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O'Reilly's Legacy Marred By Ecuador's Environmental Crisis

Amazon Watch

Toxic sludge pit left behind by ChevronTexaco

David O’Reilly’s surprise early retirement as CEO of Chevron comes at a time he was under increasing pressure from shareholders and the media over an environmental liability in Ecuador that could eat up roughly 20% of the market value of the company and has caused a wave of negative publicity and scrutiny from Wall Street analysts and a potential criminal investigation by New York Attorney General Andrew Cuomo.

“David O’Reilly’s legacy will be marred by his inability to close out the Ecuador problem which hangs over Chevron like an enormous dark cloud,” said Karen Hinton, a representative of the Amazonian communities who brought the class action suit against the company in 1993. “His failure to deal with Ecuador has allowed all sorts of ethical troubles in Chevron to fester and grow to the point where they threaten to eat up a significant portion of the company’s market value.”

The Ecuador liability – stemming from what experts consider the worst oil-related contamination on the planet -- was inherited when Chevron, under O’Reilly’s watch, paid $35 billion for Texaco in 2001, apparently without accounting for a possible adverse judgment in the case, which was pending at the time in U.S. federal court. At the time of the purchase, O’Reilly was warned by shareholders and environmental groups at Chevron’s 2001 annual meeting to vet Texaco before the purchase.

O’Reilly ignored the warnings about Texaco’s Ecuador liability, which at the time was estimated in the billions of dollars but the actual value of which has been determined to be $27.3 billion, according to a report prepared by a court-appointed Special Master in Ecuador. The lawsuit asserts Texaco deliberately dumped more than 18 billion gallons of toxic waste into the Amazon when it operated 356 oil wells in Ecuador from 1964 to 1990, poisoning an ecosystem the size of Rhode Island, decimating the lifestyles of six indigenous groups and causing an epidemic of cancers and other oil-related illnesses.

Experts have called the disaster the “Amazon Chernobyl” and the world’s worst oil-related disaster. Just this year, Chevron’s role in Ecuador has been covered in unflattering fashion by 60 Minutes, the New York Times, the Washington Post, the Wall Street Journal, the Financial Times, and a host of other publications. A judgment in the civil trial is expected in 2010; Chevron has announced it expects to lose and will seek relief in international courts.

“David O’Reilly is either trying get out of Chevron before the Ecuador judgment comes down and further embarrasses him, or he was hounded to retire so Chevron could try to bury an obvious corporate governance problem given its failure to properly vet Texaco,” said Chris Lehane, a lawyer and political consultant working for the Amazonian communities.

Earlier this year, in an open letter to shareholders, the environmental group Amazon Watch blasted O’Reilly for not properly vetting Texaco and therefore overpaying for the company. “There is no evidence that Chevron’s management … independently vetted Texaco’s representations at the time about the nature of the lawsuit or the limitations of its [release] which no court of law in either the U.S. or Ecuador has ever accepted as valid in reference to the civil lawsuit,” said the letter, signed by Atossa Soltani, the executive director of Amazon Watch.

There is also no evidence that O’Reilly’s team ever independently investigated the circumstances surrounding a release Texaco secured from Ecuador’s government after a purported $40 million “remediation” that appears to have been a sham, said Andrew Woods, an American legal advisor to the plaintiffs. Two former Texaco lawyers, Ricardo Reis Veiga and Rodrigo Perez Pallares (both now working for Chevron), are under criminal indictment in Ecuador along with seven Ecuadorian government officials for lying about the results of the remediation to secure the release.

Earlier this year, analysts at both Barclay’s and Oppenheimer warned Chevron’s investors about the Ecuador liability. Oppenheimer said the $27 billion potential liability “could depress the stock until a settlement is reached” while Barclay’s called the Ecuador a “drag” on the company’s stock. The company was also questioned by Risk Metrics, a leading investment advisory group, which asked O’Reilly to increase Chevron’s level of disclosure about the Ecuador lawsuit.

Separately, New York Attorney General Andrew Cuomo has opened a probe of the company for misleading shareholders over the Ecuador liability. In Chevron’s SEC disclosures, the company claims the case is frivolous and that it cannot estimate a potential loss, even though the damages claim of $27.3 billion is spelled out in great detail in a 4,000-page report.

Cuomo’s probe is under New York’s Martin Act, which allows for both civil and criminal liability.

Hinton said one of O’Reilly’s critical mistakes in regard to Ecuador was hiring several “ideological lawyers” from the Bush Administration to run the company’s legal department. These individuals, who had no experience in the oil industry, believe they must win at all costs against indigenous groups in Ecuador rather than work out a solution that would be in the best interests of the company’s shareholders.

Chevron’s legal department is supervised by Charles James, a neoconservative and former assistant attorney general under John Ashcroft during the first term of George W. Bush. Its General Counsel is R. Hewitt Pate, who also worked under James and Ashcroft at the Department of Justice and who began his tenure with Chevron in early August of this year. O’Reilly is the only CEO of an oil major who has hired top lawyers because of their political ties rather than their experience in the industry, said Woods.

The Amazon Defense Coalition represents the plaintiffs in the lawsuit which include dozens of rainforest communities and five indigenous groups that inhabit Ecuador’s Northern Amazon region. The mission of the Coalition is to protect the environment and secure social justice through grass roots organizing, political advocacy, and litigation. Two of its leaders, Luis Yanza and Pablo Fajardo, are recipients of the prestigious Goldman Environmental Prize.Petroleumworld does not necessarily share these views.

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Petroleumworld News 10/03/09

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