Texacochevron

The purpose of this evaluative report is to review the case of Texaco/Chevron environmental pollution in Lago Agrio in Ecuador, a small South American country, during the period between 1973 and 1993 and in particular the application of management practices and thinking in dealing with the oil extraction operations and the decision by the company to legally fight the request by local residents for compensation on environment rehabilitation costs.

Lago Agrio literally translates to Sour Lake a name acquired by the area in the Ecuadorean province of Sucumbios after the by-products contamination caused by oil extraction. The main accusatory points made by locals are that the American Company Texaco later absorbed by Chevron did not follow environmentally safe procedures and dumped 16 billion gallon of contaminated water as well as using unlined waste pits to store oil sludge from the production.

Most of the forces in the external environment were favourably aligned with Texaco expansion projects with political support both in the US (oil depletion legislation) and in Ecuador (government partnership) via favourable legislation, high consumer demand for products in particular cars and electricity, high post-war fertility rate and increased house-hold income leading to mass consumption (Cohen 2004, p.236), strong competitive market but no other forms of low cost energy comparable to oil and ever expanding technological advances especially in oil refinery and by-products (plastics).

One element of the external environment that was negatively affecting the company was the Kennedy act passed in 1962 (the year Texaco started operations in Ecuador) effectively reducing the Oil companies' future profitability prospects. This and an increased awareness in the Publics about social responsibilities were the main and foreseeable constrains to an otherwise bright future.

Harold Bill Haynes with his dual role of CEO and Chairperson of the company has facilitated his "Classical" management view of the situation and a social obligation only approach. This approach is firmly grounded in Friedman's (1970) believe that a company only responsibility is to their shareholders and that in the long terms better returns are not just good for a company but society at large.

Another problem with his dual responsibility could also lead to what is known as "Agency Theory" problem whereby stockholders which are separated from management and control of the organisation except for representation on the board may result in managers pursuing their own interests and agenda rather than that of the owners of the company.

This controlled environment, by the CEO, of the company affairs may cause ethical conflict between what is right for the company and its investors and other stakeholders, in this case, indigenous peoples living in Ecuador.

Haynes and the Texaco decision to legally fight everyone and anything that comes against the company follows Kohlberg's theory of moral reasoning (cited in Davidson & Griffin 2003, p. 102) whereby managers tend to do what is right by the law "and responding to the obligations of duty" with no regards to other issues other than returns/profits.

Statements such as "We're going to fight this until Hell freezes over--and then we'll fight it out on the ice" are a clear example of this "blind obedience" to the one and only element of interest specifically the stockholders' profit rather than proactively solving internal problems and doing what is right for society at large.

Symptomatic of this view is the recent decision by the Brazilian government to sue Chevron for $11 billion for an oil spill once again confirming that the company is not prepared to pay for other than returns to their shareholders and continuing the Friedman approach to shareholders.

1.0 Introduction

The purpose of this evaluative report is to review the case of Texaco/Chevron environmental pollution in Lago Agrio in Ecuador, a small South American country, during the period between 1962 and 1982 and in particular the application of management practices and thinking in dealing with the oil extraction operations and the decision by the company to legally fight the request by local residents for compensation on environment rehabilitation costs.

The report will start with a brief description of the events which span almost 2 decades and that recently culminated with a decision by the Ecuadorian Court to order Chevron a payment of $18 billion for legal and remediation costs.

Following that the report will focus on the analysis of three areas of corporate management

external and internal environment

ethics

social responsibility

and formulate some opinions based on research of current and former management theories as well as historic prospective of the period.

2.0 The Story

Lago Agrio literally translates to Sour Lake a name acquired by the area in the Ecuadorean province of Sucumbios (see fig.2) after the by-products contamination (see fig.1) caused by oil extraction.

Figure 1: Oil Pollution in Lago Agrio (Nov. 2007)

Source: Wikipedia, online 2012

Figure 2: Lago Agrio Location map

Source: Wikipedia, online 2012

Discovery of large reserves of oil in this small Ecuadorian country in 1964 by Texaco started a 20 years development of a first time oil extraction industry of which the local government and the American corporation shared the expansion resulting in more than 325 productive wells drilled and 18 associated crude-oil-processing facilities built (Langewiesche, online 2007).

