U.S. oil giant Chevron (CVX: Charts, News, Offers) has been tangling with the government of Ecuador this month, facing a massive $8.6 billion USD charge levied by an Ecuadorean provincial court for environmental damages to Amazonian communities due to oil drilling between 1967 and 1992. While Chevron has long been divested from the unstable leftist nation since 1992, this current battle could end up fueling an international incident and be extremely damaging for Chevron’s PR, with unpleasant memories of British Petroleum’s (BP: Charts, News, Offers) gulf disaster fresh on the public mind.
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The irony of the lawsuit is that Chevron was never actively involved in oil drilling in the Amazon – it was Texaco that began oil exploration in Ecuador in 1964. When Texaco struck oil in 1967, it entered a long-term business partnership with Ecuador’s national oil company, Petroecuador, heavily drilling throughout the rainforest region in the 1970s and 1980s. In 1992, when Ecuador’s political climate began to change with unstable leftists taking charge, Texaco closed its oil projects in the country, and recognizing the environmental damage caused by its activities, voluntarily paid $40 million USD to assist in cleanup efforts in the Amazon region. When Chevron merged with Texaco in 2001, it inherited Texaco’s legal responsibilities.
Unfortunately for Chevron, the Amazonian communities did not think that Texaco’s initial compensation was satisfactory and filed suit against Chevron in 1993, despite the oil projects being a joint venture between Texaco and Petroecuador. The communities claim that Chevron severely damaged the soil and water in the Amazon basin, which caused severe health problems for locals. On Valentine’s Day, a provincial court decided in favor of the massive fine, the single largest environmental fine levied in history against a single corporation. In addition, Chevron must pay an additional 10% to compensate the Amazon Defense Coalition, an umbrella organization representing the affected communities. Chevron has remained adamant that the charges have no basis and has refused to pay the fine, and the court has added an additional request for a public apology within the next two weeks or face a doubling of the current fine. Combined, the total bill could run nearly $20 billion. This still comes in lower than the initially requested $27 billion sought by the Ecuadoreans, who have sought to appeal the ruling for an even higher claim of $113 billion, more than half of Chevron’s market capitalization. The Ecuadorian court has currently paid the communities $5 billion USD to repair soil damage and provide health care for the afflicted.
Chevron has maintained that the charges are baseless and are “extortion,” and claims that the court commissioned expert report was ghost-written by the plaintiff’s lawyers, and were carried out under the bias of the Ecuadorean government. Chevron also claims that Texaco signed an agreement with Petroecuador after the initial $40 million payment which freed it from all future pollution claims. Chevron has remained steadfast in its position and has stated that it will appeal to the highest court in Ecuador, the National Court of Justice, if necessary. Chevron spokesman James Craig stated, “The objective, of course, is to overturn this illegitimate ruling that is the product of fraud and collusion and divorced from all legitimate scientific evidence presented in the case.” The company has stated that it plans to neither apologize nor pay the fines. The Ecuadorian communities have stated that they plan to sue Chevron-owned assets in Brazil, Argentina, Venezuela, Angola, Australia and Canada to force the oil giant to pay. Many American environmental groups have spoken up in support of the Ecuadorian government’s ruling. Robert Percival, the director of the environmental law program at the University of Maryland School of Law, had particularly harsh words for Chevron, stating, “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.”
While shareholders are currently still riding Chevron’s bull run due to Middle East unrest and soaring oil prices, the long term outlook for the company may be affected by potential roadblocks in key emerging markets caused by the fallout of this litigation. Shares of Chevron currently trade with a forward P/E of 8.53 and a quarterly dividend of 72 cents per share.
Other News About CVX
Chevron to pay Billions in Damages, Ecuadorian Court Rules
Chevron’s headaches worsen in the Amazon.
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Leo Sun is long-time market follower and finance writer. He regularly contributes to the Stock of the Day analysis.
