Background: The Oil Concession, TexPet’s Cleanup, and Petroecuador’s Mismanagement
Texaco Petroleum Co. (TexPet) operated in Ecuador in the 1970s and 1980s through an oil concession originally granted by the government to a consortium of Texaco and Gulf subsidiaries. As significant commercial oil production was about to begin, the government muscled its way into the consortium by proclamation, granting its newly formed state oil company, CEPE— the precursor of today’s Petroecuador—a 25 percent ownership interest. In 1976, the government bought out Gulf’s remaining interest to become majority owner with 62.5 percent. Though it was the minority shareholder with37.5 percent, TexPet served as consortium operator on the parties’ behalf for most of the concession period,
Petroecuador became operator in July 1990, two years before the concession ended by virtue of Ecuador’s decision not to renew it. Throughout the entire term of the concession, the government regulated, approved, and in many instances mandated the consortium’s activities. No facilities were constructed, wells drilled, nor oil extracted without government oversight and approval.
Throughout the life of the concession, Ecuador and its national oil company retained 97.3% of the oil production revenues from the project.
Consistent with global oil operations then and now the consortium members functioned as one in dealing with the government and producing crude. The consortium as a distinct legal entity made all exploration, financing, and operational decisions, provided royalties and other fees to the government, and was subject to government regulation and oversight. While TexPet, as operator, conducted the physical work, the consortium enjoyed the profits, and bore any risk and liability associated with operations.
When Ecuador decided to end the concession in the early 1990s, TexPet, Petroecuador and the government agreed to conduct an environmental audit and to apportion responsibility for remediation. The government conducted detailed and transparent negotiations with TexPet. A various stages, regulatory bodies, Ecuador’s legislature, environmental NGOs, and community organizations participated and provided input. Early in the negotiations, Ecuador’s government specifically rejected TexPet’s suggestion that the remediation program address all environmental issues in the concession area, with TexPet’s and Petroecuador each paying its proportionate share. Officials claimed, among other things, that Petroecuador lacked funds for such a project. The government instead dictated that TexPet remediate its proportionate share and leave the remainder for Petroecuador to carry out in due course as part of its ongoing operations. The government and TexPet identified the sites TexPet would be required to remediate commensurate with its 37.5 percent interest and agreed to the specific types of remediation and restoration to be conducted.
Independent, government-approved contractors conducted TexPet’s remediation program, at a cost to TexPet of $40 million. Under this program, TexPet:
- Closed and remediated 162 well pits and 67 spill areas.
- Closed 18 wells.
- Remediated soil at 36 sites.
- Installed three produced water reinjection systems and provided Petroecuador with equipment for 10 more.
- Designed three secondary spill containment dikes at storage facilities.
- Performed extensive replanting and reforestation.
- Contributed approximately $3.8 million to local potable water and sewage projects.
- Provided equipment and $2 million in funds for local socioeconomic projects to benefit the indigenous and settler communities living in the former concession area.
Representatives of Petroecuador and the Ministries of Energy and Environment monitored, inspected, and certified the clean-up work site-by-site. The results were scientifically validated by independent laboratories, including Ecuador’s Central University. When the work was completed in 1998, the government and Petroecuador certified that TexPet had complied fully with its obligations under the remediation contract and granted TexPet a complete release from all legal and contractual obligations and from any further liability for environmental impact arising out of the consortium’s operations.
From that point forward, all remaining liability for remediation was the responsibility of the government and Petroecuador— the majority owner since 1977, operator since 1990, and sole owner since 1992.
Since 1992, Petroecuador has had a widely acknowledged record of operational and environmental mismanagement, characterized by lack of investment in equipment and installations, poor maintenance, hundreds of spills, and failure to timely perform its share of environmental remediation. Ecuadorian newspapers have reported that Petroecuador has been responsible for more than 1,400 oil spills from 2000 to 2008. Press reports suggest that the company has spilled in excess of four million gallons of oil since 1990. In May 2006, Ecuador’s National Director of Environmental Protection Management, Manuel Muñoz, a representative of the Ministry of Energy, testified before Ecuador’s Congress:
“Texaco conducted the remediation of the pits under its responsibility that is 33 percent of the total. On the other hand, for over 30 years Petroecuador has done absolutely nothing to remediate those pits under its responsibility.”
Muñoz also stated that Petroecuador allowed equipment, infrastructure, and operations to deteriorate:
“There is a very serious problem regarding the pipelines, regarding all transmission systems—both of oil as well as of derivatives—which have mostly become obsolete because the budget is not adequate to replace them. Mr. President, this is one of the most important sources of contamination because their useful life has come to an end and they have not been replaced, so spills occur.”