Chevron in Ecuador

The archive of the Clean Up Ecuador campaign website

Chevron's Ecuador Case Takes New Twist

By Ed Crooks and Naomi Mapstone, Financial Times
4 January 2012

For Chevron shareholders, an Ecuadorean court's confirmation on Tuesday evening of an $18bn damages award against the company has been a non-event.

Yet the legal battle over pollution caused by Chevron's predecessor Texaco in the Amazon region of Ecuador is not over yet. The saga, which has held plenty of twists and turns since the first action was launched back in 1993, still has more to come.

The fight has dragged on thanks in large part to the dogged persistence of Steven Donziger, the plaintiffs' controversial US-based lawyer. While Chevron remains adamant in its rejection of the case against it, the company could yet end up having to pay a multi-billion dollar settlement to resolve the issue.

Fadel Gheit, an analyst at Oppenheimer in New York, says: "At the very beginning, it didn't look as though the case was going anywhere. Oil companies get sued every day by everyone, everywhere, and most of the cases we never hear about."

Now he expects Chevron to agree to pay $2bn-$3bn to bring the dispute to an end.

For Chevron, the second-biggest US oil and gas group by market capitalisation, the battle has been infuriating, not least because it has never operated in Ecuador.

The pollution that is the subject of the case is alleged to have been caused by Texaco, which Chevron bought in 2001. By then, Texaco had been out of the Amazon region for almost a decade, having pulled out of its joint venture with Petroecuador, the state-run oil company, in 1992.

Ecuador's government signed an agreement saying that Texaco had cleaned up the area as required, but that did not prevent civil claims. In and around Lago Agrio, the rough and tumble oil town where Texaco helped found Ecuador's oil industry, about 30,000 locals have come forward alleging damage to the land and their health. In the jungle, deep pits as big as swimming pools filled with crude oil are testament to the scars that the oil industry has left on the region. However, Chevron argues that it is Petroecuador, which was sole owner of the oilfields after 1992, that is responsible for the pollution.

The US company was confident enough in the strength of its argument that it sought to have the case heard in Ecuador. Its reaction to Tuesday's decision, which upheld a ruling from another court last year, was furious.

"Today's decision is another glaring example of the politicisation and corruption of Ecuador's judiciary that has plagued this fraudulent case from the start," it said in a statement.

"Chevron does not believe that the Ecuador ruling is enforceable in any court that observes the rule of law."

So far, investors have shared that view. Chevron's shares were down just 0.1 per cent at midday yesterday in New York; less than the 0.4 per cent fall for ExxonMobil, its peer in the top rank of US oil and gas companies.

That move followed an excellent 2011 for Chevron's investors: over the past 12 months, their shares have risen 20 per cent, compared with 14 per cent for Exxon and just 8 per cent for smaller rival ConocoPhillips.

Even for a company of Chevron's size, $18bn would be a significant hit: about 8 per cent of its market capitalisation. But investors seem not to believe that the award – the second-largest environmental damages ever imposed on an oil company, after the $20bn compensation for victims of the Gulf of Mexico spill agreed by BP – will ever be paid.

For now, that assessment looks justified. There are further legal contests to come in US courts and at the international court of arbitration in The Hague.

Kevin Koenig, a Quito-based spokesman for Amazon Watch, a campaign group, argues it's time for Chevron to "do the right thing and respect the judgment", but concedes it's unlikely the case will be resolved soon.

However, he said Chevron had made a "serious miscalculation" in forcing the plaintiffs to now pursue the company in foreign courts.

Chevron has significant assets in other Latin American countries, including Argentina, Venezuela and Brazil, where the US group has been targeted by regulators over an oil spill and faces a damages claim for $10.6bn. Mr Donziger's team has been cagey about its next moves to try to enforce the $18bn award, but action in one or more of those countries, or in Europe, is possible.

"Chevron has to win every one of those cases. The plaintiffs will only need to win one," Mr Koenig says. John Watson, Chevron's chief executive, is adamant that the company should not pay anything for what it regards as a fraudulent case, Mr Gheit says. However, as the dispute heats up, the argument for reaching a deal grows stronger.

"When the dog keeps on barking and barking, eventually you have to throw it a bone," says Mr Gheit.