CHEVRON CLOSE TO FILING BIT NOTICE

C O N F I D E N T I A L QUITO 000705

SIPDIS

SIPDIS

PASS TO USTR FOR BENNETT HARMAN

E.O. 12958: DECL: 03/21/2016
TAGS: EPET EINV ETRD ECON EC
SUBJECT: CHEVRON CLOSE TO FILING BIT NOTICE


Classified By: Charge d'Affaires Jefferson Brown, reason 1.4 (b),(d)


1. (C) Summary. The Ambassador met March 17 with Chevron
local representative Jaime Varela for an update of Chevron's
legal cases. Varela gave the status of the case in the Lago
Agrio court, the AAA arbitration, and the U.S. Federal Court
case and said Chevron would soon file a notice requesting
international arbitration under the Bilateral Investment
Treaty. Bottom line: the Chevron case is slowly moving
forward in several venues, with no resolution expected before
2007 at the soonest. End Summary.

Lago Agrio Case - A Long Way to Go
--------------


2. (SBU) Chevron's Ecuador representative Jaime Varela
explained to the Ambassador on March 17 that the case for
environmental damages filed against Chevron (when Texaco
operated in Ecuador) that began in Ecuador in May 2003 (after
ten years in U.S. courts) continues to plod along. The court
has now investigated 40 of the 122 oil sites the parties
agreed to investigate as part of the suit. At that rate, the
Ambassador noted that it would take six years for the Court
to conclude the investigative phase of the trial. Varela
agreed the investigations would take a long time to conclude.
He noted that the plaintiffs were talking about limiting the
number of investigations, which he said Chevron was not
inclined to do. Varela said that Chevron had not had any
real complaints about the judge in the Lago Agrio case, but
had some concerns about a new judge assigned to the case.

New U.S. Federal Court Trial Next Year
--------------


3. (U) When Chevron sought arbitration with the American
Arbitration Association (AAA) on the basis of its operating
contract with the GOE, the GOE objected in New York State
Court. Chevron wants the AAA panel to rule that under the
terms of its contracts with the GOE, including its
remediation agreement, that GOE must indemnify Chevron and
pay all legal expenses and any adverse judgment against
Chevron. Chevron had the case removed to the U.S. Federal
Court in New York and a trial date has been set for March 7,

2007. The U.S. Federal Court stayed the arbitration until it
ruled on the matter.


4. (SBU) According to Varela, the Federal case will resolve
the entire case against Chevron. If the Federal Court rules
in Chevron's favor, then the GOE would be responsible for the
defense of the Lago Agrio case and any judgment in favor of
the plaintiffs. (Note: Varela did not mention why he
thought the Federal Court's decision would mean that the AAA
panel would also rule in Chevron's favor. End note.)

BIT Filing Imminent
--------------


5. (C) Varela said Chevron was about to file a notice of

international arbitration under the U.S.-Ecuadorian Bilateral
Investment Treaty (BIT). That claim is based on fuel for
domestic consumption that Texaco was required by its contract
to provide to the GOE at subsidized prices. Supposedly any
fuel that Texaco provided in excess of internal consumption
was to be credited to Texaco. Instead, the GOE sold the
surplus fuel in the international market and kept the
proceeds. According to Varela, some of these cases have been
pending in Ecuadorian courts for 16 years and the sum
allegedly now owed to Chevron is around $800 million.


6. (C) The filing of the BIT claim would start a six month
clock for resolution of the dispute, according to Varela. At
the expiration of that period, the parties would each select
their arbitrators, who would then select a third arbitrator.
Chevron will not make public their BIT notification,
according to Varela, because they believe the Plaintiffs in
the Lago Agrio case would use it against them to argue that
Chevron is trying to pressure the court in Lago Agrio.

No Resolution This Year
--------------


7. (C) Varela concluded that there would not be much progress
in 2006 on their case. The investigations of the oil fields
would continue. The AAA arbitration has been stayed until
after the March 2007 Federal Court trial. Varela said that
the Federal Court ruling would be dispositive.

Plaintiffs' Attorneys Claim Chevron Principally Liable
-------------- --------------


8. (U) Econoffs met with the Lago Agrio Plaintiffs' American
lawyers a couple of weeks ago. They claimed that despite the
remediation agreement and release given to Chevron, as the
principal operator of the fields, Texaco (now Chevron) is
legally responsible for the environmental damages. They
argued that Texaco was the first oil company to come into
Ecuador, and basically taught PetroEcuador the oil business.
Since Texaco, as the operator, had caused the damage, it was
responsible for it, even if PetroEcuador and the Ecuadorian
government benefited financially. They did not directly
answer the question as to why state-owned PetroEcuador was
not named as a party. However, one of the attorneys noted
the GOE's difficulties in paying state-owned PetroEcuador's
private contractors and the recent judgment for Occidental
Petroleum (Oxy) and against the GOE for well over $100
million.


9. (U) The plaintiffs' lawyers stated that Chevron did not
fully disclose the history of the case to the New York
Federal Court, especially with respect to Chevron's
acceptance of the Ecuadorian court's jurisdiction as a
condition for dismissal of the prior U.S. court case for
"forum non conviens" (better jurisdiction elsewhere). The
Plaintiff's lawyers also claimed that many of the test
results of the oil patches in Ecuador supported their case.

Comment
--------------


10. (C) We agree with Chevron's local representative on
several fronts. It is unlikely that the case against Chevron
will be resolved this year. We also agree that the case in
New York Federal Court should clarify matters for both sides.
In addition, up until now, both sides in the Lago Agrio case
have had no real complaints about the administration of the
case, though, they agree the investigations have a long way
to go and both have expressed concern that the judicial
process could be affected by outside pressures at some time
in the future.


11. (C) We were surprised that Varela, in contrast to other
Chevron reps we have met in the past, requested no USG
intervention in the case. In previous meetings, Chevron reps
have suggested that the USG pressure the GOE to assume
responsibility for the environmental damage in the areas once
operated by Chevron. Given the complex legal questions and
the questions of fact disputed in the case, it does not seem
likely that any available inducements would convince the GOE
to assume what may amount to billions of dollars of
environmental liability.


12. (C) Chevron has at least three fora in which to resolve
its disputes with the private plaintiffs and the GOE. While
we will continue to raise the matter with the GOE when we
discuss other commercial disputes, our assessment is that
these matters are being fairly and adequately addressed in
the courts or in arbitration and require no direct USG action
at this time.
BROWN