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Brazil's Reply To Chevron's Proposed Settlement Is Important For Country's Oil Industry

Posted
12/20/2012 10:48:00 AM
By: Trefis
Referenced Stocks:BP;COP;CVX;XOM

Chevron Corp. ( CVX ) 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 Normal?

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.

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