Chevron fined $28 million, faces Brazil spill backlash

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

While the leak 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 the offshore fields.

President Dilma Rousseff met with her environment and energy ministers to discuss it on Monday, a day after Chevron took full responsibility for the leak of about 2,400 barrels.

The accident at the Frade field, owned in partnership with Brazil's state-controlled oil company Petrobras and a Japanese consortium, had slowed to a "residual" flow, said Haroldo Lima, 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) after a rupture in the well's structure on November 7, ANP said.

"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 BP's 2010 well blow-out.

MORE FINES POSSIBLE

Brazil's environment agency said it would fine Chevron 50 million reais ($28 million) and might take legal action too.

ANP could slap Chevron with two fines of up to 50 million reais each, ANP director Magda Chambriad told a news conference in Brasilia. Rio de Janeiro state could impose 30 million reais more in fines as well, the state's environment secretary said.

The fine of 50 million reais is roughly equivalent to the value of three-and-a-half days output from the Frade field, which is producing about 79,000 bpd, according to Chevron.

The estimate is based on a Maya crude price for Mexican heavy oil that is a benchmark for heavy crudes similar to those from the Campos basin, where Frade is located.

Brazil's biggest oil spill since 2000 is a threat to Chevron's credibility in the country after the company acknowledged it had caused the accident by wrongly estimating pressure and rock strength in the 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 total cost of Frade has been put at $2.8 billion, while Chevron also has a 37.5 percent interest in the $5.2 billion Petrobras-operated Papa Terra project in the Campos basin -- which could double Chevron's production from the country.

In its discussion of the accident, Brazil's government made no mention of Petrobras, which owns 30 percent of Frade.

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. 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.

"If we think back to the BP incident, and the comments that Chevron made about safety and standards and all that, maybe we can forgive once," said Phil Weiss, oil analyst at Argus Research in New York. "But if they mess up again ... it's like they're on watch now. So they have to be careful."

Chevron may have avoided some of BP's pitfalls after the Gulf disaster by admitting full responsibility for the spill on Sunday and giving a thorough explanation for its cause.

"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.

OFFSHORE DRILLING MAY FACE MORE SCRUTINY

The Frade leak will provide more ammunition for the growing worldwide opposition to offshore drilling in the wake of the estimated 4-million-barrel BP Deepwater Horizon spill in 2010.

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.

Brazil's so-called subsalt region -- a huge deepsea area of oil reserves under a thick layer of salt -- is the size of New York state and could hold about 100 billion barrels. With ambitions to hit 7 million bpd in output by 2020, Brazil could be the third-largest producer after Russia and Saudi Arabia.

Companies are testing the limits of drilling as they go as deep as 7 km (4.4 miles) below the ocean surface, putting equipment and people under strains often compared with those for space flight.

Chevron Brazil's CEO George Buck told a news conference in Rio that the company would clean up the spill fully. It occurred when high-pressure oil leaked into the well borehole, overcoming a liquid sealant and well-cleaning fluid. The well structure cracked and oil seeped through rock to the seabed.

Don Van Nieuwenhuise, the University of Houston's director of petroleum geoscience programs, said it seemed an unexpected pocket of pressure in the layers of rock caused a "kick" that prompted the crew to activate the blowout preventer and shut off the well. Since they had not yet reached the reservoir, the well likely had not been stabilized by piping.

"This is rare but one of the dangers in drilling is encountering shallow but overpressured sections," he said. "The more casing or pipe we have in the ground, the safer the well is when a kick is encountered from overpressure."

Chevron 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 spill comes as Rio and other producer states campaign against a proposal in Congress to distribute oil royalties more widely among states. Agreement on that is needed before Brazil can launch a legal framework for development of the reserves.

One of Rio's 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 Deepwater Horizon.

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

Transocean said it was fully cooperating with Chevron and the Brazilian authorities in "all aspects of this matter."

(Additional reporting by Jeb Blount in Rio, Marcelo Teixeira in Sao Paulo, Braden Reddall in San Francisco and Kristen Hays in Houston; Writing by Stuart Grudgings; editing by Todd Benson, Bob Burgdorfer and Dale Hudson)