ChevronTexaco Faces Class-Action Lawsuit in Ecuador Over Environmental Damage

A resolution asking ChevronTexaco to report on new initiatives to address its legacy of environmental damage in Ecuador gained nine percent support from shareowners.

What do Bianca Jagger, ex-wife of Rolling Stones lead singer Mick Jagger, Trillium Asset Management, a socially responsible investment (SRI) firm, and 30,000 Ecuadorians living in the Amazon region of the country have in common? All of them support a shareowner resolution filed by Trillium asking ChevronTexaco (ticker: CVX) to report on company initiatives to address the destructive social and environmental legacy of operating in the Ecuadorian Amazon in the 1970s and 1980s.

Also supporting the resolution, which went to vote at the company's annual meeting late last month, were nine percent of voting shareowners. That is more than triple the three percent threshold required to re-file this first-year resolution next proxy season.

Ms. Jagger, a human rights advocate who visited the affected region in Ecuador along with representatives from Trillium and the New York State Common Retirement Fund, spoke in support of the resolution at the meeting.

"What Texaco did in Ecuador is not just an environmental catastrophe and a human tragedy, but also a major potential corporate governance issue for the company," said Ms. Jagger. "Has ChevronTexaco's management adequately disclosed to shareholders the potential for a $6 billion legal liability?"

Ms. Jagger refers to the highest estimate for adequate remediation of the environmental damage in Ecuador, according to Global Environmental Operations (GEO), an Atlanta-based environmental consulting firm. Other estimates average $1 billion. She also refers to a class-action lawsuit representing 30,000 Ecuadorians that is currently being tried in the Superior Court in Nuevo Loja, Ecuador.

The suit claims that Texaco Petroleum (TexPet, a subsidiary of Texaco) released 18.5 billion gallons of petroleum waste and wastewater into the environment in the 1970s and 1980s, when it operated in partnership with PetroEcuador, the state oil company. Standard practice in the US at that time called for re-injecting this waste into the ground.

"This issue is fast becoming CheronTexaco's Exxon Valdez," said Shelley Alpern, Trillium's director of social research and advocacy, who accompanied Ms. Jagger on the site visit.

Ms. Alpern points out that the estimated 16.8 million barrels of crude oil spilled by TexPet throughout its Ecuador tenure surpassed the amount of oil spilled from the Exxon Valdez by more than 50 percent.

For its part, ChevronTexaco points out on a section of its website devoted to the controversy surrounding itsEcuador operations, that it did spend $40 million between 1995 and 1998 on remediation of 161 well pits and 7 overflow areas. In addition, it remediated soil at 36 sites, and plugged and abandoned 18 wells. It also installed 3 water treatment and reinjection systems, and provided PetroEcuador with equipment for 10 additional such stations. The company recently commissioned a site inspection by a team of environmental experts, including representatives from URS Corporation, a firm specializing in environmental remediation.

"Our team of experts re-visited all of the sites cleaned up by TexPet that will similarly be inspected by the court," said Rodrigo Perez, TexPet's legal representative. "What they concluded was that TexPet carried out an effective cleanup program in full accordance with its obligations to the Ecuadorian government."

"Any hydrocarbons or pollution found were either outside of the area of TexPet's responsibility as directed by the government, or clearly the result of the continuing oil operations of PetroEcuador and oil activities occurring long after the company stopped operating in Ecuador in 1990," he continued.

Ms. Alpern's site visit convinced her otherwise.

"We toured a number of the 627 waste pits and contaminated pools that were once used by Texaco," Ms. Alpern told SocialFunds.com. "Some that we visited were reportedly remediated, but all the ones we examined had contamination on the surface of the ground or just below, which we found by using a shallow core sampling device."

"The conclusion I took away from this visit is that, while PetroEcuador surely bears responsibility for any contamination that occurred after Texaco left Ecuador, Texaco's $40 million settlement with the Ecuadorian government was an under-investment in cleanup that was inadequate to the task and bound to invite a backlash," she added.

At the heart of the dispute is the issue of disclosure. US Securities and Exchange Commission (SEC) Regulation S-K Item 303 requires companies to disclose material financial issues, including potential monetary sanctions imposed by a governmental authority greater than $100,000. However, ChevronTexaco failed to disclose the potential liabilities associated with the class-action lawsuit, which clearly surpass the materiality threshold.

"We did not get an explanation from ChevronTexaco CEO David O'Reilly as to why the $1 billion-plus of potential liabilities in Ecuador are not mentioned in any of the company's SEC filings," Ms. Alpern said.