought to him concerns about safety, health and threats to the environment at Prudhoe Bay, Alaska. 21 "They seek the corrosion problem addressed and corrective action 22 to see undertaken without further delay...," he wrote in the letter.... 23 Mr. Hamel warned Dr Massey that, as a board member, he owed it to shareholders 24 to investigate...." 25 249. Similarly, MSNBC.com reported on BPXA's prior knowledge of corrosion issues 26 Zwerling, Schachter, & Zwerling, LLP CONSOLIDATED AMENDED COMPLAINT 1904 Third Avenue, Suite 1030 -66- Seattle, WA 98101-1170 Tel: (206) 223-2053 Fax: (206) 343-9636 No. C06-1505 MJP Case 2:06-cv-01505-MJP Document 30 Filed 05/01/2007 Page 67 of 82
1 in an article published on the same day: 2 BP now admits that senior company officials were warned three years ago about 3 serious corrosion problems in the pipeline being shut down this week.
4 The warnings were laid out in correspondence ... between Chuck Hamel, an advocate for oil workers, and senior BP officials. 5
6 Hamel writes that BP workers had come to him predicting a "major catastrophic event" and warning that "cost cutting" had caused "serious corrosion damage to 7 flow lines systems."
8 In the last few months, a number of BP workers have told the FBI that beginning 9 in 1999, supervisors ordered them to cut back on a key chemical - known as corrosion inhibitor - put into the system to protect pipes. 10 250. On the same day, in a CNNMoney. com article, Art Smith, chief executive of John 11 S. Herold, a Houston-based energy consulting firm, was quoted as stating that the corrosion 12
13 "should have been caught sooner." Charles Clusen, Director of the Alaska project for the
14 Natural Resources Defense Council, is quoted as saying the Prudhoe Bay shutdown "was almost 15 guaranteed to happen" because oil companies "have not been putting money into the 16 infrastructure" in Alaska. 17 251. A Bloomberg article published on August 9, 2006 reported, "BP Plc was alerted by 18
19 employees and contractors in a February 2004 survey that its Prudhoe Bay, Alaska, pipeline
20 network probably wasn't being adequately monitored for corrosion."
21 252. The article also stated that BP plc's survey respondents referenced the company's 22 cost-cutting program as possibly compromising safety at the pipeline. Cost cuts in 1999 created 23 "anxiety in the workforce, and that impacts safety," a contractor and supplier said in the report. 24 The article went on to state that "[c]ontractors, suppliers and the conversion community were 25
26 Zwerling, Schachter, & Zwerling, LLP CONSOLIDATED AMENDED COMPLAINT 1904 Third Avenue, Suite 1030 -67- Seattle, WA 98101-1170 Tel: (206) 223-2053 Fax: (206) 343-9636 No. C06-1505 MJP Case 2:06-cv-01505-MJP Document 30 Filed 05/01/2007 Page 68 of 82
1 concerned about BP's purported drive to support the highest standards, yet push for reduced 2 costs in its operations." According to employees, BP also "pared spending on a corrosion 3 inhibitor in its Alaskan pipelines following the costs cuts." 4 253. The Bloomberg article quoted DOT PHMSA Administrator Barrett as saying that 5
6 "[t]he typical standard of care is far above what we saw from BP's maintenance practices over
7 the past dozen years leading up to the 2 March spill."
8 254. On August 10, 2006, the Anchorage Daily News reported that BP spokesman 9 Beaudo stated, "Pigging and cleaning, clearly in hindsight, would have removed the solids that 10 we believe helped foster the growth of these microbes." 11 255. On August 11, 2006, the Houston Chronicle reported that "BP also said it takes 12
13 full responsibility for the lack of upkeep that led to the severe corrosion and shutdown."
14 256. On the same day, United States Representative Joe Barton wrote a letter to then- 15 president of BP plc Lord John Browne: 16 BP has repeatedly assured the Committee that the condition of the pipeline that 17 failed in March was an anomaly, and that BP's corrosion control program was an effective means to monitor and maintain pipelines and infrastructure on Alaska's 18 North Slope. 19 News that BP production of roughly 400,000 barrels per day of crude oil at 20 Prudhoe Bay has been shut down due to excessive corrosion of its oil transit lines contradicts everything the Committee has been told. The fact that BP's 21 consistent assurances were not well grounded is troubling and requires 22 further examination.
