Since acquiring Texaco in 2001, Chevron (NYSE: CVX ) has been embroiled in a legal battle related to Texaco's operations in Ecuador in the 1960s. The Fool discussed the background of the case, which revolves around environmental contamination due to an oil spill, in the article, "Exclusive Fool Interview: A Look at Both Sides of Chevron's Nightmare Legal Battle." To learn firsthand how this case has evolved and where it stands today, we conducted interviews with both parties to the case – plaintiffs and defendants. The following interview took place in late 2012 with Graham Erion, an attorney for the Ecuadorian plaintiffs who are suing Chevron.
James Early (The Motley Fool): Hi, I'm James Early, and if you own Chevron stock or follow Chevron in the news, you likely are aware of Chevron's issues with this pollution in Ecuador rising from its liabilities from buying Texaco in 2001. In fact, recently the U.S. Supreme Court refused to rehear an appeal Chevron was challenging a $19 billion Ecuadorian court ruling. So this is one of the biggest legal cases ever. It has both an investing angle and maybe a socially responsible investing angle for those of us who are concerned about the ethics of the companies we invest in.
So I am joined today by Graham Erion. He's a securities lawyer. He's based in Toronto. And Graham, first of all, thank you for being here.
Graham Erion (Plaintiff Attorney): It's my pleasure, James.
James: So, you are based in Toronto, and that's kind of relevant. Can you explain the Canadian connection first off?
Graham: Sure. Well the judgment was issued in Ecuador in February of 2011. I'm sure we can get into the back story of how that judgment came about, but Chevron said that it removed its assets from Ecuador, which meant that for the plaintiffs to collect on the judgment and be able to fund the cleanup of the really unprecedented contamination that Chevron left behind in Ecuador, it required them to file enforcement actions in other countries where Chevron has assets, and Canada was the first country that they filed an action in.
James: Gotcha. Now in terms of the original sin here, the original issue, because this is one of the things that's ironically not so much contested in terms of what happened, can you, for somebody's who's listening to this for the first time, just explain the back story?
Graham: Sure, yes. So this goes back to the 1960s, as you said in the introduction when Texaco, as you mentioned, Chevron bought in 2001 and assumed this liability. But Texaco began exploration, they were the first company to find oil in Ecuador and they basically for 25 years designed, and ran, and operated the oil concession in Ecuador, and that in itself was not problematic. The problem was that despite promising the Ecuadorian government and contractually binding themselves in the concession agreement to respect the pollution laws and use best practices in their operations, they actually used no environmental controls in their operations and they abandoned the practices that they were doing elsewhere.
The most prominent example of that was that they basically dumped any of the toxins that would come up when the oil was drilled. It's called, "produced water" is the industry term for it. Rather than treating it or reinjecting it into a new well, which is the practice that Texaco actually was the industry leader of in the United States. They helped write the manual for the American Petroleum Institute in; sorry, yes, the American Petroleum Institute in 1971 had a manual on the safe handling and reinjection of production water. Texaco never reinjected any production water in Ecuador. In fact, they just dumped it into streams. And these were the streams; this was where they were operating was a community of what is now 30,000 people. The population wasn't that large at the time, but there were indigenous tribes that had lived there basically well before any records were kept, and this just decimated the local population. The other thing that they did was they...
James: Decimated by cancer, by birth defects, things like that?
Graham: Cancers, birth defects, I mean there was multiple studies that came out later in the trial and studies published in peer-reviewed medical journals, looking at the cancer rates in the area and how much higher that was compared to the rest of Ecuador, looking at the birth defects, the infant mortality rate, basically all of the things that you would see in a Superfund site in the U.S. In Ecuador, you really had; there were over 350 wells and each of these would have basically this toxic fluid dumped into the streams around the wells. And then the other thing that Texaco did was they built waste pits, and in the United States and Canada and really anywhere else in the developed world and many developing countries, these waste pits would have to be lined and could only be used temporarily and then you would have to treat the waste. In Ecuador, they never lined any of the pits, and, in fact, they would build trenches so if they overflowed, they would again just be directed right into the streams and waterways that people really relied on for their livelihoods.
Over this period from really the mid-1960s until their concession ended in 1972, the concession agreement, Texaco really had this oil operation that was designed to pollute with no environmental controls, as I said, and really created this epidemic of health impacts and destroyed a very pristine part of the Ecuadorian wilderness and really the headwaters of the entire Amazon river basin.
James: And so how then did the Ecuadorians respond and did Texaco/Chevron act to clean up? I mean before we get into the current legal situation, what happened next?
