David Meiler and Amanda Lourenço Cunha*

On November, 2011, the oil spillage of almost 3,000 barrels involving Chevron at Frade Field in Campos Basin – State of Rio de Janeiro, Brazil – raised once again worries amongst oil and gas operators on the stiffness and, moreover, on the width of coercive actions taken by Brazilian government bodies, particularly when with regard to the imposition of penalties arising from environmental incidents occurred during performance of exploration and production activities. Further, just recently, on March 13, 2012, a minor oil spillage of nearly 4 liters has been detected about 1.6 miles from the site where the first spillage occurred.

The cornerstone of environmental liability in Brazil rests on the Federal Constitution of 1988, which awarded the three levels of government – federal, state and local - with coercive powers aimed at ensuring compliance with environmental regulation. Such powers comprise not only environmental licensing, a rather confusing and time-consuming process, but also authority to impose penalties. Further, according to the Brazilian Constitution of 1988, environmental liability under Brazilian law is threefold, encompassing criminal, administrative and civil liabilities.

Administrative liability may not only comprise fines ranging from R$ 50 to R$ 50 million, but also seizure of assets, partial or total suspension of activities, suspension or revocation of licenses, embargo, prohibition to enter into any agreement with the Government -- including Petrobras -- for up to three (3) years and cancellation or suspension of financing arrangements with state-owned banking institutions, just to name a few.

Despite the provision of such limit, in an oil spillage, for instance, it is quite common to have the alleged wrongdoer being assessed for multiple infractions at the same time, which means that the aggregate amount of fines may easily surpass R$ 50 million (about US$ 29 million). Moreover, as already stressed, since environmental regulation is entrusted to three different levels of government, the purported offender may be assessed by each one of them and therefore be ordered to pay for fines whose total amount would be much higher than aforesaid limit.

In this particular, it is worth noting that there is no clear drawing line amongst federal, state and local governmental authorities on who has competence to do what. The confusion affects even authorities belonging to the same level of government, such as the Brazilian Navy, the National Agency for Oil, Natural Gas and Biofuels ("ANP") and the Brazilian Institute for the Environment and Renewable Resources ("IBAMA"), all of them part of the federal government and with authority to impose penalties for environmental damages arising out of oil and gas activities carried in the Brazilian continental shelf. To put simply, an alleged polluter may be subject to multiple administrative penalties arising out of the very same event.

This has been made very clear in Chevron’s case, where penalties have been imposed on the company by IBAMA, the Environmental Authority of the State of Rio de Janeiro ("INEA") and ANP. So far, IBAMA has fined the company at the top amount of US$ 29 million, while INEA has fined the company twice, for discharge of oil and non-compliance with environmental permits, at a total amount of US$ 35 million. Also, ANP has issued three assessment notices against Chevron, one for non compliance with the well abandonment plan, other for allegedly omitting relevant information from ANP by editing footage images of the location of the spillage, and a more recent one for not complying with the field’s development plan. Drilling activities in the Frade Field have also been temporarily suspended. The amount of penalties resulting thereof will only be known at the end of administrative proceedings in course at ANP.

In the wake of the spillage occurred in March, 2012, ANP has authorized Chevron to temporarily suspend production activities in the Frade Field. Apparently, according to a press release from Chevron, , such spillage is not related to the former one. Nonetheless, ANP issued a fourth assessment against Chevron, this time for not taking relevant measures in order to prevent further spillages from occurring in the Frade Field area.

As far as civil liability is concerned, Brazilian law clearly provides for strict liability as a result of damages caused to the environment, meaning that causation is all that needs to be established. Further, directors and officers may be held joint and severable liable with the company for such damages. As for limitation of damages, the prevailing case law in Brazilian courts is that no limitation applies. This is of uppermost importance to owners of oil carriers, since Brazil ratified CLC-69 - the International Convention on Civil Liability for Oil Pollution Damage - in 1977 and such Convention does provide for limitation and even exemption of liability in certain circumstances.

