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Chevron's Promising South American Trifecta

David Smith
May 24, 2013

It's no secret that oil and gas behemoth Chevron (NYSE: CVX) operates in a vast array of locations. Along with being a major player in the deepwater Gulf of Mexico, it's also the top dog in Australia's burgeoning LNG world. It's active in Sub-Saharan Africa and is the only major company working upstream in Saudi Arabia. It's also busy across Southeast Asia, and is trying to plumb hydrocarbons from Poland's shale formations.

But it's in South America, a continent on which it's figuratively been "snakebit" for years, that Chevron has made notable strides of late. The company has been attempting to fend off pesky legal challenges in Ecuador for about two decades, has seen its operations in Brazil called to a halt by an oil spill, and has evidenced a desire to begin operations in geologically promising but politically unstable Argentina.

Now, almost at once, there are tangible developments on all three of these fronts. Of course, progress in Ecuador, OPEC's tiniest member, doesn't imply new oil or gas discoveries or a pact for new exploratory efforts. It simply means that an ordeal of lawsuits and countersuits, all played out against a backdrop of apparently rampant fraud in the Ecuadorian legal system, may be coming to an end.

Swatting Ecuador's pesky mosquito
You probably know the story: In 2001 Chevron acquired Texaco Petroleum, whose own colorful history hearkened back to the 2001 Spindletop gusher near Beaumont, Texas. With Texaco's assets, Chevron also assumed claims that the newly acquired company had, while operating in Ecuador prior to 1992, fouled its Amazon rain forest work site. This, despite state-owned Petroecuador having owned a 62.5% majority of the consortium in which Texaco participated. The Ecuadorian company also continued to work in the affected area for more than 20 years after Texaco's departure.

A trial that was subsequently conducted in the Andean country resulted in a clearly "homecooked" $19 billion judgment against Chevron. However, both during and after the legal circus (which included a parade of about a half dozen presiding judges), Chevron uncovered likely indications of high-stakes shenanigans on the plaintiff's side.

For instance, it appears likely that reports by "independent" environmental consultants were actually ghostwritten by plaintiffs' lawyers. And even more amazingly, the judgment itself may actually have been the product of those same attorneys' penmanship.

Indeed, just last week the final judge to oversee the trial, who had signed his name to the judgment failed to appear to provide testimony in Lima regarding whether he really was the decision's author. Couple that with an earlier order by the Permanent Court of Arbitration in The Hague that the Republic of Ecuador cease in its attempt to enforce the judgment until Chevron's claims of violations of international law have been resolved, and you have litigation almost certainly on its last legs.

It's unlikely that the plaintiff's attorney will quietly fade into the night, however. Indeed they've clearly found an ideal incubation site for their efforts to extract lucre from a big American company. But, Chevron isn't alone in encountering legal devilry in Ecuador. Fully 39 arbitration requests have been filed with the World Bank by international companies involved with Ecuador's powers that be. Last year the bank's Center for Settlement of Investment Disputes ordered the country to pay $1.77 billion to Occidental Petroleum (NYSE: OXY), following the seizure of the company's assets there in 2006.

Thin ice in Argentina?
Speaking of plucking a company's assets by a host country, Argentina's Kirchner government proved itself adept at that action last year when it nationalized most of the 51% interest in energy producer YPF then held by Spain's Repsol. No compensation was proffered, and Repsol is now seeking about $10.3 billion in restitution.

Nevertheless, because reality involves big oil companies signing onto potentially precarious pacts in the perpetual quest for new reserves -- as with ExxonMobil's big new venture with Russia's Rosneft -- it appears that Chevron may be in the process of reaching an agreement to ante up $1.5 billion for the right to participate in the development of the Vaca Muerta basin, which it believes to be the world's second-largest unconventional oil reservoir.

So Chevron will cast its lot with the wobbly administration of President Kirchner, which is battling sky-high inflation and less than amused creditors. Others are already involved there, including Apache (NYSE: APA) and EOG Resources (NYSE: EOG), which were