23 Among the questions ... are:
24 Why did BP wait for the U. S. Department of Transportation to issue a corrective action order against it before taking steps to adequately inspect the corroded 25 pipeline? 26 Zwerling, Schachter, & Zwerling, LLP CONSOLIDATED AMENDED COMPLAINT 1904 Third Avenue, Suite 1030 -68- Seattle, WA 98101-1170 Tel: (206) 223-2053 Fax: (206) 343-9636 No. C06-1505 MJP Case 2:06-cv-01505-MJP Document 30 Filed 05/01/2007 Page 69 of 82
1 (Emphasis supplied.) 2
3 257. On August 12, 2006, the Fairbanks News Miner reported on further information
4 indicating that BPXA had long known of the corrosion in its pipelines:
5 Critics have said the BP officials could not have been shocked at the corrosion and 6 resulting leaks.
7 Richard Finebergg [sic], a Fairbanks oil analyst who often consults for environmental groups, said Beaudo in March acknowledged that BP ran the 8 western line at reduced pressure due to corrosion problems. 9 "Under the circumstances, it is difficult to take his professed surprise seriously," 10 Fineberg wrote in a March 15 preliminary report on the western line leak. "What is more surprising is that BP was not inspecting that pipeline daily for leaks, as 11 recommended by [ADEC] in 2003." 12 258. On August 14, 2006 USATODAY. com reported that Kemp Copeland, BP's 13 greater Prudhoe Bay field manager, stated, "If we had to do it over again, we would have been 14 maintenance-pigging the lines." 15
16 259. Also on August 14, 2006, the Financial Times reported that, according to oil and
17 gas industry experts, BPXA should have been aware of the risk of corrosion caused by bacteria:
18 [I]ndustry experts argue that for BP to say it did not suspect microbial bacteria in 19 its transit lines is just not credible. Microbiologic influenced corrosion, or MIC as it is known in the industry, has been something companies have guarded against 20 for decades.
21 "Any prudent operator is going to be sure it does not have MIC and is going to periodically run cleaning pigs colonies if they form," Rick 22 to sweep out do says Kuprewicz, president of Accufact, a pipeline energy consulting firm.... 23 He notes that the oil transit lines are like the main arterials on an oilfield: "If 24 you're not looking at this stuff, what's going on here?" 25 260. On August 21, 2006, the Financial Times reported on an interview it conducted 26 Zwerling, Schachter, & Zwerling, LLP CONSOLIDATED AMENDED COMPLAINT 1904 Third Avenue, Suite 1030 -69- Seattle, WA 98101-1170 Tel: (206) 223-2053 Fax: (206) 343-9636 No. C06-1505 MJP Case 2:06-cv-01505-MJP Document 30 Filed 05/01/2007 Page 70 of 82
with a contract worker for BPXA: 2 BP workers have taken to the federal investigators accusations that the company 3 skewed findings by inspecting more areas of known good pipe than bad, creating blended data that left the impression that the pipeline was in better shape than it 4 was.
5 The company said it did blend data, not to determine if action needed to be taken 6 on the pipeline but rather to determine concentration levels of chemicals inhibitors.
7 The veteran worker said that, starting in the late 1990s, BP reduced corrosion chemical injection, or even stopped injection altogether during the final months of 8 the year, to enable it to meet budget figures. Ronnie Chappell, a BP spokesman, 9 said it was difficult for BP to investigate this claim because "the 1990s started 16 years ago. The people and the programme have changed. The chemicals have 10 changed. So have the ways we use them".
11 The worker said BP started using digital radiography film, which does not show the detail that ordinary film would show. 12
13 Digital was cheaper and while the quality has since improved the early corrosion problems were hidden, the worker said. 14 In addition, he insisted that BP had stopped using high-technology pigging 15 equipment to clean and maintain is oil transit lines because management did not 16 want to pay for the pigging, given a managerial environment in which "production was everything". 17 "The responsibility was left for the next management group, which would have 18 come in every three to four years. Then the next management would do the same 19 thing," the worker said.
