Brazil: Impacts Of The Chevron Oil Leak

Last Updated: 6 December 2011
Article by Ted Rhodes

The recent leak of 2,400 barrels of crude oil from the Chevron operated Frade well off the coast of Rio de Janeiro has provoked a great debate in Brazil and among environmental groups, international oil and gas companies and the general public. 

The debate is focused on two issues. First, whether the country has the technical skills to deal with incidents arising from its rapidly expanding oil and gas activities.  Second, whether Brazilian regulators tend to act with a certain level of bias against international oil companies.

Incident

The leak is suspected to have originated on 7 November from a crack in the wellbore on Chevron's exploration well at the Frade field, caused by higher than expected reservoir pressure. Chevron mobilised a remote operated vehicle and borrowed sonar equipment from Petrobras to determine the exact site of the oil seep.  

Vessels were deployed to skim the oil sheen from the ocean surface without use of chemical dispersants.  However, the Brazilian oil, gas and biofuels regulatory agency (ANP) has raised doubts about Chevron's handling of the incident and the ability of other oil and gas companies to deal with a similar leak.

The incident also exposed a lack of coordination between the ANP, the Brazilian federal environmental agency (IBAMA) and the Brazilian navy, in addition to the absence of a national emergency plan. 

Penalties

The incident is still under investigation by the Brazilian authorities, but already IBAMA has fined Chevron USD 28 million. ANP has initiated administrative proceedings against the company with the potential for a further USD 56 million penalty, and has informally required the suspension of Chevron's drilling program until the investigation is complete. Since the news broke, the company's shares lost more than USD 14 billion in market value though have been recovering in recent days. 

Chevron officials have alleged that the ANP acted hastily and that the treatment given to the company by the regulatory agency has been out of proportion to the damage caused and to Chevron's response. Media reports have highlighted that operations by Petrobras have leaked twice as much oil in 2010 alone, amid suggestions that the Brazilian regulatory agencies have shown an overly heavy hand against foreign companies.

Implications for the industry

The debate has come at a time when Brazil is preparing for the geological and technical challenges involved in exploration and production of the "Pre-Salt"; giant oil fields lying under a thick layer of salt in ultra-deep water offshore the Brazilian states of Rio de Janeiro, São Paulo and Espirito Santo.  The country needs to develop contingency plans to ensure it has the equipment and knowledge to handle even more significant spills oil leaks in future. There have been calls for ANP's budget to be increased to enable more effective supervision.

All oil and gas companies, including Petrobras, are likely to be required to increase their investment in health, safety and environmental response plans. One option for either the industry or the government of Brazil, would be to introduce joint health, safety and environment (HSE) initiatives to share costs and to guarantee a minimum level of protection, similar to the UKCS voluntary oil pollution compensation fund (OPOL) and some of the activities undertaken by the oil spill response forum (OSPRAG) which was set up in the aftermath of Macondo.  

The question of whether Brazilian government regulators give harsher treatment to foreign oil companies is harder to answer. ANP and IBAMA assert that they acted within their powers, and have spoken out to justify the sanctions applied so far. 

The wider impact of the incident should be to ensure that all players in the Brazilian oil and gas industry, domestic and foreign, including the government, pay greater attention to HSE issues to ensure that future challenges can be met. 

Co-contributor trainees:  Tarsis Goncalves, Lawyer admitted in Brazil and New York  (tarsis.goncalves@cms-cmck.com) and Als Scrope (als.scrope@cms-cmck.com). 

This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq

Law-Now information is for general purposes and guidance only. The information and opinions expressed in all Law-Now articles are not necessarily comprehensive and do not purport to give professional or legal advice. All Law-Now information relates to circumstances prevailing at the date of its original publication and may not have been updated to reflect subsequent developments.

The original publication date for this article was 01/12/2011.

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