Brazil lawsuit against Chevron may scare investors

The nearly $11bn lawsuit Brazilian prosecutors filed this week against Chevron Corp. over an offshore oil leak could scare away foreign capital needed to develop Brazil's huge offshore oil deposits, an analyst said Friday.

Brazilian officials and environmentalists, however, argued that such a high amount was needed for the U.S.-based company to take proper responsibility for the leak.

Robert Kessler, head of U.S.-based Pickering, Holt & Co.'s global integrated oil research department, said the $10.6 billion fine that federal prosecutors are seeking is more than 700 percent of Chevron's $1.5 billion net capital investment in Brazil.

"That would be a poor risk/reward ratio for all companies looking to invest in the business," Kessler said by telephone from his office in Houston, Texas.

Nearly 3,000 barrels of oil spilled from an offshore well into the Atlantic Ocean last month.

"At $3.5 million per barrel that's the most expensive oil I have ever seen," Kessler said. "It is disproportionate. You don't want to scare away much needed capital that is doing quite a bit of good for Brazil's economy."

He said the lawsuit represented "disproportionate fines without any evidence" of intentional wrongdoing on the company's part, which he said doesn't bode well for Brazil's business climate.

The prosecutors also are asking a judge to order Chevron and Transocean Ltd., the drilling contractor for the well where the leak occurred, to halt all activities in Brazilian territory for an indefinite period.

"During an investigation, the Attorney General's Office found that Chevron and Transocean were not capable of controlling the damage caused by the spill ... proof of a lack of environmental planning and management by the companies," the prosecutors said in filing their request.

Chevron said Friday that it still had not received notice of the action by the prosecutors.

Karen Hinton, a U.S.-based spokeswoman for a group of Ecuadorean plaintiffs who recently won a lengthy $18 billion lawsuit against Chevron for environmental damage done in Brazil's neighbor, said Brazilian officials were wise to be aggressive with the company.

"Brazil is smart to distrust Chevron and to assume the worst," she said in an emailed statement. "Clearly the lawsuit isn't just about the amount of oil spilled. It's about Chevron's disregard for the laws of Brazil."

Kessler said Brazil's oil production would decline should the rigs operated by Transocean come to a halt because of the lawsuit.

Of the 60 deepwater rigs being used in Brazil, 10 are operated by Transocean, he said, "and there are no immediate replacements for these rigs if you take 17 or 18 percent of your fleet out of commission."

Current production is relatively flat, Kessler said, adding, "I would have significant reservations about the ability of the country to meet its local demand for oil with domestic supply without at least maintaining the current rate of industry activity."

Brazil produces 2.75 million barrels of oil a day. Its daily consumption rate is 2.65 million barrels.

Candido Vaccarezza, the governing Workers' Party leader in the lower house of Congress, told the G1 news website that the fine was not reasonable.

"I find it strange that the prosecutor's office is charging a fine of 20 billion reals," he said. "Did the prosecutor study what happened? Did he see the damage done? People have to be reasonable."

A person who answered the telephone at the office of prosecutor Eduardo Oliveira said he was not available for comment.

Chevron has already been punished for the spill. Late last month, Brazil's National Petroleum Agency banned the company from any drilling activities in Brazil until an investigation into the leak is finished.

The Brazilian Environment Ministry fined Chevron about $28 million, but has said the company could face further penalties. Chevron has not indicated if it will contest the fine in court, which it is allowed to do under Brazilian law.

Paulo Antunes, head of the city council in Macae, a main hub for Brazil's oil industry 110 miles (180 kilometers) northeast of Rio de Janeiro, said those punishments weren't nearly harsh enough. He also criticized Chevron for what he called its arrogant attitude in the days following the spill.

"The company says it's innocent of everything, so who is guilty, our city?" said Macae council president after prosecutors announced the penalty they're seeking. "The $28 million fine for Chevron is a joke. It's the second-largest oil company in the world."

Chevron is appealing the ruling in the $18 billion Ecuadorean lawsuit and has said it's not liable for any environmental damage caused by Texaco, which is now one of its subsidiaries.

Chevron says a 1998 agreement that Texaco signed with Ecuador after a $40 million cleanup absolves it of liability. It also says Ecuador's state-run oil company is responsible for much of the pollution in the oil patch that Texaco quit more than two decades ago.

Most of Brazil's oil drilling is conducted offshore, and that is where Chevron's work is concentrated. The company does own lubricant-manufacturing plants in Rio de Janeiro and Sao Paulo. It wasn't clear if these operations would be affected by any decision a judge makes on the federal prosecutor's lawsuit.

Oil started leaking at the site of a Chevron appraisal well Nov. 7, about 230 miles (370 kilometers) off the northeastern coast of Rio de Janeiro state.

George Buck, chief operating officer for Chevron's Brazilian division, has said the spill occurred because Chevron underestimated the pressure in an underwater reservoir.

He said this caused crude oil to rush up a bore hole and eventually escape into the surrounding seabed. The oil leaked out through at least seven narrow fissures on the ocean floor, all within 160 feet (50 meters) of the well head.

Both Chevron and Brazilian officials said in late November that the leak was under control, although some residual oil continues to seep from the site of the leak.

The Frade field where the leak occurred is one of Chevron's biggest capital investments, according to the company's website.

(Published by Seattle P-I - December 16, 2011)