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An Analysis of the Financial and Operational Risks to Chevron Corporation from Aguinda V. ChevronTexaco (May 2012)

From the Executive Summary of this report:

  • Chevron is facing significant financial and operational risks stemming from enforcement of an $18 billion adverse judgment in Ecuador.   On March 12, 2012, an Ecuadorian appellate court declared the $18 billion judgment for the company’s contamination of soil and water final and enforceable, giving the plaintiffs the right for the first time to collect on the judgment.  Chevron itself has admitted in a sworn legal statement that the company is at risk of “irreparable injury to [its] business reputation and business relationships” that “would not be remediable by money damages” from potential enforcement of the Ecuadorian court judgment.
  • The enormous breadth of Chevron’s global business operations makes the company particularly vulnerable to enforcement.  There are many jurisdictions around the world in which the plaintiffs could seek court recognition and enforcement of the judgment, including many where Chevron has substantial reserves and that are strategic importance.
  • Chevron’s defenses to enforcement actions have greatly narrowed. The U.S. Second Circuit vacated in its entirety a preliminary injunction from a U.S. District Court that purported to bar the Ecuadorian plaintiffs from enforcing the judgment against Chevron’s assets anywhere in the world.  The Ecuadorian courts have rejected awards by an arbitral panel seeking a halt to enforcement of the $18 billion judgment against Chevron.
  • Shareholders of Chevron are increasingly demanding more transparency of the risks and an alternative to the company’s litigation strategy.  In May, 2011, shareholders of Chevron – representing $156 billion of assets under management – called upon Chevron “to fully disclose to shareholders the risks to its operations and business from the potential enforcement of the Aguinda verdict” and “reevaluate whether endless litigation in the Aguinda case is the best strategy for the Company and its shareholders…”  Separately, Trillium Asset Management formally requested the Securities and Exchange Commission “to review whether Chevron has appropriately disclosed to shareholders the scope and magnitude of the financial and operational risk” from the judgment.
  • Chevron shareholders are demanding better corporate governance. Citing management’s handling of the case in Ecuador, shareholders are questioning Chevron’s generous executive compensation packages and have proposed overhauls of the company’s corporate governance.  Despite losing the landmark $18 billion judgment in Ecuador, Chevron awarded its General Counsel R. Hewitt Pate a 75% raise in 2012 to a staggering $7.8 million salary and even went so far as to praise “his outstanding management of Ecuador” ahead of the company’s annual “say on pay” vote.    In 2010 and 2011, a significantly large percentage of Chevron’s shareholders supported a resolution calling for the appointment of a director with expertise in environmental liabilities.  In addition to re-filing this resolution, shareholders have filed two additional new resolutions for Chevron’s 2012 annual meeting calling for corporate governance reforms, one asking that Chevron separate the positions of Chief Executive Officer and Chair of the Board and the other asking that Chevron lower the thresholds for calling a special meeting of shareholders.

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Did Chevron Just Fund its Legal Opponents in Ecuador?

Did Chevron just hand its legal opponents in Ecuador $106 million?

That appears to be the case according to a press release put out this week by the communities that have sued Chevron for oil pollution in the Ecuadoran rainforest.

In what could be a huge boost to their campaign to force Chevron to comply with a $9.5 billion environmental judgment in Ecuador, rainforest villagers plan to enforce a court order directing them to take possession of a $106 million arbitral award won recently by the oil giant from Ecuador’s government in a case that recently became final in Dutch courts….

The $106 million figure comes from the amount of an arbitral award that Chevron won from Ecuador under the U.S.-Ecuador Bilateral Investment Treaty in an unrelated series of commercial disputes dating to the early 1990s between the American company and Ecuador’s state-owned oil company, Petroecuador. A Dutch court last week denied Ecuador’s last appeal of the award, rendering the arbitral decision final.

One of Chevron’s principal tactics in this litigation has been to starve the Ecuadoran communities of the money that they need to pursue their case. Chevron has flipped two of the financiers of the case: Burford Capital and Patton Boggs.  The oil company has also sued two others: Russell DeLeon and Woodsford Litigation Financing. But, if the Ecuadoran government hands over the $106 million arbitral award to the Ecuadoran communities, it would completely replenish the plaintiffs’ legal war chest.

The likelihood appears high that the Ecuadoran government will indeed give the money to the plaintiffs.  Firstly, the Ecuadoran courts have already ruled that the rainforest communities can seize all of Chevron’s assets in Ecuador.  Secondly, after Chevron’s relentless attacks against Ecuador, it is hard to imagine that the Ecuadoran government would give Chevron any money that it could more appropriately channel to the plaintiffs.

The rainforest communities would likely make very good use of the $106 million. It could be used in part to pay for remediation of the oil pollution, as the Clean Water is already doing. Another portion could be used to fund new legal enforcement actions to seize Chevron’s assets outside Ecuador to collect fully on the $9.5 judgment.

If the government of Ecuador gives the $105 million to the plaintiffs, Chevron management only has itself to blame for this possibly game-changing defeat. After all, it was Chevron that successfully petitioned to have the case moved from New York to Ecuador only to lose badly. If there’s one thing that Chevron CEO John Watson does well in this case, it is making mistakes that cost millions to Chevron’s shareholders.

Is it any wonder that Chevron’s own shareholders have questioned management’s competence in this case?

 

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