November 21, 2011 / 8:27 PM / 8 years ago

Analysis: Chevron spill may complicate Brazil oil dreams

RIO DE JANEIRO (Reuters) - Chevron’s oil spill off the Brazilian coast exposes the major environmental risks of tapping the country’s new oil wealth and could further delay development by fueling nationalistic oil politics.

The accident, for which the U.S. oil company has taken responsibility, has quickly become politicized at a time when Rio de Janeiro and a handful of other “producer” states are campaigning bitterly against a proposal in Congress to spread the oil wealth more widely.

By drawing attention to the environmental risks of exploring at such massive depths, the spill could further delay the concession of new exploration areas and increase the power of state-controlled Petrobras at the expense of other oil companies, both national and foreign.

“The reality is that this spill is going to speed up the politicizing of Brazil’s oil industry,” said Cleveland Jones, a geologist with the National Oil and Gas Institute at the State University of Rio de Janeiro.

“We are not going to have a real discussion about the risks and benefits of offshore oil exploration, but an idiotic political discussion. The political risk is going to rise in the industry.”

One of the first results of the spill could be to further delay expected sales of new oil rights in Brazil’s so-called subsalt region, said Adriano Pires, head of the Brazilian Infrastructure Center, a Rio de Janeiro energy research group.

Brazil has not sold new offshore oil rights in the region near Rio de Janeiro and Sao Paulo since 2007, preventing companies from expanding activities in an area already responsible for more than 80 percent of Brazil’s 2.1 million barrels a day of output.


The New York-sized subsalt area, which includes the Frade concession where Chevron’s accident occurred, may hold 100 billion barrels of oil or more, according to a study from the National Oil and Gas Institute. That’s enough to supply all needs in the United States, the world’s largest oil consumer, for more than 14 years.

With no new concessions to buy, many oil companies that set up in Brazil a decade ago to help develop Brazil’s offshore will likely go home, Pires said.

“There are many in the government who don’t want to sell new concessions, even though Petrobras will by law be the leader of any new subsalt operations,” Pires said.

“They’ve put off new sales to next year but if we now have a debate on new environmental rules for the offshore, it will be pushed off even more.”

Brazil’s Congress approved a legal overhaul of the oil sector last December that makes Petrobras, already the sector’s dominant player, the operator of all new projects in the subsalt with the right to a minimum 30 percent stake.

Chevron says the leak, which was caused by its underestimation of pressure in an offshore oil reservoir and overestimation of the surrounding rock’s strength, totaled about 2,400 barrels and that it has plugged the rupture.

While far smaller than the 4-million-barrel Deepwater Horizon disaster in the Gulf of Mexico in 2010, the accident highlights the technological challenges and environmental risks of tapping oil in waters up to 3 km (1.9 miles) deep and another 3 to 4 km beneath the seabed — a challenge often compared to space travel.

According to George Buck, the head of Chevron’s local unit, drilling systems worked correctly despite failing to anticipate the pressure in the oil reservoir. And the leak occurred so far from the drilling platform that Chevron originally thought the spillage was from a nearby Petrobras platform or a Petrobras seafloor oil pipeline.

That raises questions about claims by Brazil’s government and Petrobras that drilling offshore in Brazil is as safe as they say and not environmentally risky, Pires said.


Petrobras, which has the most experience drilling in the Campos basin where the spill occurred and was sought out as a partner by Chevron for that reason, was involved in approving all the drilling plans used by the U.S. company.

“Drilling offshore is inherently dangerous and drilling in deep water is even more dangerous,” Pires said. “If you want to end leaks, you have to ban drilling at sea.”

The reaction to the spill has highlighted a nationalist undercurrent in Brazilian oil politics.

While Chevron is not the only owner of the project, it has been the only company that owns a stake in the field to come under attack from government officials.

The head of Brazil’s oil regulator, the ANP, said on Monday that only Chevron, and not its partners, Petrobras and Japanese group Frade Japao, would be fined for the spill. Chevron is being fined about $28 million and is the subject of a federal police probe.

“In this country, it’s easier to attack the national soccer team than it is to attack Petrobras,” said Pires, who says the government has sold offshore development as the key to national wealth and middle-class lifestyles.

According to Brazilian law, all members of an oil partnership are “jointly and severally” responsible for their field or concession, said Marilda Rosado De Sa Ribeiro, an oil rights lawyer and partner at Doria, Jacobina, Rosado, Godinho, a Rio de Janeiro law firm.

Based on the Maya Mexican crude oil price of around $104, Chevron’s 50 million reais fine is roughly the equivalent to 3-1/2 days’ output from the Frade field which Chevron says yields around 79,000 barrels per day.


Rio de Janeiro’s state government also plans to seek 100 million reais from Chevron through a civil suit, according to its environment secretary Carlos Minc.

The clamor over the spill has dropped into the middle of a bitter national debate over future oil royalties.

Congress is expected to approve a plan to divide all oil royalties more equally among states and municipalities, not just those in producer states. Rio state says it stands to lose about $7 billion a year, money it says it needs to prepare for the 2014 World Cup and 2016 Olympics — and to deal with any environmental accidents on its coastline.

Rio state’s environment secretary, Carlos Minc, has been the most vocal critic of Chevron, threatening to take away the license of Transocean, the oil platform operator that owns the Chevron drilling rig.

Brazil’s environmental protection agency said the Chevron rig and many others operate under an exclusively federal license and are beyond Minc’s authority.

“This has been going on for some time and it’s now speeding up again,” Jones, the geologist, said.

“This spill will be another excuse to limit the role of companies other than Petrobras in Brazil’s oil industry and for the politicians to take more control of the country’s oil industry.”

Additional reporting by Rodrigo Viga Gaier; Editing by Stuart Grudgings, Dale Hudson, and Bob Burgdorfer

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