Published by Minyanville

Oil giant Chevron (CVX) is banned from further drilling in Brazil, after an oil spill off the country’s coast earlier this month. While the ban is temporary, there are now doubts about the Californian corporation’s role in the country’s huge and ever-expanding oil industry—in line for $225 billion of investment over the next five years.


Chevron must explain the causes of the spill which leaked around 2,400 barrels of oil into the sea off Rio de Janeiro on Nov. 8. The country’s National Petroleum Agency (ANP) has accused the company of “negligence,” and there are further accusations that Chevron massaged images when it handed them over to the agency.


“The company’s treatment of the regulatory agency and the Brazilian government was unacceptable,” director of the ANP Magda Chambriard told Bloomberg. “We had to go aboard the platform to search for the original images even after the company was notified to provide us with the video.”


Chevron has already received a fine of $28m and further penalties—including potentially jail terms for officials—are expected. The company has taken full responsibility for the leak.


State oil company Petrobras (PBR) is investing a whopping $225 billion over the next five years primarily into developing deepwater subsalt regions off Brazil’s coast. This month’s spill took place in the Frade field, in the oil-rich Campos basin—currently the source of more than 80% of Brazil’s output.


Quick castigation of Chevron is thought to be an attempt by Brazilian officials to send a message to other companies working in the region, benefiting from the huge investment. However, the $28 million fine is a small dent in Chevron’s market value, writes Reuters’ Jeb Blount.


“The more lasting legacy of the spill may be an awareness that Brazil has overestimated its capacity to exploit deep,” Blount writes, adding that experts say it “partly reflects the huge difficulties of operating in such extreme conditions.”


Brazil’s O Globo newspaper pointed out that Petrobras actually spilled nearly double Chevron’s 2,400 barrels during 2010, adding to those concerns.


Brazil’s economy appears to be soaking up huge foreign investment, with recent figures showing that foreign direct investment during the first nine months of 2011 grew 124% on the same period last year.


However, these figures may be skewed, according to Ipea, a government-linked economic research institute. According to Ipea, a large part of the increase may be thanks to investors disguising portfolio investment as foreign direct investment to save on a financial transactions tax.


The country’s economy is slowing, having expanded at its slowest pace in two and a half years during the third-quarter. GDP grew just 0.3% from the second-quarter—equivalent to annual growth of 1.2%.


The figures are only an estimate from the Finance Ministry. The government is due to publish official figures next week.


“The economy slowed in 2011 because it was necessary,” said Finance Minister Guido Mantega. “We had an inflation problem, but now inflation is under control.”


Inflation does appear to be slowing. The figure for the year through mid-November is 6.69%, its slowest pace in five months. However, this is still above the government’s 4.5% target.


This may mean further interest rate cuts. President Dilma Rousseff suggested as such in a speech in Brasilia last week, claiming the Brazil could “use monetary police” to shore up economic growth.


The president’s words immediately pushed the real down to 1.8980 to the US dollar, a fall of 1.7% on the previous day.


Analysts are expecting interest rates to fall up to 75 basis points, down to 10.75% on Wednesday.





Brazil’s slowdown may be quicker than expected, as a key indicator of economic activity fell earlier this month, thanks to the crisis in Europe as well as slowing growth in the US.


The Central Bank’s IBC-Br economic activity index fell 0.32% during the third quarter. This—along with a 10% fall in car sales in October from the previous month as well as a 2% drop in industrial output in September from the previous month—has raised concerns about the speed of the slowdown.


“Like a driver who sees a deer in the middle of the road long before his passengers,” writes Joe Leahy in the Financial Times, “the government is swerving to avoid a collision in the economy way before most observers have started to worry.”