Ecuador oil: At war with Chevron

by The Economist Intelligence Unit, February 17th, 2011.

A protracted court case in Ecuador has resulted in a multi-billion-dollar judgment against Chevron (US), which has been found responsible for oil-drilling contamination in a wide swathe of Ecuador’s northern jungle. However, the company intends to fight the ruling and says it will not pay the penalty. At the same time—and regardless of its merits—the Chevron case could further damage Ecuador’s ability to attract investment from global oil companies.

The case was initially filed 17 years ago against Texaco (US), before Chevron bought that company’s Ecuadorean assets in 2001. In the 1970s and 1980s, Texaco operated in partnership with the state oil company, Petroecuador, and, the lawsuit states, left substantial environmental damage in the area in and around Lago Agrio, a town founded as an oil camp in the 1960s.

The judge on February 15th ordered Chevron to pay US$8.6bn to compensate for the contamination, with payments to go to a group representing rainforest tribes and villagers in the area. This is one of the largest environmental awards ever ordered by a court. The penalty could be doubled with the addition of punitive damages if the company fails to pay up promptly. Meanwhile, both sides plan to appeal: the plaintiffs to increase the award (reportedly to as much as US$113bn) and Chevron to overturn it.

Chevron, the US’s second-largest oil company and one of the biggest in the world, has stated that it considers the lawsuit political and that it did not get a fair trial in Ecuador. It denies any responsibility for cleaning up Lago Agrio, saying that Texaco carried out a clean-up operation in agreement with the government. Chevron is expected to appeal the decision both domestically and abroad, based in part of what it says is evidence of fraud and collusion between the plaintiffs and the court. (continue reading… )

Pan American Energy, –partly Chinese owned–, keeps expanding in Argentina

by Merco Press News, February 22nd, 2011.

Argentina’s Pan American Energy will sign a deal later this month to buy Exxon Mobil local downstream unit Esso, turning the company into a fully integrated oil and gas producer. Pan American Energy is a unit of Bridas Corp., which is jointly owned by Argentina’s Bulgheroni family through Bridas Energy Holdings and China’s Cnooc Ltd.

The deal, between 800 million and 850 million US dollars will be signed Feb. 28 in London, according to a person close to the matter. Cnooc executives asked that the signing be delayed until after the end of Chinese New Year celebrations.

Esso is Argentina’s third-biggest fuels retailer after YPF and the local unit of Royal Dutch Shell. Esso operates a network of 450 service stations and an 85,000-barrel-a-day oil refinery.

Acquiring Esso’s retail and distribution business will allow Pan American to better compete with YPF, the country’s largest integrated oil company, analysts said. YPF controls more than 60% of the retail fuel market, compared with Esso’s 14%.

Esso has been operating in Argentina since 1911. Pan American already supplies most of Esso’s crude oil, making a merger of the two companies a good fit. (continue reading… )

FT warns Brazil could be approaching a “US like sub-prime” situation

by Merco Press News, February 22nd, 2011.

The Financial Times warns that in spite of the current optimism about the performance of the Brazilian economy, the country could be heading to a ‘sub-prime’ crisis ‘worryingly’ similar to that experienced by the United States.

The article by Paul Marshall argues that Brazil has been living on a credit binge for the last five years with credit expanding 2.4 times nominal GDP. This is not a dangerous ratio because in Brazil loans to GDP are still low by industrialized countries standards, 46%. (In India and China the credit expansion vs GDP growth ratio is 1.6 and 1.2).

But in Brazil the problem is that with a manageable 6% inflation, Brazilian banks charge an average (punitively expensive) lending rate of 25% and in consumer lending 30%. This means real interest rates between 20/25% compared to 1 to 3% in most countries.

“The ramifications are serious as the debt service burden has risen to 24% of disposable income and is set to rise further as rates push higher” and could reach an ‘exorbitant 30% by 2012’. (continue reading… )

Spanish exchange eyes Andean bourses

by The Financial Times – Beyond Brics, February 21st, 2011.

On the heels of an unprecedented flurry of deals among the world’s leading exchanges, Spanish operator Bolsas y Mercados Españoles has expressed interest in a “significant” stake in a planned pan-Andean exchange.

The FT’s Jeremy Grant reports that BME chief financial officer Javier Hernani said the group sees opportunity in Latin America, particularly in Mila, the forthcoming tie-up between the Chilean, Colombian and Peruvian bourses that is set to start direct trading later this year.

Mr Hernani said: “In any place where there would be a possibility of becoming a friendly shareholder, we would be very interested. If it [Mila] gets to the point of being a single holding company, we would like to talk to them.” (continue reading… )

Monster or victim?

by The Economist, February 17th, 2011.

A court in Ecuador controversially fines Chevron a whopping $9 billion

Chevron is a “multinational monster”, says Ecuador’s populist president, Rafael Correa. Various celebrities agree. And at first glance, it does look like the story of a nasty big American corporation polluting a poor country and then refusing to pay for the damage. But the case is in fact rather more complicated than that.

On February 14th a court in Ecuador walloped Chevron, an oil giant based in California, with a $9.47 billion fine. If upheld, this will be the highest-ever damages award in an environmental case, according to Pablo Fajardo, a lawyer for the plaintiffs. If Chevron does not apologise within 15 days, the fine may be hiked to an incredible $17.2 billion.

Yet Chevron shows no sign of contrition. On the contrary, it is fiercely contesting the verdict and hopes to persuade courts in New York and The Hague that it is the innocent victim of an attempted shakedown based on a spectacular fraud by the plaintiffs’ lawyers and members of the Ecuadorean judiciary. (continue reading… )