Wednesday, September 9, 2009

More on the Chevron Witch Trial; and a Floor Beneath the Price of Gold

Agora Financial
Agora Financial's Outstanding Investments

September 8, 2009

More on the Chevron Witch Trial; and a Floor Beneath the Price of Gold

Dear Outstanding Investments Reader:

I hope you had a good Labor Day weekend. I suffered through shirt-sleeve temperatures, blue skies and sunshine on Saturday and Sunday. Then I dealt with gentle rain and cool breezes on Monday. How much more of this can I take? Oh well, let's get back to work.

The Chevron Witch Trial

I sent you a two-part article last week describing the litigation between oil giant Chevron and a group called the Amazon Defense Coalition (ADC). ADC is suing Chevron in a small court in Ecuador for $27 billion in damages. Sound like a ton of money? It's to compensate for what ADC calls "environmental justice" -- a wide-open term.

The ADC claim concerns oil development by Texaco in Ecuador from the 1960s through 1980s. ADC alleges Texaco created a toxic mess. ADC has a slick, professionally managed Web site that's a wall-to-wall slam against Texaco (and now Chevron). There are incriminating photos, like this one…

The photo looks pretty disgusting, right? It's a good way to, as the saying goes, "try the case in the media." Except there's something wrong with the photo. It doesn't really implicate Texaco, because it's a recent photo. That is, Texaco stopped operating in Ecuador in 1990. Yet we see liquid, dripping, gooey, yucky oil now in 2009 -- a mere 19 years later. The photo shows recent pollution, not "Texaco pollution" that predates 1990.

Based on what I've seen and been told (I've never visited Ecuador), there are a lot of environmental problems in the old Texaco oil concession region. But were these caused by Texaco? The fact is that Texaco's operation got nationalized by the government of Ecuador starting in 1977 when Petroecuador, the national oil company, seized a 62.5% share of the operation. By 1990, Texaco was totally taken out by Petroecuador.

Later, during the 1990s, Texaco cleaned up certain sites under an agreement with the national government -- and I've been told that those former Texaco sites are clean. Petroecuador was supposed to clean up the balance of sites, but never did so. Why not? Well, Petroecuador paid over many of its funds to -- surprise! -- the government of Ecuador.

It's interesting that ADC never sued Petroecuador, and by extension the government of Ecuador. Then again, why not just sue the big, evil U.S. oil company, right? To make a long story short, Texaco got sued by ADC. After Chevron bought Texaco in 2001, Chevron became the successor in the lawsuit. It's been a long case -- 16 years and counting -- with something like 140,000 pages of documents in evidence.

Early last week, Chevron posted video and transcripts on the Internet. These indicated that the trial judge met last May and June with government officials and third parties. They're on tape, eating lunch at a seafood restaurant and discussing who's going to get up to $3 million in bribes.

If the transcripts are accurate, the judge has already made up his mind to nail Chevron for $27 billion. Then again, we'll never know what the judge was going to do. On Friday, the judge recused himself from the case, at the request of the chief magistrate of Ecuador. The judge, of course, denies that he did anything wrong. Now another judge will pick up the case. And I doubt that the new guy will patronize that seafood restaurant for lunch, if you know what I mean. One way or another, it looks like the fix is in against Chevron.

Hitting a Nerve

My two articles last week, apparently, hit a nerve. One reader looked me up through the Harvard alumni directory. In a caustic e-mail, he accused me of being a "shill for Chevron" and adopting the "Chevron view of the case, lock, stock and barrel."

To quote President Harry Truman, that's a lot of "manure." And if all you know about the oil industry is what you learned at Harvard, then you don't know very much. That goes double for graduates of Harvard Law School.

In the first article, I told you that Chevron is not in the OI portfolio and never has been. I've never worked for Chevron. I've never applied for a job, nor been offered employment by Chevron. I've never taken any compensation from Chevron. I don't own Chevron stock. Chevron doesn't advertise with Agora Financial. Basically, I've got no skin in this game.

My "personal interest" in the Chevron case is accurately to inform 50,000 OI readers -- many of whom doubtless own Chevron stock, either personally or in retirement funds -- about what's going on with one of the world's major oil companies. This is my job. It's why Agora owner Bill Bonner pays me. Discussing Chevron is the same as when I discuss news regarding other oil companies, whether they're in the OI portfolio or not.