20 261. On April 30, 2007, Representatives John D. Dingell and Bart Stupak, of the U. S.
21 House of Representatives Committee on Energy and Commerce, sent a letter to Defendant 22 Malone expressing their concerns regarding documents that emphasized budget pressures at 23 BPXA: 24 The documents suggest that budget pressures were severe enough that 25 some BP field managers were considering measures as draconian as reducing 26 Zwerling, Schachter, & Zwerling, LLP CONSOLIDATED AMENDED COMPLAINT 1904 Third Avenue, Suite 1030 -70- Seattle, WA 98101-1170 Tel: (206) 223-2053 Fax: (206) 343-9636 No. C06-1505 MJP Case 2:06-cv-01505-MJP Document 30 Filed 05/01/2007 Page 71 of 82
1 corrosion inhibitor to save money. BP provided e-mails that detail proposals to cut funding for corrosion inhibitor during at least two different years and in two 2 different locations.... If senior BP managers were willing to consider turning off 3 inhibitor at these locations, it suggests a budgetary environment in which other corrosion management activities may have bene eliminated or reduced to a degree 4 that may have directly affected corrosion of the portions of the oil transit lines (OTL) that experienced leaks last year. 5
6 Similarly, the documents suggest that corrosion-monitoring efforts such as smart pigging, coupon pulling, and digging up road crossings for visual inspection, 7 were either reduced, put on hold, or "squeezed" in some cases due to budget constraints. In other words, important action items related to health, safety, and 8 the environment, were being delayed, or cut altogether, and that this was related to 9 tight budgets possibly in an effort to maintain "flat lifting costs."
10 262. A Reuters article published on April 30, 2007 regarding the letter reported that a
11 committee aide stated that "the documents suggest Alaska operations were operating under a 12 culture similar to the unsafe cost cutting culture criticized by the [U.S. Chemical Safety Board] 13 at Texas City," where an explosion at a BP plc refinery killed fifteen workers. 14 263. Indeed, BPXA employees are reported to have repeatedly voiced concerns 15
16 regarding BPXA' s practice of minimizing spending on necessary pipeline safety and corrosion
17 prevention. Defendants' actions throughout the Class Period allowed it to meet certain
18 budgetary goals, permitting it to continue operation of Prudhoe Bay at certain profit levels at the 19 expense of safety and maintenance. 20 264. In addition, the "Chargeable Costs" per barrel paid by the Trust to BPXA are, 21 according the Trust's FY 2006 10-K, "fixed amounts specified in the Conveyance and not 22 to do
23 necessarily represent BP Alaska' s actual costs of production." Therefore, BPXA alone would
24 bear any increased cost of production due to pipeline maintenance, providing further incentive to 25 minimize maintenance and other expenses ultimately to the detriment of Trust investors. 26 Zwerling, Schachter, & Zwerling, LLP CONSOLIDATED AMENDED COMPLAINT 1904 Third Avenue, Suite 1030 -71- Seattle, WA 98101-1170 Tel: (206) 223-2053 Fax: (206) 343-9636 No. C06-1505 MJP Case 2:06-cv-01505-MJP Document 30 Filed 05/01/2007 Page 72 of 82
CLASS ACTION ALLEGATIONS
265. Lead Plaintiff brings this action as a class action pursuant to Federal Rules of Civil
Procedure 23(a) and (b)(3) on behalf of a Class (the "Class") consisting of all persons who
purchased the Trust Units during the Class Period, a period previously defined as from March
31, 2005 through and including February 5, 2007 ("Class Members"). Excluded from the Class
are Defendants, any entity in which any Defendant has a controlling interest or is a parent or
subsidiary of or is controlled by any Defendant, and the officers, directors, employees, affiliates,
legal representatives, heirs, predecessors, successors and assigns of Defendants.
266. The Class Members are so numerous that joinder of all members is impracticable.
While the exact number of Class Members is unknown to Lead Plaintiff at this time and can only
be ascertained through appropriate discovery, Lead Plaintiff believes there are thousands of
Class Members that traded Trust Units during the Class Period.
