Frade Nerves in Brazil

English: Flag of Rio de Janeiro's State, Brazi...

Rio State Flag via Wikipedia

Chevron’s accidental spill of about 2,400 barrels of oil offshore in the Frade oil field has turned into a fracas that threatens Brazil’s hopes of developing its massive offshore oil capacity.  Chevron admitted the leak, fixed it and reports suggest no oil fouled the beaches.  But now prosecutors in Campos near Rio de Janeiro are threatening fines of more than $11 billion and criminal charges against Chevron executives.

Chevron accused Brazilian officials of grandstanding and over reaction which only added more fuel to the fire.  The environment secretary in Rio state threatened to permanently suspend Chevron and its drilling partner Transocean from operating.  That threat caused Brazilian federal officials to go into damage control mode.

Brazil’s goal is to double its oil production capacity by 2020 to around 7 million barrels a day. But to achieve that goal Brazil needs the best technology and experience since the largest Brazilian oil company, Petrobras, is not capable of performing the deep water drilling needed to gain access to the off shore oil and Transocean owns 7 of the 10 drilling rigs now in operation.

As the oil industry scratches its head asking what is really going on in Brazil, the answer may have as much to do with local politics and money as with a genuine concern about the environment.

Brazil’s federal government is trying to build public support for offshore oil development by promising to equitably distribute oil royalties across the Brazilian states.  This has created a fury of protest from the coastal states nearest where the drilling occurs. Rio, in particular, has complained that the Federal plan will cost the state more than $7 billion in oil royalties. Money Rio and its cities like Campos say they need for the infrastructure development and other costs for the 2016 Olympic Games.  So if the Federal government takes the oil revenue away, local officials seem to be threatening to undermine that very revenue potential by wrapping themselves in the green flag and hauling the oil miscreants into court to exact fines at least as large as the revenue losses they expect to incur with the Federal plan for oil wealth transfers.

Conveniently, the criminal charges filed against Chevron executives by the City prosecutors in Campos must be approved by Federal prosecutors before they can be arrested and formally charged.  Those Federal prosecutors are also, conveniently, out of the office until after the New Year.  So the issue is playing out in dueling press releases and accusations.

Does this smell like politics to you?

Chevron says it is committed to Brazil and expects the problem to be resolved in a reasonable fashion.  This is a prudent statement.  Brazilian officials at the Federal and State levels obviously have work to do to arrive at a compromise that the People of Brazil judge fair and equitable.

If this is resolved quickly the oil industry will chalk it up to local politics and greed—concepts they are accustomed to facing in every newly oil rich market.  If it is not solved quickly or amicably then Brazil will clearly be the loser.

Those Transocean rigs now working in Brazil likely came out of the Gulf of Mexico when the US shut down drilling after the BP spill.  Now that President Obama needs the votes in the Gulf coast states to win re-election oil drilling permits are starting to be issued again so those Transocean rigs can pull up anchor and be hauled back to the Gulf.  Chevron can focus its efforts in other markets and let Brazilian politicians sit there debating how to split zero revenue equitably among the states.