Chevron May Be Playing With Fire

Could Chevron (NYS: CVX) be the proverbial moth circling a flame? You know how it is with those critters: They fly ever closer to the fire until they recklessly singe their wings, and then its over for them.

The incessant South American meandering of the second-largest of the U.S.-based oil companies -- behind only ExxonMobil (NYS: XOM) -- has me shaking my head to the extent that my better half is convinced I've developed a permanent tic. That's not the case, but it's tough to understand a giant oil company figuratively flirting with a flame.

An Argentinean flame
You see, earlier this week it was announced that Chevron has signed a memorandum of understanding with YPF SA,an Argentine energy firm that is controlled by its country's government. Under the terms of the agreement, Chevron and YPF will evaluate and explore conventional and unconventional resources in the province of Neuquen. The financial particulars of the pact remain undisclosed.

The specific acreage involved spans Vaca Muerta basin, which is thought to contain about 23 billion barrels of oil. Indeed, there are those who believe that Argentina ranks third only to China and the U.S. in the magnitude of its shale reserves. So, you're thinking that this is a terrific deal for Chevron, right?

Maybe, but maybe not. For starters, the state-controlled status of YPF stems from the expropriation last spring of 51% of the company from Spain's Repsol (NASDAQOTH: REPYY.PK) by Argentina's government. Before that move, the Spanish company had held a 57% stake in YPF. That stake has subsequently been forcefully whittled to 12%. Add to that Chevron's own dicey track record in South America -- Venezuela, Ecuador, and Brazil -- and you're apt to conjure up images of moths on suicide flights.

Not a terrific history
I hasten to note that none of Chevron's difficulties in those three countries appears to have resulted from its own ineptitude. As you likely recall, just over five years ago Venezuela's less-than-collegial Hugo Chavez expropriated operations that were being conducted in the Orinoco River basin by a half-dozen major national companies. Included among the big operators were ExxonMobil, Chevron, and France's Total (NYS: TOT) . While Exxon dug its heels in and contested Chavez's buyout dictates, most of the other companies, including Chevron, accepted Hugo's terms.

In Ecuador, while it has nothing to do with its own operations, Chevron continues to be involved in litigation that seems to have become slightly older than dirt. Unless you've been held incommunicado for a couple of decades, you know that the company is defending itself against allegations that Texaco, which it bought in 2001, was responsible for severe environmental damages in the country. Those alleged damages date back to the years before 1992, when Texaco abandoned its operations in the country.

Last year, an Ecuadorian court hung a nearly $20 billion judgment on Chevron, a verdict that the company continues to contest, both in the courts and in the Permanent Court of Arbitration in The Hague. While the figure involved in the judgment is high and the case obviously has grown whiskers, the overhang doesn't appear to be affecting the company's share price.

Brazil's Frade cat
So let's move on to Brazil. As I wrote last spring, Chevron looks to have "stumbled into a veritable hornet's nest" there. It turns out that nearly a year ago, Chevron became embroiled in an oil spill controversy centered in its Frade field, a Campos Basin play about 230 miles from Rio de Janeiro. Unlike BP's (NYS: BP) massive 2010 Gulf of Mexico explosion and fire, which led to the gushing of nearly 5 million barrels of oil, Chevron's spill looks to have been a seep, which can be caused by natural forces. It resulted in a spill about 37,000 barrels.

Nevertheless, the seep has led to ham-handed treatment of Chevron by the Brazilians. The company has been the target of fines that ultimately could reach billions of dollars, its operations in the country have been suspended, and -- most surprisingly -- a dozen of its employees are facing criminal charges in Brazilian courts.

The Foolish bottom line
So Chevron, which is zero-for-three in South America, is extending its tour of the continent to Argentina. That would be an understandable move, given the country's likely reserve holdings, but for the government having dealt a blow to Repsol. And that same government, which also nationalized its own private pension system in 2008, has already moved into first place among the world's nations as the biggest defaulter on investment arbitration awards.

I know, I know, it wasn't that long ago that I told Fools that, by my reckoning, Chevron was the strongest of big oil's contingent. What with the company's balance sheet, its LNG projects in Australia, and its successes in the Gulf of Mexico, Chevron is stellar. It's just that propinquity to the flame in South America that gives me a moment's pause. On that basis, I suggest that we all monitor it closely by making certain that it's included on My Watchlist.

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Fool contributor David Lee Smith doesn't own shares in any of the companies identified in this article. The Motley Fool owns shares of ExxonMobil. Motley Fool newsletter services have recommended buying shares of Chevron and Total. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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