Chevron Criticized For ‘Medieval Techniques’, Production May Take a Hit

CVX: Chevron logo

Chevron (NYSE:CVX) found itself at the receiving end of some harsh criticism from the governor of Rio de Janeiro over its handling of the oil spill in the Frade fields. In a separate order, the Brazilian government ordered the company to shut one of its eleven production wells in the region. The move comes in reaction to the leak, which took place 70 KM offshore from the Brazilian coast and resulted in 3,000 barrels of oil leaking into the ocean. The spill has hurt Chevron’s image in the country, which is expected to become one of the largest producers of crude oil in the world over the next decade. Other major players such as Exxon Mobil (NYSE:XOM) also have plans to develop Brazil’s large offshore reserves. We have a $109 price estimate for Chevron which is about 5% ahead of its current market price.

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‘Irresponsible’ behaviour

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State Governor Sergio Cabral told reporters in New York this week that Chevron would be held responsible for the leak and that the whole incident would end up being “expensive” for the company. [1] Chevron was also accused of acting irresponsibly and using “medieval techniques” to cope with the spill. The statements hinted that the company may face further action in addition to the $27.6 million fine imposed by Brazil’s oil and gas regulator Agencia Nacional do Petroleo. The latest order to suspend production in one of the wells in the Frade fields could bring down output of the facility by 10% or less according to Chevron. Regulators were apparently unhappy with the company failing to disclose that traces of hydrogen sulphide in the crude oil from the region. [2] Hydrogen sulphide is known to complicate exploration because of its toxicity, flammable nature and corrosiveness.

Chevron has insisted that it moved in decisively to plug the leak and to reduce the surface sheen. The company pressed 18 ships into service as a part of the operation and stopped the escaping oil in a matter of 4 days. [1] In comparison, the Macondo blowout in the U.S. Gulf of Mexico continued to spew out oil for 3 months before being closed.

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  1. Chevron Was ‘Irresponsible’ in Oil Leak, Rio Governor Says, Bloomberg [] []
  2. Brazil orders Chevron to shut production well, FT []