Bloomberg News

Chevron’s Oil Spill in Brazil Prompts $10.6 Billion Lawsuit

December 16, 2011

Dec. 15 (Bloomberg) -- A Brazilian lawsuit that seeks to halt Transocean Ltd. and Chevron Corp. operations after an oil spill would reduce the country’s offshore drilling at a time when it wants to double output in ten years.

Federal prosecutors in Campos, in the oil region of Rio de Janeiro state, are suing both companies for 20 billion reais ($10.6 billion) in environmental and social damages and asked a court to suspend their operations, according to a statement yesterday.

Chevron, based in San Ramon, California, and Transocean, based in Vernier, Switzerland, said they haven’t been notified of the lawsuit and are cooperating with Brazilian authorities.

The case imperils Brazil’s plan to boost crude output because Transocean operates 10 out of the 61 rigs working in the country and it would be hard to replace them in a tight market for oil equipment, said Judson Bailey, an analyst at Jefferies & Co Inc.

Brazilian oil production growth has slowed after the country increased safety requirements following the spill at BP Plc’s Macondo well in the Gulf of Mexico last year.

“The rig market is pretty tight, so if Transocean were banned, the oil companies wouldn’t be happy at all,” Bailey said in a phone interview from Houston. “Chevron and Petrobras can’t get a rig elsewhere, so it messes with the state-owned oil company.”

Chevron, Brazil’s third-largest producer behind state- controlled Petroleo Brasileiro SA and Royal Dutch Shell Plc, will see production wane in Brazil until the government lets it drill again, said Cleveland Jones, an oil specialist and professor at Rio de Janeiro State University.

‘Opening Shot’

Chevron fell 3 percent to $100.53 at the close in New York yesterday. Transocean declined 3.9 percent to $40.19.

Chevron has come under increased scrutiny in Brazil after 3,000 barrels of oil leaked last month from an oil field in deep waters of the Campos Basin. The company underestimated the amount of pressure at an oil deposit it was exploring, and crude leaked from the reservoir for about eight days, George Buck, the head of Chevron for Brazil, said on Nov. 20.

BP has booked more than $40 billion in losses related to the April 2010 blowout of the Macondo well in the Gulf of Mexico. The accident killed 11 workers aboard Transocean’s Deepwater Horizon well and spilled 4.9 million barrels of crude. That’s about $8,163 per barrel spilled, compared to $3.57 million per barrel if the Brazilian fine were to hold.

Still Operating

“Ultimately this is an opening shot, Chevron’s attorneys are probably not at all fazed by this,” said Jones. “The prosecutor’s office will be a positive development for Chevron, because they will ensure that the letter of the law is followed and the letter of the law is reasonable.”

Chevron said in an e-mailed statement that it “responded responsibly to the incident at its Frade Field and has dealt transparently with all Brazilian authorities.” Guy Cantwell, a Transocean spokesman, said the company’s rigs are operating in Brazilian waters and the company continues to cooperate with the government.

Chevron holds a 51.74 percent stake in Frade. Petrobras holds a 30 percent stake, and Frade Japao Petroleo Ltda., a joint venture including Inpex Corp. and Sojitz Corp, holds 18.26 percent. Frade is about 230 miles (370 kilometers) northeast of Rio de Janeiro in the Campos Basin and produced 76,000 barrels a day of oil and natural gas in October.

Criminal Lawsuit

In the next few weeks, prosecutors will probably file a criminal lawsuit against Chevron for alleged environmental crime, said Romulo Sampaio, a law professor at Brazil’s Getulio Vargas Foundation.

“In this case, everything conspires against the company: it’s a foreign company, drilling for oil in Brazilian waters. That may bring about emotional responses,” Sampaio, who coordinates the university’s Environmental Law program, said in a telephone interview.

Prosecutors’ track record in lawsuits against companies involving environmental issues has been at best mixed. Federal prosecutors twice this year sought to halt construction of the Belo Monte hydroelectric dam in the Amazon, and on both occasions federal judges ruled that the project should proceed.

Federal prosecutors in 2009 convinced Brazilian cattle ranchers in Para, the state that has lost the most forestland to illegal logging, to halt Amazon forest destruction and replant trees to avoid an international ban on meat after prosecutors took action.

Brazil’s five largest meatpackers -- JBS SA, the world’s largest beef producer, Marfrig Alimentos SA, Bertin SA, Minerva SA and Frigol Comercial Ltda. -- agreed to stop buying cattle from suppliers that contributed to stripping the Amazon forest.

A lawsuit against Alcoa Inc. is still pending after six years of legal haggling. Federal and state prosecutors sued Alcoa’s Brazilian mining subsidiary in 2005 in an effort to block construction of the Juruti bauxite mine in the state of Para, saying the company had circumvented the law by not applying for a federal permit and instead seeking a license from the state of Para.

--With assistance from Bradley Olson in Houston and Rodrigo Orihuela in Rio de Janeiro. Editors: Charles Siler, Keith Gosman

To contact the reporters on this story: Peter Millard in Rio de Janeiro at pmillard1@bloomberg.net; Rodrigo Orihuela in Rio de Janeiro at rorihuela@bloomberg.net Adriana Brasileiro in Rio de Janeiro at abrasileiro@bloomberg.net

To contact the editor responsible for this story: Carlos Caminada at ccaminada1@bloomberg.net


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