The New Jersey Chemical Spill That Could Pollute U.S.-Argentine Relations

Argentine President Mauricio Macri flew to Washington this week to present a new image of his country. Once mired in debt and feuds with foreign creditors, Macri wants the world to know that Argentina is back open for business. But there’s a big hitch in his sales pitch, and it has to do with a chemical-laden river in New Jersey.

Argentina’s state-controlled oil company, YPF SA, is mired in a heated legal dispute over who foots the bill to clean up a New Jersey river saturated with pollution. The state legislature accused YPF of trying to duck out on its responsibility to help clean up the mess that one of its subsidiaries is legally on the hook for, even though it filed for bankruptcy last year. Both chambers of the New Jersey state legislature have called on Trump’s Justice Department to investigate, and they say the buck stops with Macri.

The legal dispute could cloud Macri’s international campaign to present a new above-the-board face for Argentina’s business climate. It’s also embroiled the state oil company in a potentially costly legal mess at a time when Argentina needs its energy revenues the most. And if YPF manages to avoid footing the bill, New Jersey lawmakers say, it could provide a blueprint for companies to escape future environmental damage claims.

The story dates back to the 1980s, when the Environmental Protection Agency (EPA) first measured off-the-charts pollution levels in New Jersey’s Passaic River, thanks in large part to a spillage from a nearby chemical company, Diamond Shamrock Chemicals, which produced Agent Orange, among other toxic chemicals. In 1983, Maxus Energy Corporation bought Diamond Shamrock, legal liabilities and all, and then YPF bought Maxus for $762 million in 1995, thereby inheriting a share of the Passaic River cleanup burden, New Jersey lawmakers say.

In 2016, the EPA finally completed a plan to clean up the Passaic River, one of the largest of the EPA’s so-called “Superfund” sites requiring hazardous waste cleanup. (New Jersey has 100 Superfund sites — more than any other state in the country).

The cleanup for the Passaic River, dubbed the Diamond Alkali Superfund site, is a massive undertaking that requires dredging 3.5 million cubic yards of contaminated soil. The task could cost $1.38 billion, though other government estimates price the total environmental and economic damage at $5.5 billion.

“The Passaic River has been seriously damaged by over a century of pollution,” EPA Regional Administrator Judith Enck said in March. “Extraordinarily high concentrations of dioxin, PCBs, heavy metals and pesticides have robbed the people of New Jersey from being able to use this natural resource.”

With Trump poised to gut EPA funding by as much as 31 percent, the cleanup effort needs all the outside funding it can get. But when New Jersey turned to YPF to help foot the bill, the company said it couldn’t afford to pitch in at the levels the state wanted. YPF’s subsidiary Maxus filed for bankruptcy in June 2016, so the company said it was fresh out of money to help out.

But the New Jersey state legislature and other businesses involved in the legal battle say this bankruptcy was by design. They claim YPF undertook a premeditated plan, years in the making, to strip Maxus of its assets and force it into bankruptcy to shirk its duty to the Passaic River cleanup.

“The timing of this bankruptcy filing was no coincidence. It was, we believe, part of YPF’s master plan to attempt to make Maxus’ environmental liabilities evaporate from YPF’s balance sheet,” Frank Parigi, a lawyer with Occidental Chemical Corporation, told a New Jersey Senate committee hearing this month. Occidental Chemical Corporation is another one of dozens of companies involved in the legal battles over who pays what to clean up the the Superfund site.

And just two months after the bankruptcy filing, the Wall Street Journal reported YPF managed to raise $1.75 billion in bonds from Wall Street — one of the most successful Argentine corporate bond sales in history. Leading lawmakers to believe YPF wasn’t as cash-strapped as it first led on.

For New Jersey legislators at wits end over the legal battle, the buck stops with Macri.

Though he doesn’t oversee day-to-day operations of YPF, the oil company is 51 percent state-owned, and Macri’s government hand-picked YPF’s top leadership.

“Mounting evidence of fraud committed by [YPF] against U.S. taxpayers shows Macri has a long way to go,” New Jersey state Sen. Bob Smith and Assemblyman Tim Eustace wrote in an op-ed for NorthJersey.com Friday. “It’s precisely the kind of bad deal Trump railed against as a candidate and that his administration needs to undo,” they wrote.

The case comes as Argentina works to repair its economic image abroad, left in tatters after its 2001 financial crisis that forced it to default on $100 billion in debt — one of the largest sovereign defaults in history. Macri’s market-oriented reforms slowed the country’s economic hemorrhage, but didn’t stop it. The country’s economy contracted 1.9 percent in January and 2.2 percent in February, dashing hopes his reforms could quickly turn the country’s economy around.

“[Macri’s] reforms are effective, but take time. Which he may not have politically,” said Shannon O’Neil, an Argentina expert with the Council on Foreign Relations. “Growth hasn’t picked up as fast as everyone hopes. The question is if Argentines, who so far have given him the benefit of the doubt, continue to do so,” she added.

She said the reforms, including pricey social program, rely on a steady stream of government revenue including from oil and gas; Argentina has the fourth-largest shale oil and gas reserves in the world. That makes the state-owned oil giant all the more crucial for Argentina’s road to recovery — and Macri’s political future.

The U.S. government is challenging YPF’s subsidiary Maxus on its bankruptcy filing in the U.S. Bankruptcy Court in Delaware. In court filings submitted April 16, the U.S. government claims the natural resource damages to the Superfund site total $5.5 billion. If Maxus, and by extension, YPF was found responsible for covering these damages, it could put a huge dent in the company’s value, estimated at some $24 billion.

YPF agreed to pay $130 million to cover environmental costs for the cleanup — that’s only around 2.3 percent of the total cost the U.S. government claims.

Occidental Chemical, which bought Maxus’ chemical business in 1986 but claims YPF is responsible for the bulk of the legal liabilities, agreed to spend $165 million on the work to begin cleaning the Passaic River.

YPF did not respond to FP’s request for comment, but in past statements said Occidental Chemical is merely trying to shift blame to pay less money for the clean up. “Maxus has certain contractual obligations to Occidental related to the Passaic River, and it has fulfilled those obligations, including after Maxus was purchased by YPF,” a YPF spokesman told the Wall Street Journal on April 18. “Maxus was forced to seek bankruptcy protection after it exhausted its ability to continue paying.”

The legal drama wasn’t at the top of the agenda — if it was even on the agenda at all — for Trump and Macri’s meeting, but it could dog the relationship in the future. New Jersey legislators plan to make a lot of noise in Washington over the issue, and want to see Congress hold Argentina’s feet to the fire. That could throw a wrench into Macri’s plans to pitch a new Argentina to the United States.

Photo credit: BRENDAN SMIALOWSKI/AFP/Getty Images