Criminal charges added to $11 billion Brazilian lawsuit against Chevron and Transocean

Brazilian federal prosecutor Eduardo Santos de Oliveira filed charges this week against American energy conglomerate Chevron (CVX, quote) and Swiss oil rig outfit Transocean (RIG, quote). 

Santos de Oliveira is seeking 20 billion reais ($11 billion) in damages and lengthy jail sentences for seventeen Chevron and Transocean executives in the country. The Rio de Janeiro-based attorney has accused Chevron and Transocean of callous negligence resulting in a spill that could “possibly push… some species to extinction.”

Chevron and Transocean have responded with strongly worded incredulity. They point to the incident in question releasing a ‘mere’ 3,000 barrels worth of crude, or 0.1% of the BP (BP, quote) incident in the Gulf of Mexico in 2010. 

Santos de Oliveira countered that the damage is underground, raising the possibility of future disastrous leaks as the result of Chevron and Transocean’s supposedly reckless drilling. 

Chevron released a statement: “Continuous monitoring of the incident area shows no environmental impact to marine life,” Chevron said. “No oil reached Brazil’s coast. No persons were harmed as a result of the incident, and there is no technical basis for assuming that there is any risk to human health.”

Experts appear to be siding with Chevron and Transocean on the issue. Adriano Pires, the head of the Brazil Infrastructure Institute think tank claims that “the prosecutor is moving far too fast… He has little or no technical experience.” Even members of President Dilma Rousseff’s Worker’s Party, a political entity with limited sympathies for foreign multinationals, consider Santos de Oliveira’s actions to be overly belligerent.

The lawsuit against these multinationals has done nothing to allay the concerns of some foreign investors over supposed government antipathy towards foreign oil companies and perceived protectionist measures to shield state-owned Petrobras (PBR, quote). Petrobras does own 30% of the Frade field where the incident took place, but has yet to be charged. 

However, Christopher Garman of the Eurasia Group disagrees, arguing that accusations of protectionism are largely unfounded and that the government will not prevent foreign participation in the energy sector.

Although the penalties that Chevron and Transocean face appear pernicious, they are unlikely to materially affect their stock prices over the medium-term. The case appears to have little merit, unrealistic penalties, and an overzealous prosecutor. Also, the Brazilian court system has a lengthy appeals process, ensuring that any judgement would be years off.

Furthermore – barring new information or new developments pertaining to the spill – Brazil (EWZ, quote) is unlikely to allow such a monumental judgement for a relatively small incident, because of the potential ramifications for foreign direct investment in the country.

CVX, RIG, BP, PBR, and EWZ are all trading lower today. 

Disclosure: Immediate family members are long PBR and EWZ. 

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