by Jaiyant Cavale
People have this notion that Brazil is all about beaches, carnival and the Amazon rain forests. Well, Brazil is all about that and more. In fact, Brazil has one of the largest natural gas reserves, and that is probably why it attracts so many international oil and gas exploration companies to its steamy waters and forests. Chevron (CVX) is no stranger to Brazil and has been a long-time partner in the nation's energy market. Chevron also manufactures and sells lubricants within Brazil and is a household name in that country.
However, all doesn't seem to be well in Chevron's Brazilian headquarters. A series of oil spills have landed Chevron's executives and administrators in soup, and some may even have to do time in prison. Just a few days ago, another oil spill was discovered off Espirito Santo state and is being investigated by the Brazilian Navy. Immediate estimate of the leak's size s not known and Petrobas (PBR) informed the country's environmental protection agency about the accident. Petrobas is Brazil's state controlled oil company and helps Chevron to develop and explore oil fields.
Brazilian lawmakers have announced that each oil spill will be charged $11 billion and these environmental fines have landed Chevron in a big image dent in the Latin American nation. However, Petrobas allayed fears by saying that regulators will not shut down Chevron's operations and such drastic measures are unlikely. Chevron's Frade oil field has been speculated as one of the targets that could be force-closed. Almost 3,000 barrels of oil spilled into the sea and the damage is still being controlled. The ongoing lawsuits will cost Chevron quite a lot but it is unlikely that Chevron would have to close its shop in Brazil.
Brazilian Energy Minister Edison Lobao had affirmed in March that the two oil spills in questions weren't large enough to expel Chevron. Instead, the company will have to bear the brunt of Brazilian red-tape, bureaucracy and lengthy lawsuits. We must also take into account that these oil spills put together are less than 1% of BP's (BP) Deepwater Horizon accident way back in 2010. That notorious oil spill happened in the Gulf of Mexico and is the worst environmental disaster in the American history. Petrobas owns 30% of the Frade field and Chevron owns an astounding 52%. 18% of the share is owned by a Japanese group led by Inpex Corp.
When talking about oil spills, we can't forget the damage caused by Exxon Mobil (XOM) when its pipeline broke last year in Montana. An estimated 63,000 gallons of crude oil flowed freely across the protected Yellowstone Park. The cleanup and pipeline repair work cost $135 million and eyebrows are still raised when the topic arises among investors. BP's notorious oil spill may have taken place two years ago, but the consequences are being noticed among migratory birds from Minnesota. Pollutants have been found in pelican eggs and the chicks may suffer from arrested development and other disorders. Oil pollutants in the eggs of birds can disrupt hormonal balance and damage embryos.
BP was again in news as oil spilled into Fremantle Harbour. The spill took place because of an accident at its North Quay facility. Though relatively small, the spill brought back memories of the Gulf of Mexico spill. In other news, Royal Dutch Shell (RDS.A) paid $1.1 million last year in order to compensate for the losses certain communities in Nigeria endured. ConocoPhillips (COP) was fined by China for its role in Bohai Bay oil spill as well.
Oil spills and tragic accidents take place frequently and such tragic incidents do affect the stock of companies. However, what gains investor confidence is the way a company behaves in the wake of disasters. Chevron has cooperated with Brazilian authorities and will continue to do so. The relatively smaller oil spills are unlikely to cause major environmental damage and will likely be dismissed with fines and jail times to Chevron employees. I do not believe that these accidents will have a significant impact on Chevron as it has been one of the only oil exploring agencies to remain responsible over such accidents.
Oil spills can have far ranging effects that can cause monumental damage to natural resources like flora and fauna, and cause economic disasters as well. It is important to understand that almost all oil spills are accidents except the ones that take place due to terrorist attacks or during wars. These oil related accidents can be avoided with the help of the right technology and preparedness.
Companies that are well prepared have fewer accidents to their record than companies that tend to take oil spill preparedness for granted. If we take the example of BP, the company has a number of oil spills and all the accidents could have been avoided if only it paid attention to its faulty pipelines, drills and ships. Chevron on the other hand is not perfect but has managed to remain relatively unscathed. Its dual gradient drilling technology will only add to safety measures that it has already adopted.
The present scenario in Brazil will likely affect its stock in the short term. However, it is unlikely to affect the stock in the long run. I do expect the stock to dip toward $95 on this news. Once the cleanup is over, Chevron's stock will pick up and attention will be diverted to its more remarkable achievements in the field of oil exploration.
In the long run, investors have nothing to fear about, as the effects of the developments in Brazil are temporary and unlikely to persist. Moreover, Chevron's operations in Brazil are likely to remain unaffected. When this mess is over, it will be business as usual for Chevron and its investors.