Still on civil liability, both the Federal and the State District Attorney Offices are entitled to claim for environmental damages on behalf of the collectivity through the so-called public civil actions, a sort of class action. Nevertheless, this does not prevent each individual from filing their own civil claims for damages resulting from environmental wrongdoing. In the episode involving Chevron, a class action filed by the Federal District Attorney of Campos against the company and Transocean, its drilling contractor, has been widely reported in the local and international mainstream media due to the large amount of compensation so claimed, that is, BRL 20 billion (nearly US$ 11.8 billion). Just as a way of comparison, BP has just announced that it settled claims in the US due to the Macondo incident at nearly USD 7,8 billion. BP's Macondo well spilled nearly 4 million bbl into the Gulf of Mexico, much more than the 3,000 bbl spilled by Chevron in Brazil. Worse, the D.A. has also requested an injunction in order to suspend activities of both Chevron and Transocean in Brazil. This, however, has been rejected by the federal court of first instance of Campos, Rio de Janeiro.

Last but not least, criminal liability may fall upon the company, their officers, directors and senior managers. Nevertheless, unlike civil liability, criminal liability shall always depend on wrongdoer's negligence, lack of skill or care, or willful misconduct. On the other side, from an individual's perspective, penalties may vary from imprisonment (though unlikely) to community service, prohibition to enter into any agreement with the Government -- including Petrobras -- or receive any public subsidies or incentives for up to 5 years, in case of willful misconduct, or 3 years, in case of negligence or lack or skill or care, suspension of activities (either on a partial or total basis), fine and house arrest.

As for the company itself, the following penalties apply, either on individual, cumulative or alternative basis: (i) fine; (ii) restriction of rights, which may encompass total or partial suspension of activities, temporary interdiction of establishment, work or activity, and prohibition to enter into any agreement with the Government -- including Petrobras -- and receive any public subsidies or incentives, including tax incentives such as Repetro, for up to ten (10) years; and (iii) community service, which may include payment of environmental projects or programs, recovery of damaged areas, maintenance of public space, and donations to public environmental or cultural entities.

In the particular case involving Chevron, the Federal Police has carried out an investigation and has recently asked for the indictment of as many as 17 Chevron and Transocean employees for their alleged roles in the oil spill. The Federal Court of Campos has then granted an interim measure in order to retain the passports of such individuals while the police inquiry is not concluded and a criminal lawsuit is not filed, which shall occur soon.

The reaction of Brazilian authorities to the spillage occurred in Frade Field seems to be quite over the top, specially when compared to similar cases involving the quasi state-owned company Petrobras, which has reported the spillage of nearly 4,201 bbl of oil in 2010 and fines of only US$ 43 million. Further, the incident involving Chevron and Transocean happened right in a moment of intense political debate on the distribution of oil revenues with oil-producing States such as Rio de Janeiro and Espírito Santo claiming a bigger share of such revenues. The issue became rather politicized, particularly in Rio de Janeiro, whose government threatened to revoke Chevron’s license to operate, a statement that forced the federal government to quietly reassure that drilling licenses were under federal jurisdiction and that such permits would be kept in place despite local officials declarations.

The feeling amongst oil and gas operators is that oil-producing States such as Rio de Janeiro will more often resort to environmental penalties not only to compensate their losses with the redistribution of oil revenues, but also in order to demonstrate to local public opinion how much needed oil revenues are for oil-producing states so as to prevent spillages from occurring and, if they do occur, to promptly mitigate damages as much as possible. However, the hostile reaction of local authorities towards Chevron and Transocean in the case at hand may raise second thoughts amongst foreign companies thinking of doing business in Brazil and therefore jeopardize country’s plans to become an important oil exporter. For instance, Transocean is the world’s largest deepwater drilling contractor and currently operates a large number of oil platforms in Brazil. Without foreign expertise, it is virtually impossible for Brazil to consummate its dreams of moving into the restrict group of world’s largest oil producers. A rather confuse environmental regulation definitely does not help and not even the large oil reserves of the pre-salt may be enough to overcome the fears of foreign oil companies of being forced to face billion dollars lawsuits and criminal charges should anything go wrong.