Neil Pyper: A messy affair – and it's hard to see it ending cleanly

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Texaco, which Chevron acquired in 2001, is accused of responsibility for water and soil contamination between 1964 and 1992. In truth the $8.6bn fine is unlikely to be enforceable.

The company left Ecuador in 1992 and no longer has assets in the country that could be seized. It argues that the ruling is fraudulent and lacking in scientific evidence, and in any case it fulfilled its cleaning-up responsibilities.

In a wider sense much has changed in Ecuador. The government of President Rafael Correa has promoted an agenda of economic nationalism. Ecuador's National Assembly last year passed a hydrocarbons law requiring that contracts give the state ownership of the means of production, with companies simply receiving payment for their extraction work.

At the same time the government is aware of environmental sensitivities surrounding oil extraction. Correa has pioneered an innovative project under which Ecuador agrees not to exploit oil and gas fields in return for foreign governments agreeing to contribute to a fund administered by the UN Development Programme.

But change has come slowly. Texaco worked in alliance with the state oil company Petroecuador, which continues to operate along the Colombian border. Part of Chevron's case included a claim that Petroecuador should pay damages. Petroecuador's performance has improved in recent years but the company has long been plagued by corruption, managerial incompetence and political interference.

Oil is a key source of government revenue, and the country needs to develop production. It cannot afford to turn the tap off. In truth, Correa is keen to convince oil companies that new contracts offer a secure and stable framework in which to operate.

This combination of policy volatility, dependence on oil revenues, and continuing difficulties at Petroecuador mean there is a significant risk of further environmental damage in Ecuador.

Neil Pyper is a senior analyst at Oxford Analytica

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