) has offered $150 million to settle the two civil lawsuits filed
against it for an oil spill accident in November 2011 off the coast
of Brazil. The lawsuits are seeking $20 billion in damages from
Chevron. The federal prosecutors need to wait for an environmental
agency report before they can accept Chevron's offer. The offer can
only be accepted if report corroborates Chevron's claim that the
spill did not have a significant impact on the environment.
In November 2011, oil started to seep into the Atlantic Ocean
after a drilling accident in the Frade oil field. An estimated
3,700 barrels or 155,000 gallons of crude oil leaked into the
ocean. Chevron has already paid $17 million in fines
to Brazil's National Petroleum Agency, or ANP, earlier this
year. No workers were hurt in the accident and the oil did not come
near the shore. The ANP has already said that there was no
discernible environmental damage from the spill, but a clean chit
from the environment regulator is required as well. The final
outcome of cases against Chevron will definitely have wider
ramifications for the relatively nascent Brazilian oil industry
where foreign players are reeling under strict regulations.
Frade is operated by Chevron, which has a 52% stake. Petrobras
owns 30%, and Frade Japao, a joint venture between Japan's Sojitz
Corp. and Inpex Corp. trading houses, holds 18%.
See our full analysis for Chevron
If Chevron's Offer Is Accepted, Will Things Get Back To
In short, no.
The settlement offer, if accepted, will take care of the two
civil lawsuits but not the criminal case involving Chevron,
drilling rig operator Transocean and 17 executives of the two
companies. This case will proceed as usual. These executives'
passports have been seized and they face jail terms of up to 31
years if convicted. However, courts have allowed many of these
executives to travel to visit family, take vacations, or even
accept new jobs, as long as they post a bond worth $240,000.
Importance Of The Case For Brazil's Oil Industry
Ever since Brazil discovered massive deposits of oil under a
thick layer of salt in the Atlantic, there has been a rush of
companies keen to exploit this opportunity.
The country has been cautious in allotting exploration blocks to
foreign companies, and the regulatory environment is still
evolving. It has not sold any offshore permits since the big
finds of 2007. Brazil has placed onerous demands, sometimes
irrational, on players in this industry. The government
insists that companies should incorporate a high degree of local
content in new offshore drilling rigs and production facilities.
This has increased the cost of doing business in Brazil. There is
also a high degree of political interference in the oil sector,
with politicians adopting nationalist rhetoric. ((
Anadarko shelves Brazilian sale
, Financial Times))
We think that the disproportionate response of authorities in
the Chevron case was a result of the need to be seen as strictly
enforcing rules and regulations on foreign players. But the effect
has been to discourage and scare off potential investors and
skilled workers who are reluctant to work here for fear of
prosecution if something were to go wrong. They have demanded
inclusion of clauses in their work contracts which assure
availability of helicopters and plane tickets to enable them to
leave the country if something goes wrong.
Foreign oil companies' initial enthusiasm has somewhat waned. In
September, Anadarko sold its 30% stake in an offshore block
located in the Espirito Santo basin to Petrobras so that it could
reduce its $13 billion debt. It took the company quite some time to
find a buyer willing to pay its desired price, signalling that
companies were no longer lapping up Brazilian assets eagerly.
We think that the Chevron case will be closely watched by
industry players active in Brazil in order to better gauge the
risks and consequences they might face in the future. The Brazilian
government would do well with regards to avoiding unfair
regulations or penalties toward companies looking to invest in
Brazil's oil industry.
We currently have a Trefis price estimate of $120 for Chevron,
which is around 10% above the market price.
a Company's Products Impact its Stock Price at Trefis