International oil firms operating off Brazil are suddenly finding themselves under close government scrutiny
In South America, two confrontations between foreign oil firms and the governments of Brazil and Argentina should serve as stark reminders for investors of the continuing challenges of operating in the continent.
In Brazil, prosecutors are attempting to ban two oil firms – US-based Chevron and Swiss-based Transocean Ltd, its contracted drill-rig operator – from working in the country. Bloomberg News reported that prosecutor Gisele Porto had asked that “the two companies must be suspended from operating until they stop environmental damage from the November leak off the coast of Rio de Janeiro.”
Prosecutors have said the companies should be fined up to 500 million reais (US$273m) per day if they do not adhere to the suspension order.
Chevron has responded by contesting the prosecution’s claims and taking out full-page advertisements in Brazilian newspapers denying the oil leak at the firm’s Frade project had caused any environmental damage. The spill, in November 2011, had discharged approximately 3,000 barrels of oil into the sea 240 miles off Rio de Janeiro.
Media outlets are also reporting however that federal prosecutor, Eduardo Santos, would also like to extend the current probe into the spill. This may include detailed investigation into the geological conditions and operational practices in the Campos Basin and into the companies’ ability to respond to emergency situations.
Adding to Chevron’s problems, Brazil’s largest oil workers’ union has filed a lawsuit against the company, accusing it of having ‘offended the Brazilian people’.
Brazilian courts have previously banned leading Chevron executives from leaving the country until the case against their employer is concluded.
Meanwhile in Argentina, YPF SA, the country’s largest oil and gas producer – which is controlled by Spain’s Repsol YPF - is also being threatened with the loss of some of its key operating licenses by several of Argentina’s provincial governments.
Most significantly, Chubut Province has announced that the revocation of the firm’s license in the reig, which will include YPF’s most productive field. They said this was in response to the company’s failure to comply with contracts signed with the province. This follows the loss of 12 licenses across five Argentine provinces since mid-March.
More worrying however, are newspaper reports that Argentina’s leftwing government may be considering an outright takeover of YPF SA, effectively nationalizing it and seizing its assets.
The ongoing cases are being watched closely by investors and oil and gas firms around the world. If Chevron, Transocean and YPF lose their respective cases, for many this would confirm many investors’ fears that South America’s two largest economies are still some way from being safe or reliable investment destinations.
Indeed, the ongoing cases concisely illustrate the wide range of hazards still facing investors in these countries. These range from a politicized and nationalist judiciary, politicians willing to exploit popular phobia of foreign-owned companies, as well as legislation and regulation that is often opaque and heavily open to interpretation. The events are also a reminder that in South America, unlike in Europe for instance, there are few higher authorities for firms to appeal if court cases find in the government’s favour. Access to international arbitration is also markedly variable across the continent.
Investors elsewhere in Latin America will no doubt also be wondering to what extent such problems are confined to Argentina and Brazil, or indeed to the hydrocarbons sector. Oil and gas companies investing in Uruguay and Colombia – two countries both looking to expand domestic oil production – will be looking for assurances that similar challenges will not arise there.