Graham: Well, what happened next was literally the very next year that Texaco pulled out of Ecuador, the Ecuadorians filed a class action lawsuit in New York. New York was previously the home jurisdiction of Texaco. They were in White Plains and so they filed this action in federal court in New York, and basically Texaco argued for the next eight years that New York was not the proper jurisdiction for this and the case kept going back and forth on really preliminary motions up to the court of appeals and back down to the second circuit.
And finally, Texaco said to the court, If you release us from these claims, we promise you, and we will sign a release saying that we will submit to the jurisdiction of the Ecuadorian courts and the Ecuadorian courts are the better place to hear this. They're not corrupt. We can get a fair trial there, all the evidence is there, all the people are there. We will waive our statute of limitations defense. We will waive any objections to their jurisdiction over us. We will voluntarily appear there.
So that's sort of how the case eventually ended up in Ecuador, but what happened in the meantime was that Texaco basically cut a side deal with the Ecuadorian government where they said we'll do a remediation if you make this lawsuit go away. And the Ecuadorian government said, "Well we can't do that, but we will promise not to sue you if you do this, if you clean up some of your mess. So Texaco did that and came back and said to the New York courts, "Hey, look, we have a remediation agreement that says we don't have to litigate this case anymore; the Ecuadorian government's released us from claims." And the New York court said, "No, this remediation agreement specifically carves out third-party claims, and since the plaintiffs are not a party to it and the plaintiffs are not the Ecuadorian government, they can continue to litigate this." So that's how; that was sort of what happened in the 1990s, and then the case gets refiled in Ecuador in 2003.
James: And you've been to this area, right, is that correct?
Graham: Yeah, I actually started working on this case as an intern in 2008 in Quito. The case was litigated in the eastern part of Ecuador called The Oriente, a little town called Lago Agrio, which is literally translated into "sour lake." Which anyone who used to own Texaco stock may know that that was the original (before it was White Plains, New York) headquarters of Texaco in Sour Lake, Texas. So they actually named their settlement after their former home, and that's where the trial was held. It was actually one of the most evidentiary-heavy trials in history, James. The trial record, which I have not reviewed entirely myself, only due to the capacity of, or limited capacity of, my reading skills since it's 216,000 pages long.
James: Oh, my gosh.
Graham: There were over 62,000 chemical samples that were submitted in this trial, over 50,000 by Chevron itself. There was over 50 judicial inspections where the whole courtroom would go and look at these unlined pits and look at all the waste that Chevron had left behind. And really throughout the trial it became clear on Chevron's evidence alone that they had left the worst oil contamination on the planet. The majority of the evidence submitted in trial, and in fact, at every site that was inspected, including every site that Chevron said was remediated, showed toxins well in excess of the already-lax standards in Ecuador.
Just to give a little bit more color to that: when the main element that they were looking for is what's called total petroleum hydrocarbons. It kind of brings together a number of different toxins that you see in oil contamination. When Chevron remediated, they said that they would agree to a standard of 5,000 parts per million. At the time, the Ecuadorian standard was 1,000 parts per million, and in most U.S. states, the standards is 100 parts per million or less. So they tried to remediate to a standard that was already 50 times higher than what it was in the United States, and even then during the trial, it became obvious that at every site that there was samples that were taken that were in excess of that. I mean some of the samples showed total petroleum hydrocarbons in excess of 700,000 parts per million. It entirely destroyed the idea of using "parts per million" as a measurement when you just have pretty much 70% pure toxic waste.
So, that's sort of what the trial produced and that led to the judgment in February of 2011, which really assessed a rather large figure at the time, of $18.2 billion; it got revised up to $19.04, and that's what's been executed on Chevron. But if you sort of look at what BP has spent on the Gulf, and then you compare the amount of oil that BP (NYSE: BP ) spilled in the Deepwater Horizon compared to, it's still just a fraction of what was intentionally dumped in Ecuador over this 20-year period.
James: So, in the spirit of the law, if you buy a company, you typically buy it for better or for worse, you buy the good and the bad. Chevron, and obviously you're the plaintiff's attorney and you have a perspective. Chevron has a very different perspective. If you go to their website, they've got plenty of nasty things to say about the other side, questioning the studies, questioning this, that and the other. What do you feel; I mean A, what do you feel Chevron's wrong here is from your perspective? And B, do you feel that they have accurately described and disclosed the problem to their investors, to their shareholders and the stakeholder?