267. Questions of law and fact are common to all Class Members and predominate over
any questions affecting solely individual Class Members. Among the questions of law and fact
common to the Class are:
Whether the federal securities laws were violated by Defendants' acts as alleged herein;
Whether Defendants failed to disclose and misrepresented material facts during the Class Period;
Whether Defendants acted knowingly or recklessly in failing to disclose and misrepresenting material information;
Whether the market price of Trust Units during the Class Period was artificially inflated because of Defendants' conduct complained of herein; and
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1 Whether the Class Members have sustained damages and, if so, what is the proper measure of damages. 2
3 268. Lead Plaintiffs claims are typical of the claims of the Class Members as Lead
4 Plaintiff and the other Class Members each sustained damages arising out of the Defendants'
5 wrongful conduct in violation of federal law as complained of herein. 6 269. Lead Plaintiff will fairly and adequately protect the interests of the Class Members 7 and has retained counsel competent and experienced in class actions and securities litigation. 8
9 Lead Plaintiff has no interests antagonistic to or in conflict with those of the Class.
10 270. A class action is superior to other available methods for the fair and efficient
11 adjudication of the controversy because joinder of all Class Members is impracticable. 12 Furthermore, because the damages suffered by individual Class Members may be relatively small, 13 the expense and burden of individual litigation make it impossible for individual Class Members 14 to redress the wrongs done to them. Lead Plaintiff anticipates no unusual difficulties in the 15
16 management of this action as a class action.
17 271. Lead Plaintiff will rely, in part, upon the presumption of reliance established by the
18 fraud on the market doctrine in that: 19 • Trust Units met the requirements for listing, and were listed and actively traded on 20 the New York Stock Exchange, a highly efficient and automated market;
21 • The average daily volume of trading in Trust Units during the Class Period was 210,305 Trust Units; 22 • As a regulated issuer, the Trust filed periodic public reports with the SEC; 23 • The Trust was followed by numerous securities analysts employed by major 24 brokerage firms, who wrote reports that were distributed to the sales force and 25 certain customers of their respective brokerage firms. Each of these reports was publicly available and entered the public marketplace; 26 Zwerling, Schachter, & Zwerling, LLP CONSOLIDATED AMENDED COMPLAINT 1904 Third Avenue, Suite 1030 - 73 - Seattle, WA 98101-1170 Tel: (206) 223-2053 Fax: (206) 343-9636 No. C06-1505 MJP Case 2:06-cv-01505-MJP Document 30 Filed 05/01/2007 Page 74 of 82
• As a result of the foregoing, the market for Trust Units promptly digested current information regarding maintenance and production at Prudhoe Bay from all 2 publicly-available sources that affected the Trust's interests, including information 3 from Defendants, and reflected such information in the Trust Units' price. Under these circumstances, all purchasers of Trust Units during the Class Period suffered 4 similar injury through their purchase of Trust Units at artificially inflated prices and a presumption of reliance applies; and 5 • At all relevant times, the material misrepresentations and omissions particularized 6 in this complaint directly or proximately caused or were a substantial contributing 7 cause of the damages sustained by Lead Plaintiff and other members of the Class. As described herein, during the Class Period, Defendants omitted or 8 misrepresented material facts. These material misstatements and omissions had the cause and effect of creating in the market an unrealistically positive assessment of 9 the Trust Units, thus causing the Trust Units to be overvalued and artificially 10 inflated at all relevant times. Defendants' omissions and misrepresentations of materials facts during the Class Period resulted in Lead Plaintiff and other Class 11 Members purchasing Trust Units at artificially inflated prices.
