Archive for Sunday, July 30, 2000

Koch is cleaning its image, pollution

July 30, 2000


— For decades, Koch Industries quietly built a financial empire grounded on its pipeline and refinery holdings around the world.

The Wichita-based firm grew into the nation's second-largest privately held company, becoming a powerful player in business and political arenas. It now is among the top contributors to George W. Bush's presidential campaign, as well as a generous benefactor in other national and state races.

The reputation the press we received out of it to me was much more difficult than the fine we paid for it. We were characterized as a company we are not. We are committed to do the right thing.

Koch president Joe Moeller

Yet its name has remained relatively obscure compared to other behemoths in the oil industry so much so that the reclusive company launched a short-lived advertising campaign a couple of years back to familiarize people with the Koch name and products: "You know us better than you think."

But while consumers may not recognize the Koch name in many of the chemicals, plastics, fuels, asphalt products, food and financial services produced by the firm, Koch Industries remains a frequent newsmaker particularly as its environmental record falls under growing public scrutiny.

Koch agreed last October to pay a $3.5 million punitive damage settlement, on top of a $296 million jury award, in connection with a 1966 pipeline blast that killed two teen-agers near Lively, Tex.

The company again drew national attention earlier this year with a record $35 million settlement with federal environmental regulators for leaking 3 million gallons of oil and other pollutants into lakes and streams in six states.

And in an agreement announced last week, Koch Petroleum Group agreed along with oil giant BP Amoco to spend millions of dollars to cut air pollution from their refineries. Koch separately agreed to pay $1 million to settle previous pollution problems, adding to $3.5 million from a settlement involving pollution at the company's Minnesota facility.

But ask Koch officials what rankles them most, and they'll tell you it's the perceived portrayal in the media of their business as a "rogue company from Kansas" that ignores the environment and the law.

"The reputation the press we received out of it to me was much more difficult than the fine we paid for it," Koch president Joe Moeller said. "We were characterized as a company we are not. We are committed to do the right thing."

And even Koch's traditional adversaries give a qualified nod to that idea.

"I think sometimes you have to get slapped around the ears a little bit before a company like this realizes that they're as answerable to the law as anyone else," said Charles Benjamin, a Lawrence-based attorney for the Kansas chapter of the Sierra Club. "I have been told by folks I know at Koch that they really are trying to become a more environmentally friendly company."

Last week's announcement came just months after the largest civil settlement ever paid under the Clean Water Act.

Still, trouble looms for Koch. A Texas grand jury is still considering criminal indictments arising from alleged environmental violations at refineries in Texas and Minnesota.

A federal judge in Minneapolis, Minn., accepted a plea agreement in March between Koch Industries and the U.S. Attorney's office effectively ending a lengthy criminal pollution inquiry in that state. Koch agreed to pay an $8 million penalty, and pleaded guilty to negligently discharging oil into a pond and backwaters of the Mississippi River.

All this comes as Koch spends millions of dollars to make its facilities among the most environmentally safe in the industry, winning praise from private environmental groups and state regulators alike.

Koch also has found that there's money not only in joining the environmental bandwagon, but also taking its lead.

Even so, Koch continues to be dogged by its environmental missteps regardless of its environmental awards, innovative environmental products or hefty monetary donations to environmental causes.

Consider, for example, the July 10 announcement by Koch Petroleum Group that the firm was voluntarily committing to reducing ozone levels by producing a low-sulfur gasoline in its Corpus Christi, Tex., refinery for markets around that state.

The cleaner fuels, with sulfur levels half the industry average, will cost Koch $28 million. Moreover, Koch plans to invest an additional $130 million to produce a gasoline that cuts sulfur levels by 90 percent by 2005 to meet anticipated federal requirements.

Many were happy with the deal, and the Texas Natural Resource Conservation Commission lauded Koch's clean air initiative.

But just two days later, the same commission slapped a $171,570 fine on Koch for air quality violations at crude oil storage facilities in 32 Texas counties.

Encircling Earth 1mes

Koch Industries owns and operates one of the largest pipeline systems in the nation, encompassing more than 35,000 total miles, according to the company. That's enough pipe to circle the planet nearly 1mes.