The main accusatory points made by locals are that the American Company Texaco later absorbed by Chevron did not follow environmentally safe procedures and dumped 16 billion gallon of contaminated water as well as using unlined waste pits to store oil sludge from the production (Amazon Defence Coalition, online 2012).

3.0 External and Internal Environments

In corporate management practices the external and internal environments are more associated with marketing concepts rather than the real environmental issues, even though this particular case is based on events which have resulted in a degradation of environmental areas in Ecuador North East.

Following is a detail analysis of Texaco/Chevron external and internal environment.

3.1 THE EXTERNAL ENVIRONMENT

A company external environment or otherwise refer to as macroenvironment (Kotler et al. 2010, p.92) can be easily summarised by the following diagram which list "seven major forces" that "shape opportunities and pose threats to the organisation" (Kotler et al. 2007, p.169).

Figure 3: The External Environment

Source: Kotler et al. 2010, p.92

Developing a well performed analysis and subsequent strategy to deal with these seven external factors is an important task which can at least formulate scenarios that can later be assess for their significance and likelihood (Reed 2006, pp. 58-60).

In relation to the case study example following is a table with Texaco/Chevron external forces at play in 1962 at the start of the oil production in Ecuador.

TABLE 1 : TEXACO/CHEVRON EXTERNAL ENVIRONMENT FORCES

COMPETITIVE AT THE END OF WWII IN THE US CONSUMPTION OF OIL FOR THE FIRST TIME EXCEEDED PRODUCTION (FUNDING UNIVERSE, ONLINE 2012) WHICH CLEARLY SHOW THAT COMPETITIVE FORCES IN THE OIL INDUSTRY WERE NOT A PROBLEM FOR THE COMPANY IN THE NEAR FUTURE

DEMOGRAPHIC A NEW DEMOGRAPHIC TREND IS DEVELOPING AFTER THE WWII THE SO CALLED "BABY BOOMERS APPEAR ON THE SCENE WITH CHARACTERISTICS SUCH AS:

• UNPRECEDENTED WEALTH OF POST WAR DEVELOPMENT

• INDEPENDENT

ECONOMIC EXCEPTIONAL GROWTH IN THE US AFTER WWII DRIVEN BY HIGH CONSUMER DEMAND FOR HOUSES, CARS WITH THE SUCCESSFUL CONVERSION OF MANY INDUSTRIES FROM PRODUCING WAR RELATED MATERIAL TO OTHER CIVIL PRODUCTS.

WRIGHT (1992) CONFIRMS THIS BY SAYING THAT "DURING THE QUARTER CENTURY FOLLOWING WWII THE US WAS THE WORLD'S MOST PRODUCTIVE ECONOMY…"

NATURAL ENVIRONMENTALISM WHILST MILDLY PRESENT IN PENNSYLVANIA GOVERNOR PENN EDICT (STANKO, ONLINE 2011) TO PRESERVE 1 ACRE OF TREES EVERY 5 CLEARED DID NOT RESULT IN SOCIAL ACTIVISM UNTIL 1962 WITH THE PUBLISHING OF SILENT SPRING BY RACHEL CARSON.

TECHNOLOGICAL IMPROVED ECONOMIC CONDITIONS FUELLED BY DEMAND AND MASS-PRODUCTION INDUSTRIES CREATED THE IDEAL SCENARIO FOR TECHNOLOGICAL DISCOVERY AND ADVANCEMENT IN ALL SECTORS

POLITICAL THE INTRODUCTION OF THE "OIL DEPLETION ALLOWANCE" IN 1926 "FURTHER STIMULATE OWNERSHIPS OF IN SUCH COMMODITIES AS OIL" (WISEGEEK, ONLINE 2012) BY PROVIDING HIGH TAX BREAK TO OIL COMPANIES IN THE US.

AN ANOTHER INTERESTING FACT