12 272. Based upon the factors set forth in the preceding paragraph, Lead Plaintiff and the
13 other Class Members are entitled to the presumption of reliance upon the integrity of the market. 14 STATUTORY SAFE HARBOR 15 273. The statutory safe harbor providing for forward-looking statements under certain 16 circumstances does not apply to the allegedly false or misleading statements pleaded herein. 17
18 Many of the allegations concern misrepresentations of historical facts and are not forward-
19 looking. Further, even if the statements pleaded were forward-looking, they were not identified
20 as a "forward -looking statement" when made . Nor did meaningful cautionary statements 21 identifying important factors that could cause actual results to differ materially from that in the 22 forward-looking statement accompany such statements . To the extent that the statutory safe 23
24 harbor does apply to any statement pleaded, Defendants are liable for those false or misleading
25 and forward-looking statements because at the time each of those statements was made the
26 Zwerling, Schachter, & Zwerling, LLP CONSOLIDATED AMENDED COMPLAINT 1904 Third Avenue, Suite 1030 -74- Seattle, WA 98101-1170 Tel: (206) 223-2053 Fax: (206) 343-9636 No. C06-1505 MJP Case 2:06-cv-01505-MJP Document 30 Filed 05/01/2007 Page 75 of 82
1 speaker actually knew the statement was false and, if the statement was made by BP plc, BPXA 2 or the Trust, the statement was authorized and/or approved by an executive officer of BP plc or 3 BPXA who actually knew that those statements were false and misleading when made. 4 COUNT I 5 VIOLATION OF SECTION 10(b) OF THE SECURITIES EXCHANGE ACT 6 OF 1934 AND RULE 10b-5 BROUGHT AGAINST ALL DEFENDANTS
7 274. Lead Plaintiff repeats and realleges each and every allegation contained in the
8 foregoing paragraphs as if fully set forth herein. 9 275. During the Class Period, Defendants directly engaged in a common plan, scheme, 10 and unlawful course of conduct, pursuant to which it knowingly or recklessly engaged in acts, 11 transactions, practices, and courses of business that operated as a fraud and deceit upon Lead 12
13 Plaintiff and the other Class Members, and omitted to state and misrepresented material facts
14 concerning the Prudhoe Bay pipelines, infrastructure and operations that misled Lead Plaintiff 15 and the other Class Members. The purpose and effect of the scheme, plan, and unlawful course 16 of conduct was, among other things, to deceive the investing public, including Lead Plaintiff and 17 the other Class Members, and to induce Lead Plaintiff and the other Class Members to purchase 18
19 the Trust Units at artificially inflated prices.
20 276. With respect to BPXA' s misstatements and omissions, Lead Plaintiff also relies
21 upon the group pleading doctrine, which allows for the presumption that false and misleading 22 statements in public documents are made by the collective action of individuals with direct 23 involvement in the day-to-day management of a company. 24 277. Defendants had actual knowledge of the misrepresentations and omissions of 25
26 Zwerling, Schachter, & Zwerling, LLP CONSOLIDATED AMENDED COMPLAINT 1904 Third Avenue, Suite 1030 -75- Seattle, WA 98101-1170 Tel: (206) 223-2053 Fax: (206) 343-9636 No. C06-1505 MJP Case 2:06-cv-01505-MJP Document 30 Filed 05/01/2007 Page 76 of 82
1 material facts set forth herein, or acted with reckless disregard for the truth in that they failed to 2 ascertain and to disclose such facts, even though such facts were available to them. Defendants' 3 material misrepresentations and/or omissions were made knowingly or recklessly and for the 4 purpose and effort of concealing the problems at Prudhoe Bay from investors and supporting the 5
6 artificially inflated price of its securities. As demonstrated by Defendants' misleading statements
7 of the operations at Prudhoe Bay throughout the Class Period, Defendants, if they did not have
8 actual knowledge of the misrepresentations and omissions alleged, were reckless in failing to 9 obtain such knowledge by deliberately refraining from taking those steps necessary to discovery 10 whether those statements were false and misleading. 11 278. As a result of Defendants' failure to disclose and misrepresentation of material 12
13 facts as set forth above, the market price of the Trust Units was artificially inflated during the
14 Class Period. Unaware of the deceptive and manipulative devices and contrivances employed by 15 Defendants, Lead Plaintiff and the other Class Members relied, to their detriment, on the 16 integrity of the market price in purchasing the Trust Units. Had Lead Plaintiff and the other 17 Class Members known the truth, they would not have purchased the Trust Units or would not 18
19 have purchased them at the inflated prices that they did.
