Ecuador, Chevron and pollution - Justice or extortion?

May 21st 2009 | LAGO AGRIO
From The Economist print edition

The hounding of an American oil company

ReutersThe gunk that unleashed the dogs of law

HIDDEN behind a row of trees and a rusted barbed-wire fence on a rutted dirt road in the Ecuadorean jungle, Shushufindi 61, a pit in which oil waste is dumped, is hardly a beauty spot. But it has attracted a string of visitors ranging from Hollywood actresses to Ecuador’s president, Rafael Correa, and managers from Chevron, an American oil company. It is one of several hundred such pits that are at the centre of a long-running legal wrangle between Ecuadorean and American activists and Chevron. For the activists, the case shows that oil companies are nowadays held accountable for their actions in developing countries. For Chevron’s supporters, the case amounts to an attempt at judicial extortion that throws doubt on whether multinational oil companies can ever get a fair deal in parts of Latin America today.

At issue is waste dumped by Texaco (bought by Chevron in 2001) as long ago as the 1960s in the region around Lago Agrio in the Ecuadorean jungle. From 1977 onwards, Ecuador’s state-owned oil company (now called Petroecuador) took a 62.5% stake in the field, though Texaco continued to operate it. In 1992 Petroecuador took over the whole operation and Texaco withdrew from Ecuador.

In a suit first filed in a New York court in 1993, lawyers representing 30,000 people in the Lago Agrio area argued that billons of gallons of waste dumped by Texaco in several hundred pits such as Shushufindi 61 caused damage to human health as well as to the jungle. They also argued that the oil company should compensate Indian people for their forced displacement. American judges ruled three times that they had no jurisdiction over the matter.

But as a result of the publicity generated by the cases, Texaco agreed with the Ecuadorean government that it would clean up 161 pits, or its share of the total, at a cost of $40m. The work was done by 1998 and the government signed an agreement releasing Texaco from any further liability. Petroecuador was supposed to clean up the rest of the pits, but didn’t do so, partly because it continues to use some of them (including Shushufindi 61).

Meanwhile Ecuador enacted an environmental law, something it had previously lacked. This is not retroactive. Nevertheless the plaintiffs filed a claim against Chevron under this law in 2003 in a court in Lago Agrio. They sought $6 billion in damages. Last year a court-appointed expert, Ricardo Cabrera, filed a 4,000-page report arguing that Chevron was liable for no less than $27.3 billion in damages. Of this $9.5 billion is compensation for 1,400 deaths from cancers that he alleges were caused by the pollution; $8.4 billion is for “unjust enrichment”; the remainder is for environmental clean-up.

Chevron has filed a 9,000-page rebuttal of Mr Cabrera’s report. It disputes his fitness as an expert, arguing that he has little experience of the oil industry. It found evidence that he used the Amazon Defence Front, a group working for the plaintiffs, to collect soil samples from sites. Sections of his report repeat verbatim documents filed by the plaintiffs. Chevron also notes that in 2007 a California court dismissed as fabricated some individual claims that the pollution caused cancers; it fined one of the plaintiffs’ lawyers for this. As for “unjust enrichment”, a Chevron manager points out that Texaco’s total profits from its operations in Ecuador were only $497m, while over the 20 years to 1992 Ecuadorean governments received $25.3 billion in profits, taxes and royalties from the field.

The judge in Lago Agrio, Juan Nuñez, is expected to rule on the case later this year. He has made no secret of his sympathy for the plaintiffs. The lawsuit appears to have the backing of Mr Correa’s government. Last year it objected to the 1998 agreement with Texaco, arguing that since the company was the operator of the field it should have cleaned up all of the pits. The attorney-general charged seven former senior officials who had signed the agreement with fraud, as well as two Ecuadorean lawyers for Chevron.

Chevron has filed a claim in an international arbitration court in The Hague and has asked the American government to review Ecuador’s trade preferences. But it faces political pressure in the United States as well as in Ecuador. On May 4th Andrew Cuomo, New York’s attorney-general, sent a letter to Chevron requesting information on the case on behalf of the state’s pension funds, which have more than $1 billion invested in the company.

If the Ecuadorean courts rule against Chevron, the plaintiffs’ lawyers can be expected to file suit in the United States to collect the settlement. Since they are working on a contingency basis, they stand to gain a substantial portion of any damages.

Texaco may have benefited from Ecuador’s past lack of environmental standards. It is questionable whether any of the pits would have been cleaned up had it not been for the campaigners. But the lawsuit may now be preventing Chevron from helping Petroecuador to clean up the rest. Ecuadoreans were the main beneficiaries from the oil—although some of them suffered some damage from it. They will also be the most important victims if the Chevron case shows that the rule of law is the servant of politics in Ecuador.