Bloomberg News

Chevron, Conoco Entrapped in Post-BP Crackdown on Oil Slicks

December 28, 2011

(Updates with closing share prices in 16th paragraph.)

Dec. 23 (Bloomberg) -- Brazil’s threatened indictment of Chevron Corp. and Transocean Ltd. executives after offshore oil leaks shows that regulators from the North Sea to the Indian Ocean are stepping up scrutiny after BP Plc’s 2010 disaster.

Brazilian authorities have said they may prosecute employees, shut operations and exact more than $10 billion in fines after the leaks at the Frade field 230 miles (370 kilometers) off the coast of Rio de Janeiro. The spill occurred 19 months after an explosion in the Gulf of Mexico killed 11 workers and triggered the biggest offshore U.S. oil spill.

Governments around the world are paying closer attention to how energy explorers drill into high-pressure deposits of crude and natural gas as much as 8 miles beneath the sea surface. Chevron’s Brazil incident took place after a ConocoPhillips leak in China and prior to what may be Nigeria’s biggest spill in a decade at a Royal Dutch Shell Plc facility.

“There’s been just such a rash of them that governments have got to act tough” with oil companies, Allen Brooks, a managing director at energy-investment bank PPHB LP in Houston and Chevron shareholder, said in a phone interview. Since the BP accident “every spill after that is heightened in terms of media attention and obviously government concern.”

ConocoPhillips was criticized by the People’s Daily, China’s Communist Party newspaper, for “negligence, cover-ups and cheating” in its handling of a June leak in Bohai Bay. Premier Wen Jiabao ordered a “thorough” investigation in September.

In Nigeria, Royal Dutch Shell shut its 200,000 barrel-a-day Bonga field this week after a tanker-loading accident caused less than 40,000 barrels of crude to leak.

Olympic Hosts

Brazilian prosecutors are suing Chevron for 20 billion reais ($10.8 billion) in environmental damages for the Nov. 7 leaks that the San Ramon, California-based company has estimated at 3,000 barrels.

The furor in a nation keen to protect beaches from floating globs of crude ahead of the 2014 World Cup and 2016 Olympic Games may lead to new drilling rules so tough that oil exploration becomes unprofitable, said Adriano Pires, an economist and former adviser to Brazil’s state oil ministry.

“What I fear is now we have a circus created around the Chevron problem, a real circus, and to show the people they are doing something they may create norms, legislation and proceedings that make it impracticable to get environmental licenses for offshore exploring,” Pires, head of the Brazilian Center for Infrastructure, a Rio-based energy-industry consultant, said in a telephone interview.

Making Exploration Expensive

“Depending on the measures that the government may take, it would make oil exploration in Brazil much more expensive,” Pires said.

Brazil’s federal police have said they intend to indict employees involved in the drilling that led to leaks from sea floor fissures near the $3.6 billion development, Kurt Glaubitz, a spokesman for Chevron, said in a Dec. 21 e-mail. In a separate statement, Transocean, owner of the drilling rig leased for the Frade field, said it will defend the company.

Chevron underestimated the amount of pressure at an oil deposit it was exploring, and crude leaked from the reservoir for about eight days, George Buck, president of Chevron’s Brazilian subsidiary, said on Nov. 20. Buck is among 17 Chevron and Transocean employees targeted for indictments, according to a copy of the federal police document obtained by Bloomberg News.

Foreign Investment ‘Chill’

“I’m a little surprised by the stance that you’re seeing in Brazil, largely because it’s so excessive, potentially, that you could put a very big chill on foreign investment in the deep water,” Ted Harper, who helps manage about $6.8 billion in assets at Frost Investment Advisors in Houston, including about $50 million of Chevron shares, said in a phone interview.

The response so far in Brazil is an “overreaction,” he said.

Chevron has lagged its peers since the leaks were disclosed on Nov. 10, gaining 1.9 percent through today’s close, compared with increases of 8.3 percent and 7.1 percent, respectively, for Exxon Mobil Corp. and Shell, the biggest Western energy companies by market value.

Chevron rose 1.1 percent to $107.50 at the close in New York. Transocean gained 0.7 percent to $40.31.

ConocoPhillips, the third-largest U.S. oil company, said on Dec. 21 that it’s taking responsibility for the Bohai Bay spill and is setting up compensation funds to support environmental research and affected communities.

Worst Since 1998

Royal Dutch Shell, Europe’s largest oil company, said yesterday as much as half of the crude that leaked from the Bonga installation has dissipated through natural dispersion and evaporation. Bonga, located 75 miles off Nigeria’s coastline, pumps about 10 percent of the West African nation’s oil.

The leak may have been the country’s worst since a January 1998 spill dumped an estimated 40,000 barrels into the sea from the Idoho platform on the southeastern coast, with slicks reported as far west as Lagos. Shell, the largest foreign oil producer in Nigeria, has been criticized by some local residents and foreign groups for onshore spills.

An “independent verification” of the Bonga platform incident is needed to ensure the spill wasn’t more, Nnimmo Bassey, executive director of Environmental Rights Action, said in a phone interview from Lagos. “Shell has never been forthcoming about incidents of oil spills in the past.”

‘More Awareness’

BP has booked more than $40 billion in losses related to last year’s Gulf disaster that sank Transocean’s Deepwater Horizon rig and spilled an estimated 4.9 million barrels of crude. The London-based oil producer also faces hundreds of lawsuits by fishermen, hoteliers and property owners in coastal areas where crude washed ashore.

Unlike the BP incident in the Gulf, this year’s Brazilian and Chinese spills are within the normal range of oil industry accidents, Nansen Saleri, chief executive officer of Quantum Reservoir Impact LLC in Houston, said in a telephone interview.

“What’s different right now, post-Macondo, is that there’s far more awareness globally at all levels,” he said. In the long run, the industry will develop better and more stringent procedures to help prevent small incidents, he said, and oil and gas development will continue.

“Those countries who choose to go on a very punitive path at the end will suffer the negative consequences themselves,” said Saleri, who is a former reservoir-management chief at Saudi Arabia’s state oil company.

--With assistance from Elisha Bala-Gbogbo in Abuja. Editors: Jessica Resnick-Ault, Charles Siler

To contact the reporters on this story: Joe Carroll in Chicago at jcarroll8@bloomberg.net; Juan Pablo Spinetto in Rio de Janeiro at jspinetto@bloomberg.net; Edward Klump in Houston at eklump@bloomberg.net

To contact the editors responsible for this story: Tina Davis at tinadavis@bloomberg.net; Dale Crofts at dcrofts@bloomberg.net


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