Deep inside its Wichita facility, Koch operates the network from a high-tech monitoring system reminiscent of an air traffic control tower.

The system was honored by the Smithsonian, which made it part of its permanent research collection on information technology.

Called Katapult, the system helps operators pinpoint possible leaks within seconds. The system uses centralized artificial intelligence to perform simulation analysis of more than 125,000 data points each minute.

The company contends that in the past eight years it has reduced crude oil leaks by 92 percent. And it often cites a 1997 audit by the Texas Railroad Commission showing that Koch's Texas pipeline averaged 60 percent fewer violations and incidents than the industry norm.

Koch has spent $980 million for environmental protection at refineries and other facilities since 1990, the company said.

Meanwhile, Koch sold off much of its system of crude oil gathering lines most notably those responsible for most of the 311 leaks in the EPA settlement in 1998. Now Koch owns about 25 percent of lines involved in the EPA lawsuit, the company said.

Pat McCann, senior vice president for Koch Pipelines, said that while Koch took into consideration environmental issues when it sold those gathering lines, in the end it was a business decision: The crude oil gathering system did not enhance Koch's business.

Koch sold the gathering system only after the company invested money to upgrade it.

"It is not like we sold our problem," Clay said.

'A diligent corporate citizen'

Koch Industries' willingness to clean up after its occasional messes, even while improving its environmental record, appears to be paying dividends among state environmental regulators.

When EPA went after Koch in its big pipeline leak case, it asked the six states where the leaks occurred to join in its lawsuit. Only Texas agreed a decision that garnered for that state half of the $30 million in penalties, plus much of the additional $5 million that Koch agreed to pay for environmental projects.

The other states Kansas, Oklahoma, Louisiana, Alabama and Missouri declined to join the EPA suit, and got little out of the EPA's record settlement. Kansas and Oklahoma split $1.5 million for wetlands acquisition and restoration.

Oklahoma where nearly two-thirds of those spills in the lawsuit occurred declined to join the EPA in its prosecution of Koch Industries on the advice of the Corporation Commission of Oklahoma, the state's chief oil and gas regulator.

Then-commission chairman Cody Graves wrote a letter to the attorney general's office in 1995, saying that after reviewing the history of spill reporting and compliance efforts by Koch, it was the commission's opinion that Koch had been a "diligent corporate citizen." He said there was no benefit in pursuing litigation with EPA.

At the Kansas attorney general's office, spokeswoman Tiffany Ball said the state declined to join the EPA lawsuit in part because of its limited number of staff attorneys, as well as concern that the statute of limitations was nearing for some of the 30 Kansas spills.

The state also decided against pursuing the case against Koch Industries after meeting with officials of the Kansas Department of Health and Environment.

"Although they weren't perfect, there wasn't anything KDHE was real concerned about," Ball said.

'More than just money'

For its part, Koch Industries is doing more than simply cleaning up its image.

Just ask Carlton Dufrechou, executive director of the Lake Pontchartrain Basin Foundation, an environmental watchdog in Louisiana.

In 1997, Koch Pipeline Southeast, another Koch subsidiary, built a 210-mile natural gas pipeline from Mobile, Ala., to a gas plant in Bell Rose in southern Louisiana. The pipeline crossed environmentally sensitive Lake Pontchartrain north of New Orleans.

The company went to the environmental group with its plans, and discussions prompted Koch to drop its original concept for a more expensive, ecologically friendly method.

"They took all our recommendations to heart, and incorporated nearly all of them," Dufrechou said.

By developing innovative environmental technologies like its Katapult pipeline monitoring system Koch Industries gradually is improving its own environmental record.

"It is more than just money," said James Mahoney, senior vice president of operations at Koch Petroleum Group. "Everybody thinks all you have to do is spend money and you solve your problems."

Meanwhile, Koch Industries has been quick to capitalize on the market created by the public's growing concern for the environment.

This is, after all, a company that has built a financial empire with 13,000 employees worldwide by using so-called market-based management practices the idea that you can run a company more like a free economy than a military organization.

So it's not surprising that Koch Industries found a way to cash in on its own environmental woes by using the experience it gained to develop new products and companies.

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