Chevron's South American Double Trouble

It becomes more and more fascinating -- and perhaps daunting -- to follow the members of Big Oil to the world's hydrocarbon-producing hot spots, where they all too often ply their trade amid explosive political and geopolitical challenges. Recently, I led Fools on a quick tour of some of the more dicey areas of the globe, including Russia and Iraq, where ExxonMobil (NYS: XOM) is either already laboring or gearing up to do so.

We're also inclined to lump the world's major producers together, casually assuming that they all tend to hit the same locations in their expanding quest for hydrocarbons. However, by simply tagging along with Chevron (NYS: CVX) , the second-largest of the U.S.-based producers, we can focus solely on South America and discover that the company is contending with an entirely different set of circumstances from those faced by Exxon in our half of the world.

The Father Time of lawsuits
For starters, you probably recall that Chevron continues to contend with litigation that may have lingered about as long as "Days of our Lives," or one of the other seemingly interminable soap operas. The company continues to defend itself against allegations in Ecuador that Texaco, which it acquired in 2001, was responsible for severe environmental damages that occurred prior to 1992. It was then that Texaco ceased doing business in the country. However, Petroecuador, the owner of the largest stake in the consortium, continued to operate the fields in queston.

Meanwhile, the lawsuit, which had been initiated in 1993, continued on. Last February, however, I noted to Foolish readers that, "Chevron could be the recipient of a 'home cooking' verdict from an Ecuadorian court that could be expensive to the company." Sure enough, within a week, an Ecuadorian judge ruled in favor of the plaintiffs and hung an $18 billion judgment around the company's proverbial neck, much of it in "punitive damages," which, according to Chevron, are unfounded in Ecuadorian law. Further, the ultimate enforceability of the judgment clearly has been rocked by the revelation that several key pieces of evidence in the trial -- all entered on behalf of the plaintiffs -- almost certainly were fraudulent:

  • A report supposedly written by a court-appointed "independent expert," dealing with the alleged contamination, estimated Chevron's liability at $27 billion. In reality, however, the report appears to have been ghostwritten, apparently in large part by Stratus Consulting, a Colorado-based firm working with the plaintiffs.
  • Crude, a film dealing with events leading to the trial and produced and funded by the plaintiffs was distorted by the intentional omission of important footage. According to Chevron's website, after having viewed the film, a U.S. federal court declared that, "The release of many hours (of Crude's) outtakes has sent shockwaves through the nation's legal communities, primarily because the footage shows with unflattering frankness, inappropriate, unethical and perhaps illegal conduct."
  • Along with the two items above, another U.S. federal court has observed that it is "more probable than not" that the judgment issued by the court was also the product of ghostwriting, in this case by the plaintiffs.

Finally vindication?
As of now, the case and its Ecuadorian judgment are being considered by the Permanent Court of Arbitration in The Hague. In addition, just last week Chevron asked authorities in Ecuador to investigate the conduct of plaintiffs' lawyers and the judge who rendered the $18 billion decision. How much longer these events will plod along prior to the establishment of a once-and-for-all conclusion is anyone's guess. It is unlikely, however, that they will consume another 19 years. Further, it's difficult to assume that vindication won't be part of the final package handed to Chevron.   

New trouble across the continent
More recently, and on the other side of the continent, Chevron is contesting with Brazilian authorities following a spill that occurred last month at its Frade field offshore Rio de Janeiro. The field lies in about 1,100 meters of water in the Campos basin -- far shallower than the typical well in the ultra-deepwater Santos basin, which has been the site of numerous major discoveries during the past couple of years.

For the sake of perspective, the spill released about 2,400 barrels (100,800 gallons), versus the 4.9 million barrels that gushed into the Gulf of Mexico during last year's BP tragedy. And at least as important was the causal difference between the two spills: Whereas the Gulf spill resulted from a failure of the Transocean rig's blowout preventer, perhaps exacerbated by human error, in the case of the Chevron spill, a fissure opened in the sea floor. Finally, the Frade spill was also minuscule compared to the hundreds of thousands of barrels let loose in Brazilian waters by spills at Petrobras-operated (NYS: PBR) facilities.

Throwing the Brazilian book
None of this has prevented Brazilian authorities from reacting with both barrels blazing, figuratively. The country's federal police have requested that criminal indictments be levied against nearly a dozen-and-a-half Chevron and Transocean (again the drilling contractor involved in the incident) employees for their alleged roles in the spill. Further, a federal prosecutor has conjured up an $11 billion civil suit against Chevron and its partners.

As if those moves weren't sufficient -- especially occurring as rapidly after the spill as they did, implying a minimum of investigation -- they follow a pair of fines against Chevron by Ibama, the country's environmental agency. The initial fine totaled 50 million reais ($26.9 million) and related to the spill itself, while the most recent fine of 10 million reais cited improper implementation of the company's emergency recovery plan. Finally (perhaps) Brazilian authorities have ordered a halt to Chevron's drilling operations in the country, and some politicians are pushing for an order expelling the company from the country.

A boomerang in Brazil
An overreaction? Almost certainly, as even several Brazilian authorities admit. With Brazil's waters having accounted for a third of the world's oil discoveries during the past five years, to say nothing of the country's plans to embark on a massively expanded exploration and development program, it'll be telling how companies currently working in the country's waters, including Exxon, Hess (NYS: HES) , and Anadarko (NYS: APC) , react to the country's excessive squeezing of their peer.

At the same time, as The Wall Street Journal noted last month, Brazil is brimming with corruption left over from the presidency of Luiz Inacio Lula da Silva. One result is a reduction in the efficiency of the administration of Lula's successor, President Dilma Rousseff. Another may be an inability to curtail the sharp elbows directed toward those foreign energy operators that might otherwise be enthusiastic about the country's promising energy scene.

Chevron has discovered repeatedly and all too painfully that, as the Journal noted in its recent article, "Corruption is nothing new in Latin American politics ... " Nevertheless, while the company's thrill-a-minute challenges in Ecuador and Brazil bear monitoring, I'll describe in subsequent articles how the big, well-managed company has fared especially well in such locales as the Gulf of Mexico, Australia, Canada, and Saudi Arabia. Concurrently, it's avoided wandering into what I view as increasingly explosive circumstances in Russia and Iraq.

Given that the company clearly packs far more opportunities than difficulties, I'm inclined to urge Fools with a taste for energy to exercise care to include it on your individual versions of My Watchlist.

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At the time this article was published The Motley Fool owns shares of Transocean. Motley Fool newsletter services have recommended buying shares of Chevron and Petroleo Brasileiro. Try any of our Foolish newsletter services free for 30 days.We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Fool contributor David Lee Smith doesn't own shares in any of the companies mentioned in this article. The Motley Fool has a disclosure policy.

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