Over the past two years, I've written numerous articles about big oil companies in the OI portfolio, like BP (BP: NYSE), Apache (APA: NYSE), StatoilHydro (STO: NYSE), Repsol (REP: NYSE) and Petrobras (PBR: NYSE). And in just the past two months, I've discussed nonportfolio companies like Exxon Mobil investing in algae-based oil technology and ConocoPhillips developing Canadian oil sands. Basically, if something is interesting in the world of energy and investing, I'll write about it.

As for adopting the "Chevron view"? I'd say that about 75% of my research into the Chevron Witch Trial articles came from links that I found through the ADC Web site. That is, when I discussed the basis for the ADC case, or the claims or evidence in the case, it was from ADC or ADC-friendly sources. Or I looked at links to news accounts (N.Y. Times, LA Times, CBS News, Bloomberg, etc.) that ADC posted or linked to on its Web site.

The balance of my research (25% or so) came from other public sites like the U.S. federal courts or the government of Ecuador. And of course, I looked at Chevron's Web site as well, particularly with the new information about the judge discussing taking a bribe. At one point, I listened to a Chevron conference call in which management discussed the lawsuit, and another time I asked ask a Chevron spokesperson to confirm certain factual information (like the 1977 Texaco nationalization and other dated events).

At any rate, the ADC lawsuit looks quite a bit different when you understand something about energy development. The ADC suit is even shakier when you understand class action lawsuits. This one seeks $27 billion in a crooked court, under a smoke screen of new age, legalistic "environmental justice."

The bottom line is that I don't buy the pro-ADC spin in the news accounts. I see the "facts" of the case in an entirely different way. I don't and won't swallow the ADC Kool-Aid. In true Agora Financial fashion, it's time to pop this ADC "environmental justice" bubble.

The fundamental issue in Ecuador is a societal dispute between the people in the oil development region and their government. The dispute has deep, historical roots in poisoned class relations between indigenous people and the "Spaniards" in Quito.

Whatever the foundations of the class-war problem, it was the Ecuadorean government that sponsored energy development over many decades. It was the government that directed much of the development. It was the government that took most of the money out of the region through the oil extraction and related taxes. It was the government (through Petroecuador) that spent decades -- since 1990 -- NOT cleaning up the mess of its national oil company, all "in the name of the people," of course.

Now Chevron has the misfortune of being in the judicial cross hairs. Something like this could happen (and likely will occur) to other large energy companies. It's a sign of the times. OI investors take note. When it comes to people and governments trying to wreck the fossil fuel energy development model, we're not even in the early innings. It's still batting practice.

The Gold Floor

Then again, why worry about the future of energy development? The West -- the U.S. in particular -- is working overtime to wreck the future by debasing its currency and choking its economy.

Don't take my word for it. In a recent article, the U.K. Telegraph quoted at length Cheng Siwei, former vice chairman of the Standing Committee of the Chinese Communist Party. He explained how Beijing is dismayed by the "credit easing" coming out of the Federal Reserve.

"If they [the Fed] keep printing money to buy bonds," said Mr. Cheng, "it will lead to inflation, and after a year or two, the dollar will fall hard. Most of our [Chinese] foreign reserves are in U.S. bonds and this is very difficult to change, so we will diversify incremental reserves into euros, yen and other currencies." Mr. Cheng was referring to over $2 trillion of Chinese foreign reserves, the world's largest holding.

"Gold is definitely an alternative," said Mr. Cheng, "but when we buy, the price goes up. We have to do it carefully so as not to stimulate the markets."

Thus, we have direct testimony from a high-level cadre that China, while cautious, is a key driving force in the gold market. It's buying. The implication is that the Chinese will not overbuy gold, which may be why the yellow metal has hovered just below the $1,000 mark per ounce in recent weeks. At the same time, it's more than likely that China will buy gold whenever there's a price dip.

The significance is that the Chinese seem to be prepared to establish a floor under any correction in gold prices. This limits the downside for well-positioned gold miners such as IAMGOLD (IAG: NYSE), AngloGold Ashanti (AU: NYSE) and Kinross (KGC: NYSE).

As for the upside to gold prices? That will depend on when monetary-driven inflation begins to bite into the economy. The tide of inflation will lift the boats of the gold miners.

Mr. Cheng's greatest concern with the U.S. is that the country "spends tomorrow's money today." Meanwhile, he added, "we Chinese spend today's money tomorrow."

To sum things up, according to Mr. Cheng, "He who goes borrowing, goes sorrowing." Mr. Cheng was, of course, quoting that famous Chinese philosopher Benjamin Franklin.

That's all for now. Thanks for reading…

Byron W. King

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