Chevron's $17 Billion Ecuador Judgment May Be Unenforceable, Analysts Say

Chevron Corp., the second-largest U.S. oil company, may never pay a cent of the award of more than $18 billion 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. in New York. In anticipation of an adverse ruling, Chevron went to court in New York last week to obtain an order temporarily 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 $8.6 billion and an equal amount in punitive damages, according to the 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.”

Luis Yanza, co-founder of the Amazon Defense Front, a group representing the Ecuadoreans who sued Chevron, said today the damage award should be higher and the plaintiffs will appeal the decision. He spoke on a conference call that was held by the plaintiffs’ lawyers in Spanish and translated into English.

‘Every Strategy’

If the judgment is upheld after the appeals process in Ecuador, the plaintiffs will “use every strategy and manner at our disposal” to enforce the damage award in the U.S. and elsewhere, Pablo Fajardo, their lead lawyer in Ecuador, said on the call.

International energy producers have been squeezed by Ecuadorean President Rafael Correa’s push to assert more control over natural resources, the U.S. Energy Department said in a report on its website. Correa is emulating Venezuela’s Hugo Chavez in seeking redress for decades of dominance by foreign oil companies that reaped huge profits and paid little in return, said William Adams, a portfolio manager at Resilience AG in Zurich.

‘Business Case’

“It’s cheaper for Chevron to pay the lawyers than to pay for the lawsuit,” Adams said today in a telephone interview. “It’s a simple business case for them.”

The company, based in San Ramon, California, 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.

The court ordered the company to pay an additional 10 percent of the value of the compensatory damages, or about $860 million, 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 damages.

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

‘Product of Fraud’

“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.

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. Crude accounts for about 50 percent of the nation’s export earnings, according the U.S. Energy Department.

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.

PetroEcuador Release

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.

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 behind peer companies such as ConocoPhillips and Exxon Mobil Corp., which rose 3.1 percent and 2.5 percent, respectively.

Shares Underperform

“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,” Fajardo said in an e-mailed statement.

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.

Documentary Film

The company won U.S. 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.

To contact the reporters on this story: Joe Carroll in Chicago at jcarroll8@bloomberg.net; Karen Gullo in San Francisco at kgullo@bloomberg.net

To contact the editors responsible for this story: Susan Warren at susanwarren@bloomberg.net; John Pickering at jpickering@bloomberg.net.

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