Sheila McNulty Fear of precedents drives Chevron fight against Ecuador claims

Chevron’s high-profile defense against a lawsuit seeking $27bn for environmental damages in Ecuador has ranged from YouTube postings to secretly-taped videos of the judge discussing the case in what it claims is evidence of political interference and corruption in the country. The nature of Chevron’s defence, which has included keeping those who did the secret taping away from media and the authorities, certainly is uncharacteristic of an oil major.

Typically these companies settle cases or do whatever else they can to avoid drawing negative attention to themselves. But, then again, this is no ordinary lawsuit. The damages being sought are extremely high – roughly a quarter of Chevron’s market capitalisation of $140bn or a fifth of its $160bn in assets.

This is, indeed, the biggest environmental lawsuit in history, with the potential for almost seven times the damages awarded against ExxonMobil for the 1989 Exxon Valdez oil spill in Alaska. For this reason, Chevron is refusing to settle, insisting Texaco, which it bought in 2001 to inherit the lawsuit, spent $40m on cleanup when it was pressured to leave Ecuador in 1992.

The Ecuador government released it in writing from further responsibility. In the words of Don Campbell, Chevron spokesman: “They wanted 100 per cent of the oil production and accepted 100 per cent of responsibility for conditions in the concession after signing off on Texaco’s comprehensive and successful remediation. The fresh oil on the ground is theirs.”

This gets to the crux of why this case is so important for Chevron and, for that matter, every other international oil company.

As resource-rich nations, such as Venezuela and Russia, nationalise assets or make operating conditions unfavorable to force the majors out, these companies do not want to have a precedent set whereby they could be called back, years later, to be held responsible for assets that have, for all purposes, been taken away from them.

Amy Myers Jaffe, energy expert at the James A Baker III Institute for Public Policy, notes that in the world of private business, when a company buys an asset, they typically take over any liabilities. Regardless of whether Texaco was a horrible polluter in Ecuador, one would, therefore, assume that any fallout from that must now belong to Petroecuador, the national oil company that took over from Texaco. Yet the plaintiffs are not suing Petroecuador. Karen Hinton, of the Amazon Defense Coalition, representing plaintiffs, said the fault lies with Texaco, which built and operated all of the well sites and pits and was sole operator until the day Texaco left.

In her words:

Texaco built a faulty system and handed it over to Petroecuador. It’s not like all of Texaco’s employees left the country when Petroecuador took over. Most people stayed because most of them were Ecuadorian and from the area. They continued to do what Texaco always had done – but for Petroecuador.

That makes it sound like Petroecuador should, at the very least, share some of the blame, according to Chevron, which says Petroecuador has had numerous spills since it left and the environmental degradation being blamed on it is due to Petroecuador.

Bill Doyle was responsible for executive oversight of the then-Texaco operations in Latin America and Africa from 1987 to end of 1990, and visited the oil field numerous times. He says operations looked pretty much like what you would see in onshore Germany, Louisiana, Texas, California. Even though oil industry technology and environmental standards have improved since then, much of the work being done years ago by Texaco in Ecuador would still be acceptable by today’s standards, he said.

For example, the use of unlined earthen pits to hold and recirculate fluid while drilling or working over oil wells. At the time Texaco was active in Ecuador, in 1984, for example, there were 125,000 open pits in the US, he says, of which 97.6 per cent did not have synthetic liners. Mr Doyle was in charge when then-Texaco began remediation efforts and said it took three years to clean up the 161 areas the government assigned the company, ending with inspections of soil samples before they were certified as clean.

Chevron believes the plaintiffs have not gone after Petroecuador in exchange for government support for their lawsuit. For backup, it quotes from the US State Department’s Investment Climate Statement on Ecuador in February: Corruption is a serious problem in Ecuador. The courts are often susceptible to outside pressure and bribes. Ecuador denies its judiciary is corrupt and that it has any deal with plaintiffs for part of the award.

The plaintiffs say they cannot sue every single company that ever spilled a drop of oil. This case is about Texaco (now Chevron’s responsiblity). And it has found support from a string of big name celebrities, ranging from Daryl Hannah, the actress to Kerry Kennedy, a human rights advocate and daughter of the late Robert F Kennedy.

