BRAZIL oil spill: who will bear the costs of Chevron’s poor engineering decisions?


Engineers are cast as bad guys in the latest costly oil spill to unnerve a major international oil company drilling in deepwater.

Cost that and samba

An estimated 110,000 gallons of oil have been spilt by Chevron exploration on a Transocean rig off Brazil. Yet, in a remarkable shift since the Gulf of Mexico oil spill, Chevron have identified the problem and publicly accepted responsibility. One (unfounded) reason posited for this early admission of guilt might owe to an alleged infraction of drilling over 500m deeper than they were allowed to.

Indeed, for this oil spill, it is less about the total cost of the oil spill, clean-up, remediation and compensation. Rather it is about how the industry and the responsible parties manage the oil spill that are being watched anxiously in Latin America andAfrica.

As of Monday 21 November, environmental concerns have lessened with news that the surface oil slick – estimated  at only 65 barrels by Chevron, with 18 cleaning vessels in attendance  – is moving away from the coast, but with whales migrating through the channel.

Experts said the main common thread between the BP oil spill and this one is the slow flow of information and different explanations for what happened and the severity of what happened.

“There’s a pretty long track record of all the people involved in spills underestimating at least initially the size of the spills… I would suspect they literally don’t know, so they are trying to figure out” said Ed Overton, a Louisiana State University professor.

The Chevron leak is smaller than those Brazilhas seen in the past. Brazil’s worst oil disaster was in 1975, when an oil tanker from Iraq dumped more than 8 million gallons of crude into the bay and caused Rio’s famous beaches to be closed for nearly three weeks. In 2000, crude spewed from a broken pipeline at the Reduc refinery in Rio de Janeiro’s scenic Guanabara Bay, spewing at least 344,400 gallons into the water. Just a few months later, more than 1 million gallons of crude burst from a pipeline state-controlled oil company Petrobras into a river in southern Brazil. The Sinclair Petrolore that Ludwig built in 1955, was at 56,000 long tons not only the largest freighter in the world, but also a self-unloading ore-oil carrier, the only one of that type ever built. It exploded on 6 December 1960 near Brazil — likely because of cargo leakage in the double bottom — resulting in the largest spill until then with 60,000 tons.

Yet, this oil spill is emblematic of the latest chapter in oil industry history: expansion into new countries, often developing ones. IOCs are increasingly pitched in battle with the fledgling governance infrastructures of these nations, who sit on the knife edge between vast riches, and the knowledge that the resource curse and a collapsed economy await the unwise and unlucky.

The discovery of Brazilian oil fields in 2007 marked the beginning of a scramble to prove reserves along the eastern Latin American and western African seaboards. There are legitimate concerns by environmental and economic commentators that weaker governance in these countries of oil industry will open the doors to exploitation, ruinous contracting arrangement, graft and riskier exploration activities.

For this reason, Chevron’s response to this oil spill is to be applauded: admission of guilt from a corporate perspective albeit with an undercurrent of blaming their engineers and the contractors at Transocean who supplied it with the Sedco 706 rig.

Chevron’s management of its oil spills has been questioned before. In the USA, Chevron recently agreed to a $4.5 million settlement with Utahenvironmental officials for two oil spills that polluted a creek and city pond. While, in Ecuador, Chevron is in open conflict with the Ecuador government over the Amazon Chernobyl $18 billion settlement for legacy oil spills by Texaco.

Fines have already been talked of by Carlos Minc, the Rio de Janeiro state environment minister, said that Chevron, which is a partner with Petrobras on the well, likely faces fines of at least $5.5 million.

The Slick Economist is aware that this latest chapter in exploration and production for the oil industry will require a new set of engineering standards to be applied, both conspicuously and internally for the industry. This will incorporate new and different risks, opportunities, governance issues. We spy an opportunity for engineers to be at the vanguard of ensuring that risks taken in these relatively new, often developing countries, are appropriate, accord with international standards and work in seamless collaboration with the people and environments of these nations.

Indeed, the Slick Economist is sure that wise engineering coupled with appropriate risk management and wise decision-making will be the foundation stones for profitable and sustainable oil industry development simultaneous with economic development for the decades ahead in Africa and Latin America.

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9 Responses to BRAZIL oil spill: who will bear the costs of Chevron’s poor engineering decisions?

  1. SPHR says:

    Great work. Thanks for the information… Wow. Have a nice weekend

  2. Does this site have a page on Facebook?

  3. I am now not positive where you are getting your information, however good topic. I need to spend some time learning much more or figuring out more about how economic incentives affect the possibility of catastrophic oil spills occuring. Do you think the risk of catastrophic oil spills is rising?

    • Thanks Frederick. Your comments always keep me on my toes! With the increasing fines for Chevron and the intriguing politics of trade relations among the BRICs and the Americas that this oil spill has generated. I worry that the focus on money – whether for cleanup or compensation – detracts from the underlying risks being taken on a daily basis on the world’s thousands of oil rigs, millions of kilometres of pipelines and many other potential pollution sources. Thanks for following!

  4. Mark says:

    Thanks Frederick. Your comments always keep me on my toes! With the increasing fines for Chevron and the intriguing politics of trade relations among the BRICs and the Americas that this oil spill has generated. I worry that the focus on money – whether for cleanup or compensation – detracts from the underlying risks being taken on a daily basis on the world’s thousands of oil rigs, millions of kilometres of pipelines and many other potential pollution sources. Thanks for following!
    +1

  5. Stephanie H says:

    I am one of your followers and admire your content. This article really piques my interest since as a Brazilian this has shown why we should be careful who we climb into bed with. This time we have been lucky in that the oil has not landfallen, but an ominous repeat of Gulf Of Mexico in Brazil is possible and we as Brazilians dont want this! The costs from this disaster need to be brought into our government’s decision-making to ensure we weigh up our environmental and economic situation before making rash decisions. Surely this figure is an underestimate?! It muust be in the billions??

    Keep up the excellent work!

    • Hi Stephanie – thanks for your continued support! It looks like your estimate for cost is already ringing true – with $200 million in fines, over $100 million for a relief well , and a rising bill for cleanup topping $100 million already. Indirect costs to Chevron such as reputation risk, increased costs of licence to operate in Brazil, Latin America, deepwater and further compound this.
      Furthermore, the costs to the industry in terms of regulation tightening, terms of engagement and ability to negotiate will further anger the industry. However, if these collective costs help lead the industry toward lower risks of spill, then these dollar signs have served their purpose and might even line the pockets of the needy folk in these nations. A big “might”, but …
      The Slick Economist
      http://slickeconomist.wordpress.com

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