Chevron and Ecuador Drop the Gloves in Canada

In the National Hockey League, the term "dropping the gloves" indicates that fisticuffs are imminent. And since there was a day when the NHL was populated almost exclusively by Canadians, it seems appropriate to observe that Chevron (NYSE: CVX  ) and its Ecuadorian plaintiffs have dropped the gloves in Canada. Their two-decades-long bout of legal pugilism has now moved north of the border.

During the past wild and woolly week, which ended with the market's Friday plummet, lawyers for residents of an Amazonian rain forest filed a lawsuit against the big oil company in Canada. Their intention is to help themselves to Chevron's assets in Canada to satisfy an $18.2 billion judgment that was slapped on the California company -- which ranks second in size only to ExxonMobil (NYSE: XOM  ) among U.S.-based fossil fuels producers.

Heading for the assets
Chevron has no assets in Ecuador. In Canada, however, it's an active operator on land and off the country's eastern provinces. It also refines product and cooperates with a host of other companies in producing crude oil from Alberta's tar sands. Approximately 3% of its worldwide production emanates from the land of our northerly neighbor. As a result, the plaintiffs and their attorneys could go a long way toward satisfying their questionable judgment, were they able to gain acquiescence from Canadian courts.

Perhaps the only thing that's completely clear about this bizarre case is that Chevron isn't guilty in the slightest of any sort of pollution in the country that constitutes OPEC's runt. What it did do was to acquire Texaco Petroleum in 2001. Texaco had worked in Ecuador until 1992, nine years before it became even a twinkle in Chevron's eye. Before it ceased its operations and departed the country, Texaco received certification from Ecuadorian government agencies that it had completed all necessary remediation for its share of environmental impacts from its operations in the country.

There's more you should know
Three other significant aspects of the case deserve notation here:

  • State-owned Petroecuador owned a majority 62.5% interest in the consortium of which Texaco was a part. It has continued to work in the affected area during the 20 years since Texaco departed.
  • Before and during the trial in Ecuador -- which sported a succession of about a half-dozen judges -- evidence of apparent fraud was uncovered by Chevron on the plaintiffs' side, including reports by "independent" environmental consultants likely having been ghostwritten by plaintiffs' attorneys. Indeed, the Ecuadorian court's judgment may have benefited from interested attorneys' penmanship.
  • The case and the related judgment are currently being considered by a three-judge panel under the auspices of the Permanent Court of Arbitration in The Hague. The impetus for that action involves a treaty to which both Ecuador and the United States are signatories.

It also turns out that Chevron isn't the only U.S. oil company crying foul in the face of Ecuadorian tactics. A half-dozen years ago, Occidental Petroleum (NYSE: OXY  ) filed a suit for damages following the country's cancellation of the company's operating contract there. In a skirmish that also lingers on, Ecuadorian authorities claimed that Oxy violated the contract by failing to gain the country's approval before transferring its 40% stake in a project to Canada's Encana Corp. (NYSE: ECA  ) . Like its bigger compatriot, Oxy also maintains that Ecuador violated the U.S.-Ecuador bilateral investment treaty.

Squeezed on either side
It's progressively becoming more apparent, however, that if Chevron didn't stumble onto bad luck in South America, it probably wouldn't have any luck in the region. On the other side of the continent, the company continues to joust with Brazilian authorities over a pair of relatively small oil spills from its Frade field operation in the Campos basin. Indeed, the second -- and tinier -- of the spills may have resulted from natural seepage, rather than from the effects of drilling operations.

Nonetheless, Brazilian authorities have grabbed a big stick, including levying criminal charges against a dozen Chevron employees in Brazil. That's occurred despite Brazil's state-run Petrobras (NYSE: PBR  ) having "skated" in the face of a trio of more sizable spills in the past several months.

Regarding Ecuador, however, I continue to scratch my noggin regarding a few significant, but unanswered, questions relating to the lingering Chevron contretemps:

  • Why has Petroecuador -- like Petrobras in Brazil -- been absolved of culpability for environmental damage in Ecuador, despite its holding a majority position in the original consortium and its continuing to work in the affected area long after Texaco had bid adios to the country?
  • Based on their bi-lateral treaty with the U.S., Ecuadorian authorities have been ordered by the judges in The Hague to disallow the plaintiffs from attempting to collect on the judgment until the panel's work has been completed. Doesn't the Canadian suit place Ecuador in violation of its treaty with the U.S.?
  • Why, if their claims are legitimate and untainted by the sort of fraud that's already been turned up in the case, haven't the plaintiffs' attorneys sought enforcement of their claim in Chevron's home country, where the largest amount of its assets is located?

The Foolish bottom line
Ideally these questions will be answered before another pair of decades has passed. In the meantime, you may have a question about the attractiveness of Chevron as an investment in the face of sliding oil prices and its disputes in South America. My response: The company is solid, with quality management and sound operations globally. Further, while Exxon's shares have declined by just over 10% since mid-March, Chevron's have fallen by nearly 14%. As such, Chevron now trades at a 7.2 times forward P/E ratio, versus 8.8 times for Exxon

With all that in mind, along with my admittedly unlawyerly contention that the dual imbroglios discussed above will ultimately prove frivolous, I'm inclined to urge Fools to place Chevron on their individual versions of My Watchlist.

Fool contributor David Lee Smith doesn't own shares in any of the companies named in this article. Motley Fool newsletter services have recommended buying shares of Chevron and Petrobras. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 04, 2012, at 6:10 PM, elcpu wrote:

    Very good summary, thank you. I have followed the Chevron - Ecuador issue and your article is one of the few that is not biased one way or the other.

  • Report this Comment On June 05, 2012, at 4:39 PM, dtlnow wrote:

    Where to begin. First, when you acquire a company, you acquire its liabilities. Chevron was fully aware of the lawsuit when it bought Texaco and under any law anywhere is responsible for its liabilities. Second, the case was brought in the US. ChevronTexaco fought for 10 years to move it to Ecuador. It only started alleging fraud once it realized the evidence was overwhelmingly against it (Texaco admitted to intentionally dumping 16 billion gallons of toxic waste; by contrast the Gulf spill was 200 million gallons) and the court Chevron itself chose might rule against it. Kind of ironic they are now arguing the case should be in the US. Third, Chevron promised US courts it would abide by any Ecuadorian judgment with one exception, fraud. Wow what a surprise it has done everything possible to find it. Fourth, Chevron (Texaco) was the sole operator of the concession, and as you fully know, is jointly and SEVERALLY liable for any harms caused. Fifth, the plaintiffs are not parties to the investment treaty arbitration and that panel has no authority relating to that suit. Finally, Chevron (Texaco) representatives stated in depositions that the certifications did not and could not release Chevron from liability to third parties.

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