Chevron fined $28 million, faces backlash for Brazil spill

RIO DE JANEIRO Mon Nov 21, 2011 5:37pm EST

1 of 4. An aerial view shows oil that seeped from a well operated by Chevron at Frade, on the waters in Campos Basin in Rio de Janeiro state, November 18, 2011.

Credit: Reuters/Rogerio Santana/Handout

RIO DE JANEIRO (Reuters) - Brazil's government slapped Chevron with a $28 million fine on Monday for causing an oil spill off the country's coast, a penalty that could rise as the U.S. company faces a political backlash over the accident.

While the spill is relatively small and mostly contained, it has highlighted the environmental risks of tapping Brazil's newfound oil wealth at great depths and could add to delays in politically sensitive plans to develop offshore fields.

President Dilma Rousseff met with her environment and energy ministers to discuss the spill on Monday, a day after Chevron admitted full responsibility for the leak of about 2,400 barrels caused by its drilling.

The leak from the undersea well, owned in partnership with Brazil's state-controlled energy company Petrobras and a Japanese consortium, had slowed to a "residual" flow and was not a "major" disaster, said Haroldo Lima, the head of ANP, Brazil's National Petroleum Agency.

At its height, the leak in one of Brazil's most oil-rich offshore regions released 200 to 330 barrels per day (bpd) into the ocean following a rupture in the well's structure on November 7, according to ANP.

"There is no comparison with the Macondo spill in the Gulf (of Mexico) where 3,000 barrels a day leaked and 11 people died. This is a serious accident but not a major one," Lima told reporters, referring to last year's disaster at BP's Macondo well.

Brazil's environment agency said later that it would fine Chevron 50 million reais ($28 million) and could take legal action against the company.

ANP could also slap Chevron with two fines of up to 50 million reais each, one of the agency's directors, Magda Chambriad, told a news conference in Brasilia. The state of Rio de Janeiro could impose an additional 30 million reais in fines, the state's environment secretary said.

Brazil's biggest oil spill since 2000 is a threat to Chevron's credibility in the country after the company acknowledged that it had caused the accident by wrongly estimating pressure and rock strength in the oil reservoir it was targeting.

While Chevron's current production in Brazil is relatively small, at less than 1 percent of its 2010 worldwide output, the company has invested heavily in the country's offshore fields.

The $2.8 billion Frade deepwater development was expected to produce a peak of 72,000 bpd gross, before sharing with partners. Chevron also has a 37.5 percent interest in the Petrobras-operated Papa Terra project in the Campos Basin.

Chevron, which faces a police probe and has been called to testify in Brazil's Congress, initially said it believed the leak was a natural seepage and was unrelated to its Frade operations. Lima told a news conference after meeting Rousseff on Monday that Chevron did not have the necessary equipment in place to deal with an accident.

But Chevron may have avoided some of BP's pitfalls after the Gulf disaster by taking full responsibility for the spill in a Sunday news conference in Rio and giving a thorough explanation for the cause of the accident.

"It doesn't appear as if there was any omission here like there was in the Gulf of Mexico," said Cleveland Jones, a geologist with the National Oil and Gas Institute at the State University of Rio de Janeiro.

RIO THREATENS LICENSE CANCELLATION

The so-called subsalt region -- a massive area of deepsea oil reserves beneath a thick layer of salt on the ocean floor -- is the size of New York state and is believed to hold more than 50 billion barrels. That could make Brazil the third-largest oil producer after Russia and Saudi Arabia and power its drive to developed-nation status.

Energy companies are testing the limits of drilling as they seek oil at depths as much as 7 km (4.4 miles) below the ocean surface, putting equipment and people under strains often compared with those for space flight.

But it comes at a time when opposition to offshore drilling is growing worldwide in the wake of the estimated 4-million-barrel BP Deepwater Horizon spill.

A debate over the need for stricter environmental safeguards could delay expected sales of new oil rights in the subsalt region and increase the clout of Petrobras.

Chevron Brazil's CEO George Buck said at the news conference in Rio that the company intends to clean up the spill fully. The accident occurred when high-pressure oil was able to leak into the well borehole, overcoming a liquid sealant and well-cleaning fluid. The well structure cracked and oil seeped through rock to the sea floor.

The company says the "sheen" on the ocean surface caused by the leak now totals about 18 barrels and is 120 km (75 miles) off the Rio coastline, moving further out to sea.

The accident comes as Rio and other producer states campaign bitterly against a proposal in Congress to distribute oil royalties more widely among states. An agreement on the royalties is needed before Brazil can launch a new legal framework for development of the reserves.

One of Rio's main arguments for keeping a bigger share is that it would shoulder the costs of any environmental disasters.

"This incident could have been avoided. Rio will in no way be a stage for environmental impunity," Rio state's environment secretary, Carlos Minc, told GloboNews television channel.

He said Rio might cancel firms' operating licenses, including that of Transocean, which drilled the well for Chevron and also owned the drilling rig involved in the Deepwater Horizon disaster.

But Brazil's environment ministry said Transocean's licenses were issued by the federal government and there had been no decision to cancel them. Lima also said such a decision could not be taken by Rio.

(Additional reporting by Jeb Blount in Rio and Marcelo Teixeira in Sao Paulo; Writing by Stuart Grudgings; editing by Todd Benson, Bob Burgdorfer and Dale Hudson)