Analysis: Chevron lawsuit flags Brazil investment risks

RIO DE JANEIRO Thu Dec 15, 2011 4:16pm EST

RIO DE JANEIRO (Reuters) - A $10.6 billion lawsuit against U.S. oil company Chevron (CVX.N) and rig contractor Transocean (RIGN.VX) could further cool an increasingly chilly investment climate in Brazil's natural resources industry.

The lawsuit, filed in response to a small oil spill off Brazil's coast on November 7, will likely drag on for years and seeks to shut down the companies' local operations. But its biggest impact may be on investors, both foreign and Brazilian, who are being asked to spend upward of $600 billion to turn Brazil up among the world's top three or four oil producers.

The case comes at a time when Brazil is rewriting its oil regulations to give the government greater control over the country's oil wealth, an overhaul that has forced delays in investment projects and auctions for new drilling licenses.

The Chevron lawsuit is an abrupt reminder of the legal pitfalls that companies also face in Brazil, where a new generation of crusading prosecutors has emerged in recent years, irking the public and private sector alike.

"The situation is extremely worrisome," said Wagner Freire, a former exploration and production director at Petrobras (PETR4.SA) (PBR.N), Brazil's state-controlled oil company. "Not only does there seem to be almost no technical basis for the suit, the political overtones are the latest example of the enormous steps backward the industry is taking."

The lawsuit, for 20 billion reais ($10.6 billion), was filed on Wednesday by federal prosecutors in Campos, a city in Rio de Janeiro state close to Brazil's main offshore oil fields. It seeks punitive damages for the spill of about 3,000 barrels of oil from the Chevron-operated Frade field in the Atlantic Ocean northeast of Rio.

While the lawsuit does not name Petrobras, a partner in Frade, it may be affected since seven of Transocean's 10 rigs working in Brazil are under contract with the local giant.

The spill was met with an uproar that highlighted a resurgence of nationalism around Brazil's vast natural resources, with government officials and legislators publicly lambasting Chevron, the second-largest U.S. oil company.

Brazil's Federal Police and oil regulator ANP are still investigating the causes of the Chevron leak, which was less than 1 percent of the size of the 2010 Macondo spill involving a Transocean rig working for BP (BP.L) in the Gulf of Mexico.

The suit claims that Chevron, which has accepted full responsibility for the spill, and Transocean did not have proper contingency plans in place to respond to an accident. It also says they failed to estimate well pressure and rock strength, showing negligence.

None of the oil reached shore or formed a slick, Brazilian authorities said. Less than one barrel remains on the surface.

"This looks like an unfortunate accident caused by a kick, or unexpected reservoir pressure, a pretty common occurrence," said Benjamin Sodre, a Rio de Janeiro petroleum geologist with nearly 70 years of experience. "The equipment on site worked and prevented a blowout like the one in the Gulf."

A similar trend is playing out in Brazil's mining industry, underscoring the growing concerns about the investment climate here. Earlier this year, the government pressed for management changes at mining giant Vale (VALE5.SA)(VALE.N), a private company. It is also rewriting the mining code, and two states are trying impose new taxes on metals extraction.

CRUSADING PROSECUTORS

The size of the damages sought in the Chevron case surprised even those who want less foreign involvement in Brazilian oil and none of Brazil's four largest newspapers considered the suit serious enough to put on their front pages on Thursday.

"You have to be reasonable," Candido Vaccarezza, the leader of President Dilma Rousseff's Workers' Party in the lower house of Congress, told Reuters in Brasilia. "It's strange that prosecutors have come up with this number. Do you think it's right to ask for 20 billion reais without a study, nothing? Has Chevron even made that much profit in Brazil? I don't know."

The San Ramon, California-based company has net assets worth about $4.2 billion in the country, or about $2 per share, analysts at Tudor Pickering Holt said on Thursday. Chevron shares were down by less than 1 percent at $99.67.

While respected for cracking down on government corruption in recent years, some prosecutors in Brazil have been accused of mixing politics with the law.

In the Brazilian Amazon, the Rousseff government is asking for the removal of the lead prosecutor in a suit against a government-backed hydroelectric dam after newspapers reported that he was allegedly involved in organizing anti-dam protests.

The Chevron lawsuit comes at a time of heightened political debate around oil in Brazil, where the nationalist slogan "o petróleo é nosso," or "the oil is ours," is back in vogue.

Congress has voted to redistribute billions of dollars of oil royalties from Rio and other oil-producing states to the rest of the country, threatening the main revenue source of cities such as Campos, where the suit was filed.

The royalty issue is part of series of "negative" changes to Brazil's oil laws in the last few years, said a former top executive of one of the three largest foreign oil companies operating in Brazil.

These include reducing the independence of regulator ANP and changes to oil concession rules boosting the dominance of Petrobras, already a source of national pride, in the sector.

"Unable to totally change the rules that built this industry, they're subverting them instead," the executive said, speaking on condition of anonymity.

This environment will slow development, raise costs in the expensive and technologically challenging offshore areas where most of Brazil's oil lies, and boost government power over oil wealth, said Freire, the former Petrobras director. Petrobras, despite $225 billion of planned investment over five years, a continuation of the world's largest investment plan, will see output grow by less than 1 percent in 2011.

"Cases like this will chase away the Exxons, and Shells that have the know-how to create a competitive and efficient oil industry," he said. "Petrobras can't do it on its own."

($1 = 1.86 Brazilian reais)

(Additional reporting by Leila Coimbra in Rio de Janeiro, Maria Carolina Marcello in Brasilia and Braden Reddall in San Francisco; Editing by Todd Benson and Marguerita Choy)

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