Banana Republic and Friends - WSJ Editorial April 19, 2008

Banana Republic and Friends

April 19, 2008

Maybe Willie Sutton, the natty thief who robbed banks because "that's where the money is," picked the wrong target. If only he'd gone after oil companies, he could have made more money, avoided jail time, and even picked up an award or two along the way.

Consider Pablo Fajardo and Luis Yanza, two Ecuadorians who on Monday were the toast of San Francisco after winning the prestigious Goldman Environmental Prize. Mr. Fajardo, a lawyer, and Mr. Yanza, co-founder of the Amazon Defense Front, have been waging a long legal campaign against Chevron for allegedly despoiling the Amazon hinterland. Late last month, an Ecuadorian court trying the case was handed a report assessing the damages at between $8.3 billion and $16 billion dollars. Chevron is now girding for an adverse ruling from a clearly politicized court.

The story dates back to the 1960s, when Texaco (which merged with Chevron in 2001) became a minority partner with state-run Petroecuador, a partnership that lasted until the early 1990s when the Ecuadorians assumed full control of their oil operations. At the time, an independent environmental auditing firm recommended that Texaco spend $13.2 million cleaning up its well sites. Texaco ended up spending $40 million. Ecuador later "absolved, liberated and forever freed" the company from "any claim or litigation by the Government of Ecuador concerning the obligations acquired" by Texaco.

By its own admission, Petroecuador has since made an environmental mess in the Amazon, with some 1,000 oil spills in the past five years alone. But that hasn't stopped assorted trial lawyers from prospecting for Chevron's gold beneath Petroecuador's sludge. In 1993, "international human-rights lawyer" Cristobal Bonifaz filed a lawsuit against Texaco in the U.S. for $1.5 billion. Mr. Bonifaz's suit was repeatedly tossed from American courts, most recently last fall when the court also fined Mr. Bonifaz $45,000 for his legal chicanery.

Yet the case has lived on in Mr. Fajardo's parallel suit in Ecuador. According to last month's "expert" report, written by a mining engineer named Richard Stalin Cabrera, Chevron owes $2.9 billion in compensation for 428 cancer-related deaths; never mind that the report fails to establish a causal link between oil spills and cancer. Chevron is also supposed to pay $8.3 billion for its "unjust enrichment," another whopper considering that Petroecuador was by far the greatest beneficiary of its consortium with Texaco. Other alleged Texaco sins include introducing alcohol into the region, a claim said to be substantiated by the alcohol-induced death of an indigenous shaman.

Meanwhile, the case has become the latest environmental cause célèbre. In December, CNN awarded Mr. Fajardo one of its "Hero Awards." Actress Daryl Hannah has had herself photographed dipping her hands in oil spills almost certainly caused by Petroecuador. Groups like AmazonWatch offer one-stop shopping for misinformation about the case. Also in on the act is Ecuador's radical president (and Hugo Chavez ally) Rafael Correa, who has his own reasons to seek a huge Chevron payday.

How all this will play out is anyone's guess. Charles James, Chevron's general counsel, says his company does "not intend to succumb to extortion." The company will seek international arbitration should it lose in Ecuador's kangaroo courts. That could take years. In the meantime, we wonder whose interests are served by a case that deflects attention from the real source of Ecuador's pollution while burnishing the country's reputation as a banana republic. Certainly not the people of Ecuador.