20 279. As a direct and proximate cause of Defendants' wrongful conduct, Lead Plaintiff
21 and the other Class Members have suffered damages in an amount to be proved at trial. 22 280. By reason of the foregoing, Defendants have violated Section 10(b) of the 23 Securities Exchange Act of 1934 (the "Exchange Act") and Rule lOb-5 promulgated thereunder 24 and are liable to Lead Plaintiff and the other Class Members for damages that they suffered in 25
26 Zwerling, Schachter, & Zwerling, LLP CONSOLIDATED AMENDED COMPLAINT 1904 Third Avenue, Suite 1030 -76- Seattle, WA 98101-1170 Tel: (206) 223-2053 Fax: (206) 343-9636 No. C06-1505 MJP Case 2:06-cv-01505-MJP Document 30 Filed 05/01/2007 Page 77 of 82
connection with their purchases of the Trust Units during the Class Period.
COUNT II VIOLATION OF SECTION 20(a) OF THE EXCHANGE ACT BROUGHT AGAINST ALL DEFENDANTS EXCEPT BPXA
281. Lead Plaintiff repeats and realleges each and every allegation contained in each of
the foregoing paragraphs as if set forth fully herein.
282. BP plc and the Individual Defendants acted as controlling persons of BPXA under
the meaning of section 20(a) of the Exchange Act as alleged herein. By virtue of their active
participation in and/or awareness of Prudhoe Bay's day-to-day operations, and/or intimate
knowledge of the maintenance issues at Prudhoe Bay, and the Individual Defendants' high-level
positions, BP plc and each Individual Defendant had the power to influence and control and did
influence and control, directly or indirectly, BPXA, including its failure to disclose material facts
concerning the condition of Prudhoe Bay's operations and infrastructure.
283. In particular, BP plc and the Individual Defendants had direct and supervisory
involvement in the day-to-day operations of Prudhoe Bay and, therefore, are presumed to have
had the power to control or influence the particular misrepresentations and omissions giving rise
to the securities violations alleged herein, and exercised the same.
284. In addition, BP plc's agreement to the terms of the Support Agreement, which is
an agreement to "cause [BPXA] to perform its payment obligations" to the Trust and accept
BPXA's obligations to the Trust in certain circumstances, further demonstrates that it is a
controlling person of BPXA.
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285. As set forth above, BPXA and each of the Individual Defendants violated Section
10(b) and Rule 10b-5 by their acts and omissions as alleged in this complaint. By virtue of their
positions as controlling persons, BP plc and the Individual Defendants are liable pursuant to
Section 20(a) of the Exchange Act. As a direct and proximate result of the wrongful conduct,
Lead Plaintiff and the other Class Members suffered damages in connection with their purchases
of Trust Units during the Class Period.
PRAYER FOR RELIEF
WHEREFORE, Lead Plaintiff, on its own behalf and on behalf of the Class, prays for judgment as follows:
(a) Declaring this action to be a class action pursuant to Rule 23(a) and (b)(3) of the
Federal Rules of Civil Procedure on behalf of the Class defined herein;
(b) Awarding Lead Plaintiff and Class Members damages in an amount that may be
proven at trial, together with interest thereon;
(c) Awarding Lead Plaintiff and Class Members prejudgment and postjudgment
interest, as well as their reasonable attorneys' and experts' witness fees and other costs; and
(d) Such other relief as this Court deems appropriate.
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JURY DEMAND
Lead Plaintiff demands a trial by Jury.
Dated : May 1, 2007
ZWERLING, SCHACHTER & ZWERLING, LLP
By /s/ Dan Drachler Dan Drachler, WSBA #27728 1904 Third Avenue, Suite 1030 Seattle, WA 98101-1170 Tel: (206) 223-2053 Fax: (206) 343-9636 E-mail: [email protected]
ZWERLING, SCHACHTER & ZWERLING, LLP Richard A. Speirs Sona R. Shah David R. Kromm 41 Madison Avenue, 32nd Floor New York, NY 10010 Tel: (212) 223-3900 Fax: (212) 371-5969 E-mail: [email protected] [email protected]
Lead Counselfor Lead Plaintiff the Teramura Family Trust Group
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CERTIFICATION OF DIANA ALLEN LIFE INSURANCE TRUST
I, George Allen, declare on behalf of the Diana Allen Life Insurance Trust, that:
1. I have reviewed the complaint in In re BP Prudhoe Bay Royalty 1 rust Sec. Litig.,
No. 06-1505 MJP (W.D. Wash.) (to be filed on May 1, 2007) and I authorize its
filing.
