Friend or Foe? Chevron, Brazil Struggle with Relationship

Friend or Foe? Chevron, Brazil Struggle with Relationship

The Frade oil spill that occurred this time last year offshore Brazil is old news, but the ongoing litigation between the Brazilian government, and U.S.-based companies Chevron and Transocean is not. The controversial spill slightly resembles the after-math of the Macondo oil spill in the Gulf of Mexico, but with different players and locale. Each month, something new occurs as Brazilian politicians and journalists gain momentum in their investigation against the American multinational companies.

"Brazilians are paranoid … about a BP-style oil spill occurring in their waters … given their dependency they have on their tourist industry and the sanctity of their clean beaches," said American University Kogod School of Business Professor Frank Dubois. "It would be horrible if something of that magnitude happened there."

What Happened?

The Frade field was Chevron's first oil field development project in Brazil. The company operates and owns 51.7 percent of it; while Petrobras owns 30 percent; and a Japanese consortium owns the remaining 18.3 percent. The field came online in 2009 and until the spill, produced around 80,000 barrels a day from 11 wells.

In November 2011, Chevron was drilling a well which resulted in an unanticipated pressure spike. All subsea and surface equipment, including the blowout preventer functioned as designed. A day later, an oil sheen was noticed by neighboring deep-water facilities. It was later reported that fluid escaped from the reservoir to reach thin fissures, which migrated to the ocean floor. The situation was immediately eradicated.

A few months later, a second oil sheen - above a different part of the field - was spotted. In a March 23 statement, Chevron announced that the first seep incident was related to a pressure kick experienced during the drilling of a development well. The second seep, with a sheen totaling less than one barrel, occurred when no drilling was being done.

"Chevron has collaborated transparently and completely with all the appropriate Brazilian government authorities," stated the company in a March 21 press release. "There is no technical or factual evidence demonstrating any willful or negligent conduct by Chevron or its employees associated with the incident. We have sought to perform our operations in full compliance with Brazilian laws and industry practices and to comply with all applicable licenses and authorizations."


On March 21, prosecutor Eduardo Santos de Oilveira filed criminal charges against George Buck, president of Chevron's Brazil subsidiary, and 16 other Chevron employees, along with drilling contractor Transocean. Chevron had contracted Transocean's Sedco 706 (DW semisub) to conduct appraisal drilling on the field when the leak occurred. In addition, Brazil's largest oil workers' union (FUP) filed a civil lawsuit against Chevron and Transocean for the companies' role in the November oil spill that sought to revoke Chevron's offshore concession contract. FUP comprises 13 separate oil-industry unions across Brazil.

Meanwhile, the Brazilian National Petroleum Agency, ANP, fined Chevron $20 million.

Two months later, a Brazilian judge threw out the civil suit seeking to ban the two companies from working in the country. The judge said his rejection of the case had no bearing on its merit. In September of this year, Chevron settled its payment with the agency by paying the fine in full, $14 million (BRL $25 million) - a 30 percent discount for paying up front.

ANP said in a July report that Transocean had no responsibility for the spill - and that while Chevron made errors in its drilling plan, failed to meet certain safety requirements and could have avoided the spill - it was not negligent.

While ANP spoke on behalf of Chevron and Transocean, Petrobras, Brazil's state-run energy company, also announced it would provide the companies with legal assistance in the case. In September, the company filed a writ of mandamus to suspend the injunction granted July 31, 2012 that ordered the shutdown of their deepwater activities.

This decision stemmed from Petrobras citing the lack of specialized rigs capable of drilling in deep waters as one of the key factors in its inability to boost crude-oil production in Brazil. The company has placed an order for 28 new rigs to be built in the country to comply with strict local-content rules, but deliveries of the rigs aren't expected until much later. Transocean currently has 10 rigs under contract for Brazil, including eight that are operating for Petrobras. A suspension of Transocean's operations would impact Petrobras and its five-year, $225 billion expansion goal, depriving the government of $3.31 billion (BRL 6.71 billion) in royalties over two years.

"We like our position in Brazil," stated Steven Newman, Transocean's CEO, in the company's 3Q 2012 earnings report. "We've been in Brazil for 40 years, and over the course of those 40 years, we've seen really good times and we've seen some not so good times. We've got an excellent relationship with Petrobras, and I … [am] pleased with the support we got from Petrobras in that situation. They continue to be a very supportive customer in helping us work through the litigation and the Frade situation."

Brazil vs. Chevron

While Chevron might be at fault for the oil spill, no one can argue that the company hasn't held itself accountable. Chevron voluntarily shuttered Frade output in March, when the second series of seepages appeared at the field.

"Chevron takes full responsibility for this incident," stated Buck at a Nov. 21 press conference in Rio. "Sincere apologies to the Brazilian people and the Brazilian government."

However, how the company handled the situation in a foreign market left many locals shaking their head.

Even Chevron's Chairman and Chief Executive Officer, John Watson commented on this situation stating, "We didn't necessarily put our best foot forward in some of the communication that we made at the time, but the event itself was handled in textbook fashion."

When asked why the company was still being branded as an ecological killer, Professor Dubois said, "it may be they [the media] might want to use Chevron as an example but I don't think that's what's happening behind closed doors. Petrobras needs Chevron and its talents."

"We've been in Brazil for over 100 years in different areas of the business and have had historically very good relationships there … I think for Brazil they've had a very nice pattern, if you look over the last 20 years or 30 years, of selectively involving international oil companies. But, we need to be treated fairly, and we need to be treated consistently. Hopefully, we'll be able to work through those issues and we'll be a player in Brazil for a long time, but it's – it remains to be seen," Watson added.

As this situation plays out in the media, foreign companies are taking notes.

"All the other companies that have operations in Brazil are watching," stated Professor Dubois. "Things look dicey for Chevron and they might start to rethink the terms of their contract but Petrobras doesn't want that to happen, nor will it happen."


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