Daily Archives: March 14, 2012

Chevron, the “Energy Link” between US and Latin America, Gamble with Corporate Reputation

Chevron is being sued for more than $11 billion by Brazilian prosecutors [for spilling at least 2,400 barrels of oil offshore Brail]Officials say they are preparing criminal charges against Chevron and its management….Eager to halt criticism from regulators, politicians and environmental groups, Chevron said last November that it “accepted full responsibility” for the incident. But federal prosecutor Eduardo Santos de Oliveira viewed that as an admission of guilt.

Chevron also faces fines of up to $121 million and has had its drilling license suspended in Brazil, where it has spent over $2 billion developing the largest foreign-run oil field.  The crisis in Brazil adds big new risks for Chevron in what could be a year of reckoning for its Latin American portfolio. It already faces an $18 billion environmental verdict in Ecuador, arising from decades of oil pollution in the Amazon region by Texaco, which Chevron acquired in 2001.  Its footing in Venezuela — where Chevron stayed after major U.S. oil companies Exxon Mobil and ConocoPhillips departed in 2007 following oil nationalizations — is also unstable.  Ali Moshiri, Chevron’s head of exploration and production in Latin America and Africa, is hailed as a “close friend” by Venezuela’s anti-American President Hugo Chavez.

Once a playground for U.S. oil investment, Latin America’s resource nationalism, toughening environmental standards, and courts have spooked Big Oil.  “Other oil majors have pulled back,” says Fadel Gheit, an oil analyst at Oppenheimer in New York. Chevron “is stuck on the ground, and a string of mishaps means things have gotten difficult.”  Despite all that, the company is proceeding with its newest Brazil project, the 140,000 barrel-a-day Papa Terra offshore field led by state-run Petrobras, scheduled to start next year….

Latin America is only a minor money maker for Chevron, whose operations span more than 35 countries. It pumps about 166,000 barrels-per-day of oil and equivalent natural gas from Brazil, Venezuela, Argentina and Colombia, or around 6 percent of its 2.67 million bpd output worldwide.  From a liability and public-image perspective, its stakes are far higher. If Brazilian litigation goes badly, Chevron may “rethink” its projects here, people familiar with the situation said.  Chevron’s worst-case scenario damages from Brazil and Ecuador could top the company’s $26.9 billion in 2011 profits.

In January, a judge in Ecuador upheld a ruling ordering Chevron to pay Amazon region plaintiffs $18 billion. Today, Chevron pumps no oil in Ecuador, but the judgment takes the case to a new phase where plaintiffs can attempt to seize Chevron’s assets around the world. One of their lawyers, Steven Donzinger, expects that process to begin within weeks.  Targets for collection may include Latin American countries where legal systems similar to Ecuador’s are seen as sympathetic.  Chevron has counter-sued Donzinger, alleging the Ecuador judgment was obtained through fraud. Since 2004, plaintiffs have leveled their own fraud charges against Chevron. Chevron had chances in past years to settle for a small fraction of the judgment. “It will have a hard time convincing plaintiffs to settle now for less than the full amount,” Donzinger said.  Chevron, which has pressed Ecuador’s government to void the verdict, is optimistic about an eventual victory, as are some analysts. Mark Gilman, an oil analyst at Benchmark in New York, said “Chevron will absolutely not settle this lawsuit.” Ultimately, he said, lawsuits against Chevron in both Ecuador and Brazil have little chance of badly hurting its finances.  But Chevron’s deputy comptroller, Rex Mitchell, warned in U.S. District Court last year that the Ecuadorians’ collection effort could “cause irreparable injury to Chevron’s business reputation and business relationships.”  Chevron may be spending $200 million per year in legal fees related to Ecuador alone, the plaintiff lawyers estimated. Chevron declined to comment on legal fees.

The risks have not stopped Moshiri, 60, a dapper Iranian-American, from jetting around the region and pressing Chevron’s board to maintain investments.  The reason is simple: South America pumps 12 percent of the world’s oil and holds more than 30 percent of its oil and gas resources, and its governments need the oil majors’ expertise.  Venezuela holds 297 billion barrels of reserves, and Brazil aims to become the world’s No. 3 producer by nearly tripling output to around 7 million barrels a day in 2020.  “Venezuela (is) too rich a prize for international oil companies to abandon,” Moshiri told U.S. diplomats, according to a June 2007 cable published by WikiLeaks. He also warned them a “vacuum” left by U.S. companies in Venezuela could be filled by Chinese, Russian and Iranian rivals.  Chevron does not break out investment plans by region, but a review of its Latin America projects suggests it could spend more than $10 billion this decade at five joint-venture oil or gas projects in Venezuela, three large offshore fields in Brazil, three gas fields in Colombia and Argentine concessions…..Moshiri has also served as a back-channel diplomat, State Department cables show. Venezuela “approached Chevron for assistance in dealing with U.S. issues,” Moshiri told U.S. diplomats in 2008. He also called Chevron “the energy link” between Venezuela and the United States, the top buyer of its exports….

Chevron did not put its “best foot forward” in Brazil, CEO John Watson told analysts.  The company initially denied responsibility for a sea surface oil sheen that led to detection of its leak. Earlier, it had experienced a pressure kick at a new Frade well. Oliveira says that Chevron drilled recklessly, allowing a surge of oil and “drilling mud” to puncture fragile rock and breach the seabed. He says Chevron knew the rock it was drilling through might not withstand the oil and gas pressure levels it could find in the reservoir. Chevron has said it took no undue risk at Frade, where its drilling plans were pre-approved by the ANP and environmental regulators.The prosecutor told Reuters the more than $11 billion civil award sought against Chevron is not based on a clear assessment of damages from the spill. The figure is meant to send a message.

Excerpts, By Joshua Schneyer and Jeb Blount, Analysis: Chevron’s Amazon-sized gamble on Latin America, Mar. 12, 2012