2. I did not purchase any security that is the subject of this action at the direction of
my counsel or in order to participate in this private action.
3. I am willing to serve as a representative party on behalf of the class, including
providing testimony at deposition and trial, if necessary.
4. My transactions in the security that is the subject of this action during the class
period are as follows:
Date Security Transaction # Units Price Total 7/14/06 Units of the BP purchase 400 $86.42 $34,568 Prudhoe Bay Royalty Trust 5. During the three years prior to the date of this Certification, I have not sought to
serve or served as a representative party for a class in any other action filed under
the federal securities laws.
6. 1 will not accept any payment for serving as a representative party on behalf of the
class beyond my zo rata share of any recovery, except such reasonable costs and
expenses (including lost wages) directly related to the representation of the class
as ordered or approved by the Court.
I, George Allen, declare under penalty of perjury that the foregoing is true and
correct.
May I 2007 . 1 ^-^-- George Allen Trustee of the Diana Allen Life Insurance Trust Case 2 : 06-cv-01505-MJP Document 30 Filed 05/01 /2007 Page 81 of 82
CERTIFICATION OF MAMI TERAMURA FAMILY INSURANCE TRUST
I, George Allen, declare on behalf of the Mami Teramura Family Insurance Trust, that:
1. I have reviewed the complaint in In re BP Prudhoe Bay Royalty Trust Sec. Litig.,
No. 06-1505 MJP (W.D. Wash.) (to be filed on May 1, 2007) and I authorize its
filing.
2. I did not purchase any security that is the subject of this action at the direction of
my counsel or in order to participate in this private action.
3. I am willing to serve as a representative party on behalf of the class, including
providing testimony at deposition and trial, if necessary.
4. My transactions in the security that is the subject of this action during the class
period are as follows:
Date Security Transaction # Units Price Total 7/17/06 Units of the BP purchase 150 $90.00 $13,500.00 Prudhoe Bay Royalty Trust 5. During the three years prior to the date of this Certification, I have not sought to
serve or served as a representative party for a class in any other action filed under
the federal securities laws.
6. 1 will not accept any payment for serving as a representative party on behalf of the
class beyond my fro rata share of any recovery, except such reasonable costs and
expenses (including lost wages) directly related to the representation of the class
as ordered or approved by the Court.
I, George Allen, declare under penalty of perjury that the foregoing is true and
correct.
May 1 , 2007 George Alen Trustee of the Mami Teramura Family Insurance Trust Case 2 : 06-cv-01505-MJP Document 30 Filed 05/01 /2007 Page 82 of 82
CERTIFICATION OF YOKO TERAMURA FAMILY INSURANCE TRUST
I, George Allen, declare on behalf of the Yoko Teramura Family Insurance Trust, that:
1. 1 have reviewed the complaint in In re BP Prudhoe Bay Royalty Trust Sec. Litig.,
No. 06-1505 MJP (W.D. Wash.) (to be filed on May 1, 2007) and I authorize its
filing.
2. I did not purchase any security that is the subject of this action at the dircetion of
my counsel or in order to participate in this private action.
3. 1 am willing to serve as a representative party on behalf of the class, including
providing testimony at deposition and trial, if necessary.
4. My transactions in the security that is the subject of this action during the class
period are as follows:
Date Security Transaction # Units Price Total 7/17/06 Units of the BP purchase 120 $89.20 $10,704.00 Prudhoe Bay Royalty Trust 5. During the three years prior to the date of this Certification, I have not sought to
serve or served as a representative party for a class in any other action filed under
the federal securities laws.
6. 1 will not accept any payment for serving as a representative party on behalf of the
class beyond my pro rata share of any recovery, except such reasonable costs and
expenses (including lost wages) directly related to the representation of the class
as ordered or approved by the Court.
T, George Allen, declare under penalty of perjury that the foregoing is true and
Correct.
May 1 , 2007 George Allen Trustee of the Yoko Teramura Family Insurance Trust