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The Honolulu Advertiser
Posted on: Tuesday, May 6, 2003

State hopes to decide soon about ChevronTexaco suit

By Sean Hao
Advertiser Staff Writer

The ChevronTexaco refinery is one of only two refineries in the state. Hawai'i officials are considering filing suit against the company over alleged evasion of taxes.

Advertiser library photo • 1988

The state attorney general's office hopes to decide by May 19 whether to sue ChevronTexaco Corp. over alleged tax evasion.

That is the date when an agreement between the state and Chicago-based law firm Winston & Strawn to explore the case expires. The state already has extended the deadline several times, citing the need to gather additional information before making a decision on whether to hire the law firm to pursue a case against the oil refiner.

First Deputy Attorney General Richard Bissen said he hopes to avoid prolonging a decision on the matter.

At issue is whether Chevron and Texaco funneled profits through an off-shore joint venture to avoid taxes during the past 30 years and whether they paid inflated prices for crude oil that could have led to higher gasoline prices in Hawai'i. The two companies, which have since merged to become ChevronTexaco, have denied the charges.

"The matter is still under review with the outside counsel that we've hired," Bissen said, referring to Winston & Strawn. "We're awaiting a report from them. I certainly hope we get it sooner than the 19th."

As for whether more time will be needed beyond the deadline, "I would say it's possible, but I'm hoping not," Bissen said.

If Winston & Strawn decides there is a case, the state will sue ChevronTexaco, he said. The firm would pursue the case on a contingency-fee basis, meaning the state would not be charged unless there is a recovery.

"If they recommend to go forward, we will go forward," Bissen said.

Gordon Dobie, a member of Winston & Strawn's litigation advisory committee, was unavailable for comment.

Allegations of an oil-pricing scheme were raised last year in a report by two accounting professors, Jeffrey Gramlich and James Wheeler. The report accused ChevronTexaco of failing to pay $3.25 billion in taxes, including $536 million to the state of Hawai'i.

The Internal Revenue Service took Chevron to court on similar allegations in 1994, and Chevron settled that case for $675 million.

The professors argue that Chevron and Texaco purchased oil at inflated prices from the Indonesian government through a joint-venture called Caltex. That could have allowed the companies to avoid U.S. corporate income taxes of 35 percent to 40 percent while Caltex paid Indonesian income taxes of 56 percent.

Wheeler said that additional tax was offset by dollar-for-dollar U.S. foreign tax credits and overstated cost of goods deductions on Chevron and Texaco's U.S. tax returns.

In addition, Wheeler said Indonesian government-owned oil company Pertamina gave Caltex free oil to offset taxes paid on the overstated value of oil purchased and more oil to pay Indonesian taxes when that oil was sold to Chevron and Texaco.

Wheeler said that according to Chevron documents released to the Internal Revenue Service, Chevron overpaid for oil by an average of $4.55 a barrel, which was then returned in the form of a special dividend from Caltex.

Whether potentially inflated costs were passed on to Chevron's Honolulu refinery and led to higher gasoline prices could only be revealed through a lawsuit, he said.

Most of the crude oil refined in Hawai'i comes from Indonesia, and the state has some of the highest gasoline prices in the country. However, those prices typically are blamed on factors such as a lack of competition, the state's geographic isolation and its small, low volume market.

Wheeler said the alleged pricing scheme could have resulted in higher local gas prices.

"I feel really strongly that there's a case here, and it may be even larger than our original estimates," he said. "I know (the practice) is ongoing."

State legislators have urged the administration of Gov. Linda Lingle to pursue the case, which could include recoveries of back taxes, interest and other penalties.

The state used a similar strategy when it sued Chevron and six other oil companies in 1998, alleging they conspired to fix gasoline prices in Hawai'i. The suit, which sought $2 billion in damages, was settled for a total of $35 million, with the outside law firm pocketing much of that.

Bissen said those urging the administration to jump into a lawsuit with ChevronTexaco should be patient. ChevronTexaco is Hawai'i's largest gasoline retailer and owns one of the state's two refineries. Tesoro owns the other.

"We're going to see first if there's a case," Bissen said. "Let us get the information and see what we have."

Reach Sean Hao at shao@honoluluadvertiser.com or 525-8093.