Graham: Those are two very, very good questions, James. In terms of what they've done wrong, I mean the trial judgment is pretty clear on this and, in fact, the one thing that they haven't disputed, they're trying to attack the lawyers and have put in all these diversionary tactics, which we can discuss, but during the trial, their lawyers admitted that they dumped 16.4 billion gallons of toxic produced water. During the trial, at no point did they ever contest that they didn't line their pits or that they flared their waste.
So, the practices that they put in place in Ecuador are not disputed, and, in fact, you can't really dispute them because if you get on a plane, you can go and see their old waste pits and they're still there and they're still not lined and they're still leaking into the groundwater and the streams in Ecuador. So, they kind of did that wrong. What's happened now though is that they've adopted a strategy that says if we keep fighting this, if we keep attacking the lawyers, if we keep calling this thing a fraud and a collusion and talk about anything other than the fact that we admit that we dumped the toxic waste, that we admit that we didn't line our pits, we admit that we basically broke the law, maybe we can get away with not having to pay for this.
A bit strategy of that as you previously mentioned was saying horrible things about the lawyers. But also it's really trying to make sure that their shareholders and their investors don't put a lot of pressure on this company and to do that they really try to dismiss the merits of this lawsuit. And if you look at what they say about the lawsuit and their 10-K, and their 10-Q, and on their website, and in their quarterly calls with analysts. I've done this analysis myself, James. It's entirely misleading to the point where shareholders and a U.S. congresswoman have petitioned the Securities and Exchange Commission to investigate if they're breaching securities law.
James: That's interesting, interesting. How do you feel investors have responded? I mean, the stock, Chevron stock has fundamentally done pretty well over the past couple of years, and even this October when we heard about the U.S. Supreme Court not rehearing this appeal, we didn't see a huge sell-off or anything. Do you think this is priced in? Chevron has $20 billion in cash.
Graham: Yeah, yeah, well and that's the thing, and I should know, too, so your audience gets a full picture of what this company's facing, they're also facing a $22 billion lawsuit in Brazil for allegedly covering up and trying to intentionally mislead authorities over a smaller, offshore spill that happened in November, and there are Nigerian authorities who are trying to prosecute them for a $3 billion fine for basically having a rig explosion, again offshore. Although in that instance they're not actually being prosecuted just for the explosion of the rig, but also allegedly they refused to evacuate the 154 workers who were on the rig at the time and that resulted in two deaths.
There's this $19 billion figure from Ecuador, but you really have to see that in the context of an oil company who quite frankly is in crisis anywhere you look. I mean even to go in its own backyard in Richmond [California], there was the big fire in August at the refinery in Richmond and then just less than three weeks later, the EPA announced that they were doing a criminal investigation of Chevron because they found that they were basically using pipes to bypass pollution control monitors. And the results of that criminal investigation could end up with very senior management in Chevron's own U.S. operations facing criminal sanctions.
So, that's kind of -- obviously, we'll continue to talk about Ecuador -- but I think it's important to pause and give the total picture here, which is anywhere you look at Chevron, and I mean we haven't even discussed the previous activities of their subsidiary, Unicol in Burma, and some of the lawsuits that happened in Nigeria with targeted assassinations of political leaders. This is a company that is facing legal pressure on all fronts, and has really been trying to keep their investors in the dark as much as possible.
James: Now, Graham , as you describe these things, obviously oil is kind of a dirty industry, not just strictly environmentally, but a lot of the oil is controlled by interesting regimes around the world, let's just say. So we could talk about Chevron, but we could also talk about a bunch of other major oil companies who have similar issues here and there. To what degree do you think Chevron's Ecuadorian case could be symbolic for maybe a tidal shift or a different sense of liability among these oil companies?
Graham: Yeah, well, I think the Ecuadorian case is interesting when you look at the response that Chevron's had to it, which is to basically attack the lawyers, deny everything, and continue to sort of avoid entering into what could be very well a reasonable settlement, and, in fact, is risking shareholder value.
What I would contrast that with would be the reaction of British Petroleum, or I guess BP now to the Deepwater Horizon, and certainly in the first few weeks after that with their former CEO, it was really an exercise in what not to do. But once they got him out of the way, the company immediately took responsibility. The company immediately announced to their shareholders, We're setting aside $35 billion to cover this. The company immediately entered into negotiations to settle various lawsuits, and Ken Feinberg had his claim processed, and really tried to sort of assess what their liability is, be clear with their shareholders what risks they face and put those contingencies in.
