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An $18 billion scam in the jungle

January 10, 2012


Mixing celebrities, lawyers and oil

In 1967 Texaco struck oil in the Oriente region of Ecuador, formed a consortium with the state oil company PetroEcuador, and received a 25-year drilling concession. Initially Texaco owned half the consortium but in 1976 its share was reduced to 1/3, with PetroEcuador owning the remainder. When the concession expired in 1992 PetroEcuador took over ownership of the whole thing and, at current prices, some $10 billion annual revenue. In 2001 Chevron acquired Texaco and its liabilities

Everyone accepts that oil drilling in Ecuador caused a mess; instead of pumping waste water from the wells back underground, where it would cause no trouble, the consortium left it lying in surface pits. There was nothing illegal, the Ecuadoran government approved the practice, and PetroEcuador have continued it since.

But there probably are some health risks, albeit small compared to the other hazards of rural Ecuador.  In the early 1990s environmental groups started campaigning for the companies to clean the pits up, and in 1995 the consortium agreed to fund remediation. Texaco spent $40 million on its share and in 1998 the Ecuadoran government certified the job done, and granted it a release from any future claims.

PetroEcuador, in contrast, not only failed to clear up their bit, but carried on creating new pits – 300 in the last couple of years. This is as expected.  Private companies have to obey regulations and clean up after themselves or they get fined. Nationalised ones are protected by politicians, so they make excuses instead.

But muddled environmentalists like blaming capitalists, and some lawyers don’t worry too much where fault lies, they go where the money is.  In 2003, Steven Donzinger, a US lawyer, together with Ecuadorian colleagues, filed a claim for damages on behalf of the local people against Chevron. A legal battle of Dickensian complexity began.

Donzinger, is more publicist then lawyer, and he fought his case in the full glare of the media.  He got Crude, a “Chevron bashing” Hollywood film made, and at the Sundance Film Festival the usual celebrities turned out in support – Trudi Styler, Sean Penn, Sting, Darryl Hannah.

But even in Ecuador you need more than celebrity endorsement to win a court case, and celebrities are stingy with their own money – Donzinger’s personal fee was going to be $200 million – so a hedge fund, Burford Capital, stumped up hundreds of millions of dollars in “litigation finance” in return for a slice of the action if he won.

The battle started well for Donzinger. A left wing government got elected, and their populist leader, Rafael Correa, making no pretence of neutrality, vowed that Chevron would pay for their “crime against humanity”.

Then an independent environmental report by a fellow called Richard Cabrear, commissioned by the Ecuadoran court, recommended that Chevron pay $27 billion damages. When Chevron demanded an independent review, a Colorado consulting firm, Stratus, endorsed the report as “sound, reasonable and consistent”. In Feb 2011 an Ecuadoran judge found Chevron liable for $18 billion damages.

But it won’t end there. When Chevron’s lawyers got hold of Donzinger’s emails and the out-takes from Crude, it turned out the whole thing was a scam.

The out-takes are incriminating. Donzinger threatens to expose the Ecuadoran judge German Yanez’s drinking and womanising if he “does not adhere to the law and what we need”. When someone suggests that if Yanez ruled against the plaintiffs he might be killed, Donzinger says, “He might not be, but he thinks he will, which is just as good.” When a groundwater expert tells him the contamination is less than he had thought, he replies, “This is Ecuador, OK? At the end of the day, if there’s a thousand people around the courthouse, you’re going to get what you want.”  Later he calls the scientific data “just a bunch of smoke and mirrors and bullshit.”

But the emails were worse. The “smoke, mirrors and bullshit” remark was closer to the truth than Donzinger had intended. Donzinger’s team had not only “suggested” Cabrear to the judge, and agreed his appointment before it happened, but also ghost written his report. And the ghost writers? Stratus, the firm that later endorsed his report as “sound, reasonable and consistent”!

Chevron no longer have business in Ecuador, and international courts are unlikely to enforce such an obviously corrupt judgement, but they are still going after Donzinger for racketeering. Presumably to discourage him from starting up again. Eventually that case will peter out in a dusty courtroom somewhere.

And the polluted water pits? Maybe some celebrities will club together to fund a clean-up. If the lawyers stayed away, it wouldn’t cost much.

Jim Thornton

One Comment leave one →
  1. January 12, 2012 6:14 pm

    Of course there are two sides to this story. Here’s Chevron’s version.
    And here’s the other side’s.
    For a balanced view by a newspaper that is famously careful with it’s facts and not notably sympathetic to polluting oil companies, read last week’s New Yorker.

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