Chevron notes none of these people have spoken with the company to get its side of the story, although Ms Kennedy says she asked to meet with Chevron and never heard back. Chevron says it offered her a meeting with several high-level executives, and she declined, only wanting to meet with Dave O’Reilly, Chevron’s chief executive. Ms Kennedy says she cannot get over that Mr O’Reilly has never gone to see the situation for himself. If he did, she suspects, he would feel compelled to help clean it up.

She recalls the giant, unlined pits dug in the rainforest and filled with what appears to be a mixture of molasses and tar. The smell was so pungent, she said:

It was as though I were pumping gas at a gas station. I’ve never seen pollution so egregious. This is 30 times the size of the Exxon Valdez, and that was a mistake. It was an oil spill. This was not a mistake; this was a deliberate action.

Chevron insists, however, it found proof of corruption in videos it posted on its website, which it said were secretly made by two businessmen, acting independently of Chevron. In the videos, Chevron claims Judge Juan Nunez, who is overseeing the case, states that the Ecuadorian government – not environmentalists who have filed the suit – would receive remediation funds from a potential judgment against Chevron.

Chevron says it was inappropriate for the judge to even have discussed the case with outsiders. Judge Nunez recused himself, but the Ecuadorian courts put him back in charge of the case, saying they found no wrongdoing. In expectation of a judgment against it, Chevron has filed an international arbitration claim against the government of Ecuador, citing violations of the country’s obligations under the US-Ecuador bilateral investment treaty, investment agreements and international law and asking that its settlement agreement be honoured.

Steven Donziger, an American lawyer who advises the plaintiffs, says filing an arbitration claim smacks of forum shopping and is one of Chevron’s last cards to avoid paying for a half-century of environmental contamination in Ecuador’s Amazon.

It could well be Chevron’s best hope. Wayne Wilson, a managing director at Protiviti, the risk and business consulting firm, says a favourable ruling in the Hague will mean the contract is upheld, leaving Petroecuador – and therefore the state of Ecuador – responsible for the $27bn in damages. Given the trade pact between the two nations, Ecuador will have to accept the arbitrators’ ruling under international law. Obviously that is something the government of Ecuador wants to avoid.

Yet it is uncharted territory deciding whether anyone has the right to seek compensation for the poor condition of an asset that was taken over from an international oil company. There are no established rules in this area.

Ms Jaffe explains:

Across the globe, as more countries think about renationalising or privatising assets, the question of who becomes responsible for historical liabilities is a pivotal question. When they privatise or buy an asset, they may not know about the liabilities. It’s an issue moving out there [that] is a major challenge. It has implications beyond this case.

Indeed, there is no doubt that how this case is decided could determine the course of future ones. Kevin Shaw, energy law partner at Mayer Brown, says big companies spend a lot of time worrying about precedents.

Yet in trying to avoid a negative precedent being set, Chevron is opening itself to attack after attack. Every twist and turn of the case reminds the public Chevron stands accused of being responsible for an environmental disaster in the rainforests of Ecuador. And it goads on the plaintiffs, who have waged a high-profile public campaign against Chevron, in well placed media stories on top television shows and even a film, Crude, on the case.

Each time, Chevron, or any individual who speaks out on its behalf, is forced on the defensive.

Doug Southgate, Ohio State University professor of environmental economics, felt the plaintiff’s wrath after testifying for Chevron, based on his experience in Ecuador, dating back to the late 1970s. The plaintiffs attacked him for being a member of the Heartland Institute, which does not believe in global warming. He says he is not a member and only made one presentation to the Institute. It is remarkable, he says, how easy it is to spread anything on the internet.

Mr Shaw notes reputational risk can block a permit or otherwise interfere with business: Once you start down that road, nothing good comes of it. Yet Ms Jaffe says Chevron has no choice but to fight back: “In the court of public opinion, proliferation wins. People tend to believe something if they read it on 17 blogs. Chevron is clearly saying, We’re not going to let these random people blogosphere us to death.”

After all, unless Chevron is forced to one day pay the damages in this case – something the company has sworn to avoid by appealing into the decades – analysts say there will be no impact on the company’s bottom line. Barclays Capital is quite typical in suggesting in a research note that while any negative ruling would be damaging to the stock’s near-term performance, it would be an aggressive buyer to take advantage of any weakness. In other words, Chevron is still a good bet for investors.

Ms Jaffe sums it up by noting ExxonMobil not only survived the Valdez spill – the worst oil spill in US history – but went on to become bigger and stronger: except for a short blip, she says, it, just doesn’t have as big of an effect as one might imagine.