James: So, in 2001, when Chevron bought Texaco, in your mind that's what they should have done. They should have...
Graham: James, in 2001 they were told this. That's part of the problem here is you have John Watson, who was the CFO of Chevron at the time, and people wrote letters to him, they tried to meet with him, he refused to meet with Ecuadorians, but he certainly got their letters saying, If you buy Texaco, Texaco is facing this enormous liability and he completely dismissed it. Fast forward a decade and he's at the helm when they get hit with an $18 billion judgment and surprise, surprise, he doesn't want to acknowledge that there may be some validity there, which is what he had been told all along.
James: Interesting. Not a lot of empathy it seems like, for the Ecuadorians from the messaging that I've seen on Chevron's site, but again I have not viewed everything there, so I'm qualifying that. But Chevron does say-just to get a little bit more of the details in, then we can step back-that Petroecuador, the Ecuadorian company, did more damage. Is that something that you think has merit?
Graham: They claim, they've claimed that all along. There are two major problems with that. The first is that it was Chevron, who was the operator of the concession, made all of the operational decisions. Petroecuador provided some of the workers and was a minority party, eventually became the majority, but at no point was it ever in charge of whether or not we dumped the production water or whether or not we lined the pits, and we have the memos, the internal memos from Texaco at the time, where they considered whether or not they should line the pits and said No, this is prohibitively expensive. It was at the time in 1980, they assessed that it would cost them about $4 million. So we have the evidence that it was Chevron's decision to basically create the worst oil contamination on the planet.
James: For four million bucks.
Graham: For $4 million, yeah, $4 million. I mean this is on, if you go on the ChevronToxico.com website, it doesn't take much searching and you can find these actual memos, and I would invite your audience to do so. I mean, by no means take my word for it; we have their own documents.
But secondly, Chevron claims that Petroecuador has had these spills and had this pollution in the last ten years or 15 years and it's all their fault. But really they forget the fact that this lawsuit was filed almost immediately after they left, and they were responsible for all of this, right? So Petroecuador basically inherited the world's least responsible, or rather most irresponsible oil operation, and has over the last 20 years certainly cleaned up their act; and they are lining their pits, and they're trying to patch the leaky pipes and whatnot, but by no means does Petroecuador inheriting this disaster after the lawsuit has already been filed against Chevron, in any way abdicate Chevron of its own responsibilities. And that's as true in U.S. law as it is in Ecuadorian law as it is anywhere in the common law anywhere around the world.
James: So back up into the current situation with this $19 billion ruling, it appears as though things are going to proceed with Chevron's assets being taken, I guess, in some capacity. Is that correct?
Graham: That's absolutely correct, and in fact this conversation is quite timely because last Monday an Ecuadorian court issued the first asset seizure. Up until this point, there's been an action taken in Canada and Brazil to recognize the judgment as a first step to seizing assets, and Chevron has very important assets in both Canada and Brazil, and if you want, we can go into what those are.
But in Ecuador, since the judgment already came out of Ecuador, they didn't need to recognize it so this order came out that named a number of bank accounts, a number of license and royalties they have from certain brands, such as Havoline Motor Oil, and also named this $96 million arbitration award that Chevron holds against the government of Ecuador, completely unrelated to our case, but that debt that is owed to Chevron is now, that account receivable has been transferred to the plaintiffs.
So you put all that together and the estimation is about $200 million in assets and Ecuador has just been frozen and is in seizure process right now. And what's interesting, back to what Chevron tells their investors, is in every 10-K and 10-Q for the last two or three years and every time John Watson and Huge Pate and Chevron's senior management talks about this case, they always tell their investors, We don't have any assets in Ecuador. We've removed our assets in Ecuador. Don't worry now there's nothing they can get. But if you read between the lines and a court just said, Well no, we think you have $200 million worth of assets and we're going to give those to the plaintiff.
James: And a lot more can go to the plaintiff if these seizures happen elsewhere as well.
Graham: Well absolutely. You look at them in Brazil. They're the largest foreign oil company in Brazil. They have a majority interest in the Friday field where the spill happened and a majority interest in another field and minority in a third, so there's huge play for Chevron in Brazil. In Canada, they have a quarter interests in the Hibernia, the largest offshore oilfield in Canada, actually one of the largest in North America that's been producing since 1997. They are big on a second oilfield offshore in Atlantic, Canada. They are also minority partner in one of the biggest oilfields in Alberta in the oil sands. They've got 170 gas stations in British Columbia, a big refinery near Vancouver. These are not insignificant assets, and the problem is that through Chevron's completely aggressive kill the lawyers and attack the victims and call us criminals and not enter into any sort of settlement or abide by their promises to respect the Ecuadorian judgment, what they've done is they've really put these assets at risk.
