Chevron’s Ecuador Judgment May Be ‘Unenforceable,’ Analyst Says

By webadmin on 01:06 pm Feb 15, 2011
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Joe Carroll & Karen Gullo

Chevron Corp., the second-largest United States oil company, may never pay a cent of the more than $17 billion in fines and penalties levied by an Ecuadorean court for environmental damage dating back to the 1960s.

Chevron doesn’t have any refineries, storage terminals, oil wells or other properties in Ecuador that could be seized to pressure the company to pay, said Mark Gilman, an analyst at Benchmark Co. LLC in New York. In anticipation of an adverse ruling, Chevron went to court in New York last week to obtain an order shielding the company anywhere in the world from collection efforts related to the case.

The judgment handed down yesterday by a judge in Lago Agrio, a provincial capital near the Colombian border, ordered Chevron to pay an $8.6 billion fine and an equal amount in punitive damages, according to the court ruling obtained by Bloomberg. The judgment stemmed from an 18-year-old lawsuit that alleged Texaco Inc. dumped chemical-laden wastewater in the Amazon River basin from 1964 to 1992. Chevron acquired Texaco in 2001.

“It’s probably unenforceable,” Gilman said yesterday in a telephone interview. “I wouldn’t want to say $8 billion is insignificant in any way, shape or form for Chevron, because it’s not, but given the lack of local assets, Ecuador is going to have difficulty enforcing this.”

The court ordered the company to pay an additional 10 percent of the value of the fines to the Amazon Defense Front, according to the ruling. The organization is also the beneficiary of the trust fund that the court wants created to pay the fines.

Damages Doubled

The company will be pardoned from paying the punitive damages if it issues a public apology in major newspapers within 15 days of the court’s decision, according to the ruling.

Kent Robertson, a Chevron spokesman, said the company will appeal the judgment. Chevron attorneys were still poring over the document late Monday to calculate the amount of damages, fines and other penalties imposed by the judge, he said.

“One thing we do know is that this ruling was the product of fraud and is contrary to the legitimate scientific evidence,” Robertson said yesterday in a telephone interview.

Chevron had $17.1 billion in cash and near-cash equivalents at the end of December, according to a Jan. 28 statement. The company’s $195 billion market valuation is more than three times the size of Ecuador’s annual economic output.

Water, Soil Contamination

Ecuador pumped an average of 470,000 barrels of crude a day last year, the lowest production among Organization of Petroleum Exporting Countries members, International Energy Agency figures showed. Ecuador ranked 127th out of 178 nations in Transparency International’s 2010 corruption-perception index. Ethiopia, Indonesia and Armenia were perceived as less corrupt, according to the index.

The ruling held Chevron responsible for water and soil contamination that a court-ordered assessment estimated caused Amazon residents $27 billion in damages from illness, deaths and economic loss.

Chevron argued that it cleaned up its portion of the oil fields and was released from pollution claims in an agreement with Ecuador and state-owned oil company PetroEcuador, which took control of the Texaco operations in 1992.

“The case really sends a message that companies operating in the undeveloped world cannot rely on a compliant government or lax environmental rules as a way of permanently insulating themselves from liability,” said Robert Percival, a law professor and director of the environmental law program at the University of Maryland School of Law in Baltimore.

Underperforming Shares

The ruling may have prompted concern among some investors yesterday and served as a drag on Chevron’s stock price, Gilman said. Chevron’s 1.3 percent increase lagged peer companies such as ConocoPhillips and Exxon Mobil Corp., which rose 3.1 percent and 2.5 percent, respectively.

“There was some degree of underperformance,” said Gilman, who has a “buy” rating on Chevron shares.

Chevron rose 33 percent in the past year. The stock has 18 buy ratings and seven holds.

The judgment ranks second in environmental damage cases behind the $20 billion Gulf Coast Claims Facility, a settlement fund set up for BP Plc’s Gulf of Mexico oil spill, said Percival.

“Today’s judgment affirms what the plaintiffs have contended for the past 18 years about Chevron’s intentional and unlawful contamination of Ecuador’s rainforest,” Pablo Fajardo, the lead Ecuadorean plaintiffs’ attorney, said in an e-mailed statement.

Racketeering Lawsuit

Chevron accused the Ecuadorean government of unfairly influencing the court proceedings and alleged that a $27 billion damage assessment provided by a court-appointed expert was ghostwritten by consultants and lawyers hired by the plaintiffs.

The company won US court orders last year that forced attorneys and consultants for the Ecuadoreans to answer questions under oath about the case and gave Chevron access to outtakes of a documentary film about the lawsuit.

Chevron in February filed a racketeering lawsuit against the lawyers and the plaintiffs in federal court in Manhattan for “leading a fraudulent litigation and PR campaign against the company.”

The company filed a claim in 2009 against Ecuador in the Permanent Court of Arbitration in The Hague seeking orders that it has no liability for the environmental pollution and PetroEcuador should pay the damage award.

The case is Maria Aguinda v Chevron, 002-2003, Superior Court of Nueva Loja, Lago Agrio, Ecuador.

Exxon Mobil, based in Irving, Texas, is the biggest U.S. oil company.


Bloomberg