By Thomas Verity
Mr. Verity graduated from The University of Texas at Austin in 2009. There he received a BA in History and a Minor in Mandarin Chinese. After graduation Mr. Verity worked in Shanghai, China at Joint U.S. China Collaboration for Clean Energy (5 months) and Lehman, Lee, & Xu (5 months). This summer Mr. Verity will work as a Summer Associate at Fulbright & Jaworski and Vinson & Elkins. Mr. Verity expects to receive his JD in May May 2013.
In November of 2011, Chevron drilled into a deep-sea reservoir in the Frade field off the coast of Brazil. The extreme pressure in the reservoir led the oil to rocket upwards into the well, though a blow-out preventer (“BOP”) stopped the oil from shooting up to the Transocean rig above. The success of the BOP largely prevented damages to the scale of the Macondo blowout BP experienced in 2010. While the well pressure was trapped by the BOP, however, cracks began to form at the base of the well bore resulting in oil seeping out into the surrounding sea. Even though the actual amount of oil being leaked appears negligible, Chevron is facing massive economic sanctions, criminal prosecutions, and the possibility that their license to operate in Brazil will be revoked.
The Suits against Chevron and Transocean
After the spill, Brazilian federal prosecutor Eduardo Santos de Oliveira filed an $11 billion civil law suit against Chevron based on alleged negligence by their employees as well as those of Transocean, who was contracted to drill the well. Chevron has already been forced to pay fines equaling $110 million by Brazilian environment and oil regulators. To put things into perspective, approximately 2400 barrels have been spilled from the November incident. The BP Macondo blowout spilled approximately 5 million barrels of oil resulting in fines equaling $20 billion, which is around $1,200 a barrel. If the judgment against Chevron is awarded, they will be paying $3.6 million per barrel.
In March of this year, the same prosecutor also filed criminal charges against 17 executives and employees of Chevron and Transocean. Citizens of the U.S., U.K. France, Canada, Australia and Brazil make up the group who has been targeted by the prosecution. Those charged are required to surrender their passports to Brazilian authorities, and must post individual bail of $550,000, as well as $10 million from each company. If the charges result in sentencing, the bail will go towards indemnities, fines, and legal fees. The charges pressed could result in prison sentences of up to 31 years, and the prosecutor has publicly stated his intention to ensure the executives will “serve the full time.”
Formal indictments have yet to be delivered, as Brazilian law requires a judge to review the merits of the charges before proceeding. But, the weight of the charges means Chevron and Transocean will likely face a protracted, expensive litigation. Chevron released a statement that once the facts are fully released, the record will show “Chevron and its employees responded appropriately and responsibly to the incident . . . [and] has collaborated transparently and completely with all the appropriate Brazilian governmental authorities.” The Brazilian prosecutor, however, believes Chevron negligently utilized pressure far beyond what was acceptable to drill, resulting in a “long-term contamination time bomb.”
On March 28th, Chevron and Transocean were slapped with another lawsuit regarding the incident. The Brazil oil workers’ federation, the FUP, filed a suit at a federal court in Rio de Janeiro calling for the cancellation of Chevron’s mineral rights in the Frade field. The federation alleges that the foreign companies have demonstrated incompetence and waste in their operations thus far, and that omissions in reporting the accident and attempts to play down its severity represent disrespect to the Brazilian people.
Not all members of Brazil’s judiciary share the same fervor in attacking Chevron and Transocean as Oliveira, the federal prosecutor who has led the charge so far. Some Brazilian officials believe the prosecution has been too aggressive, and on March 23, the federal judge reviewing the case indicated he might change the venue from Campos to Rio de Janeiro. The jurisdictional grounds for the change in venue would be based on the location of the spill, which took place outside the territorial waters of Brazil but within its nautical economic exclusive zone. A change in venue would not alter the charges, but would serve the interest of Brazil by bringing in a less zealous prosecutor, reflecting political concerns of officials such as Senator Jorge Viana. Viana, who belongs to Brazil’s ruling party, expressed his concerns to a Reuter’s reporter about the damaging effects this litigation may have on foreign investment in Brazil’s oil industry.
Status of Chevron’s Mineral Rights in Brazil
The lucrative Frade field is the largest foreign-operated field in Brazil, and Chevron has spent an estimated $3.6 billion in developing it so far. The company is the largest operator in the field with a 52% stake in the mineral interests. Brazilian oil company Petrobras holds 30%, and a Japanese group owns the remaining 18% interest in the field. Before the November spill, Chevron was producing around 80,000 barrels a day. This number was reduced to 61,500 barrels per day following the spill, and Chevron received permission to temporarily suspend operations in the field in March after discovering new seeps in the ocean bed.
Chevron’s license to operate in Brasil has been temporarily suspended by the ANP, Brazil’s oil regulatory agency, and an increasing amount of local politicians and interest groups are calling for the revocation of Chevron’s mineral rights and assets in the field. Christopher Garmin, a Latin American analyst at Eurasia Group, explained in a Bloomberg interview that “media firestorms” like the one Chevron is experiencing now are a fact of life for oil companies in the “post-Macondo world”. At a hearing in Brasilia, the nation’s capital, an advisor to Brazil’s board of oil regulation informed lawmakers that in instances of non-compliance with safety laws, as has been alleged against Chevron, it is “possible to demand the operator be changed or the contract revoked.” Even the nation’s president, Dilma Rouseff, has stepped up to warn foreign companies that they must strictly adhere to Brazilian safety standards in their operations. A former energy minster herself, Rouseff stated, “there can be no exceptions to being within safety limits and knowing them, to never test them and never go beyond them.”
Even if Chevron’s license is restored, the company has indicated that it may be rethinking its South American presence in the future. Chevron is already fighting an $18 billion dollar judgment from an Ecuadorian court over allegations of environmental damage, and has expressed concern with the treatment of foreign companies in the region. CEO John Watson stated “[Chevron’s] participation in Brazil will be a function of the degree to which they welcome Chevron and other companies and the degree to which we are treated fairly.” Many have noted that Brazilian companies such as Petrobras have not been punished nearly as severely for spills on much larger scales, and that no criminal charges were pursued in those instances. The response to these concerns from Magda Chambriad, chief of the ANP, demonstrates overlying tensions typical of energy investments between foreign companies and the domestic nation’s regulators and companies. Chambriad openly questioned the dedication foreign companies have to operating in Brazil, noting that key decision makers for energy products in the country are almost always located abroad. The ANP is currently finishing a report based on their investigation of the incident, and Chambriad has indicated they do not believe Chevron has adequately “identified the causes of the accident and [that] the risks have been mitigated to the satisfaction of Brazilian society.” The final decision of the ANP will undoubtedly have a significant impact on future development plans for Chevron and other major companies.
Ultimately, the outcome of this litigation could not only have drastic consequences for Chevron, but also for foreign investment in South American countries at large. The Brazilian government has the unenviable task of balancing two polarizing factions. Environmental and political groups are concerned with damaging effects of oil spills and accountability for foreign corporations profiting from Brazil’s resources. Aggressive prosecutors and politicians have jumped on these concerns and created a media firestorm over a spill that has thus far has had minimal environmental impact. On the other hand, many Brazilian politicians and members of the energy industry are seeking to encourage continued foreign investments in its developing oil industry, which is a vital part of the Brazilian economy. The outcome of this case will almost certainly be “mandatory reading” for oil companies researching foreign oil plays, as well as the governments of nations seeking outside help to develop their mineral resources.