James: What is next legally speaking? I mean could this go back to the U.S. Supreme Court? When do we see the end?
Graham: Well, our stated intention, James, is to go around the world, and the second circuit said this to us in the decision that the Supreme Court refused to hear a couple of weeks ago. They said the plaintiffs are free to go to any country where Chevron has assets and attempt to enforce the judgment, and that's entirely what we plan to do, up until we collect the full amount of it.
In Canada I can tell you they've put forward a motion to dismiss saying that the court doesn't have jurisdiction over them. We feel quite strongly to the contrary and quite confident that we will prevail on that motion that's being heard at the end of November. And then there will be a few more preliminary motions in Canada, but we have what's called a commercial list, which is sort of a special court for disputes of a corporate nature between two corporate parties. And the idea is that these cases on the commercial list are what's called "case managed," and so they can be dealt with on an expedited basis. All that leading to the fact that we think we can get a recognition judgment within 12 to 18 months out of Canadian courts.
And we're not looking at much longer than that in Brazil, and we're not just going to stop there. There are significant assets in both Canada and Brazil, but our analysis doesn't put us at $19 billion, and even if it did, we have no intention of over collecting, but we're going to continue to file enforcement actions and continue to pursue any avenue we can to help our clients be able to clean up this mess.
James: So this could be good business for you for quite a while.
Graham: Yeah, at a certain point, one of the reasons we came to Canada, James, is that Chevron, if you go on their website, says that this thing is a fraud and this is cooked up by plaintiff's lawyers and says we're criminals and all this stuff, and no court that respects the rule of law is going to respect this judgment, and that's what they keep telling their shareholders.
Well, I don't think anyone's going to claim that the Canadian courts are corrupt, and so I think if we have a recognition order out of Canada, it's going to be very difficult for John Watson to get up at his annual meeting and say to his shareholders, like he did in May, we are criminals who are seeking to defraud them. That strategy really doesn't fly when very respected courts say No, this is a legitimate judgment and you need to pay it.
James: I guess a final question for you, Graham , if someone is just listening and maybe they don't even own Chevron, but they own another company or they're watching a company and they see some sort of a crisis. What do you think would be some lessons or some takeaways for investors, or even for stakeholders looking at a company, and how it responds to situations? Is the key to look for something like BP did, like a quick, immediate reaction, because otherwise it doesn't tend to shift back?
Graham: Yeah, I think so. I think the BP example is instructive. Being able to sort of come out to your shareholders and right away say, Here's our loss contingency; here's what we're setting aside. We may not need it, but we're proactive. I think that that lesson gives some shareholders some comfort that while they're going to try continue to protect shareholder value, there are at least, they are able to sort of assess what this impact may be.
You look at the Chevron example, they didn't even start disclosing this case until their 2008 10-K, and even since then and since the judgment has come out, they haven't even said if they have a loss contingency. They haven't even said if they can estimate a range of loss from this case, right? I mean we know, the court has told us we can't go over $19 billion, but they're still refusing to sort of say how much of the reserves they may be setting aside to fight this or what not. So it really, you look at the two strategies, if you're an investor in BP, you can still make an informed investment decision after the Deepwater Horizon disaster.
If you're an investor in Chevron, it's pretty hard to know this company's sitting on $21 billion of cash, how much of that are they expecting to spend on this Ecuador case? How much of that are they expecting to spend on the Brazil case? And calling these things frauds and just attacking any lawyer who ever brings a case against you is a criminal, doesn't really give your shareholders and your investors much idea on how to assess the value of your company.
James: That's interesting. All right, Graham , thank you very much for joining us today. And if people want to read more about, I guess, the plaintiff's side of the case, they should go to ChevronToxico.com, is that correct?
Graham: Yeah, we also, there's an advocacy organization that works specifically with shareholders in the U.K. who has started to work on this case called Fair Pensions, and they have investor briefings there and again, you go to the ChevronToxico page and it's sort of the court filings and what the plaintiffs lawyers and the plaintiffs put out, but if investors want something a little bit more nuanced and a bit more targeted to them, they should Google "Fair Pensions" and "Chevron", and they'll be directed to those materials, which I think they'll find very useful.
James: Great. Thank you very much, Graham , for joining us; it's been a pleasure.
Graham: Entirely my pleasure as well, James.