Chevron Brazil Oil Spill Fallout Warning For All
When the Chevron-operated Frade appraisal well in deep waters off the coast of Rio de Janeiro ruptured nearly a year ago spilling some 3,600 barrels of oil, it was clear that the accident would inevitably determine Brazil’s future oil development plans. What remains to be seen whether it will catalyze an oil boom or a bust, as fallout from the spill piled on this week. Brazil’s National Petroleum Agency announced it had imposed a $17.3 million fine over the spill, faulting Chevron for not following its own safety procedures that could have prevented the accident. But the ANP, as the Brazilian regulator is known, also announced it would again appeal a lower court injunction that could bar Chevron and drilling rig operator Transocean from operating in Brazil in less than a month. Previous appeals have been rejected. At stake is the country’s ability to secure money and expertise in order to become a significant global oil exporter, an especially critical goal considering the market’s tight supply. Brazil has been slow at reforming its legal and regulatory framework to reflect the country’s recently discovered oil wealth. And while the government has tried soothing growing foreign investor angst, Brasilia needs to show it can simultaneously protect its citizens and attract cash and knowhow by developing a transparent and streamlined regulatory process. Not doing so will undermine Brazil’s oil panacea and its broader long term goal of earning its world power status.
The foretold crisis
The Frade spill was the first, but surely won’t be the last. The injunction is over criminal charges and a $20 billion civil suit filed in relation to the Frade spill. Chevron voluntarily halted operations altogether in March after another leak was reported near the well. The US Energy Information Administration expects Brazil to be the single biggest contributor to non-Opec production for at least three decades, rivaling the additions of Opec’s Iraq. Currently its total liquid production is about 2.7 million bpd, by 2020 it will reach 4.7 million bpd, and 6.5 million bpd by 2035. The OECD’s advisor, the International Energy Agency, forecasts even more. But the Frade spill could well mean that expectations are overly optimistic, implying further tightening of oil markets and higher oil prices. In the long-term, there is no reason to doubt Brazil will be able to reach its output targets, in fact build on it, simply not in the time frame it initially thought. The EIA and IEA expect Brazil to add about 20 percent of global liquid fuel production growth by 2020, and the lion’s share of that would be coming from deep water oil fields, much deeper than the one Chevron was drilling under 4,000 feet of water. Indeed, most of the oil will come from the subsalt layers, one of the most complex oil production frontiers in the world. Brazil could hold anywhere between 50 and 150 billion barrels in reserves in a vast area the size of Florida. Most of it lies at least 125 miles from the coast, more than 4 miles deep, under a layer of corrosive salt more than a mile thick. Aside the logistical issues, submarine energy grids to bring the oil to the surface will have to be built and maintained at extreme depths and harsh conditions, including giant waves. The pressure of the subsalt oil fields is twice higher than in regular conventional fields, which means equipment and steel able to withstand the corrosion and physical extremes of these deposits will have to be developed and built in huge numbers. Robots, submarines, and an array of new technology will be required, not to mention a vast number of rigs. But this bounty requires a stable regulatory framework that protects all sides. Brazil is right to demand accountability for oil spills, but it’s hard enough to navigate the complex set of courts and regulatory bodies, to add uncertainty.
A political bottleneck
Like in most other countries, the root of the problem is political. The spill stirred passions in Brazil, not because of its size, but because it would inevitably become a precedent to deal with future incidents. It’s unlikely that Chevron and Transocean will have to be convicted in the civil suit, but the possible injunction is sending alarm bells throughout the industry. If enforced, the ban would “absolutely” harm oil exploration, said Magda Chambriard, the ANP director. Chevron produced 60,000 bpd before the ban, but Transocean operates 10 deepwater drilling rigs in Brazil, or around 13 percent of the total. Seven of those are under contract by Petrobras, the country’s national oil champion and responsible for close to 90 percent of production. Petrobras, which has a 30 percent stake in Frade, has said recent falling production is the result of insufficient oil rigs. If the injunction is once again upheld, this time in a high court, it would delay Petrobras’s development plans for sure. More importantly, it exposes troubling regulatory hurdles that will delay the country’s ability to tap its newly found oil wealth. Private companies need a clear playing field, just as countries need to protect against spills. It’s the quid pro quo of the industry. But domestic politics is delaying Brazilian attempts to streamline the regulatory process, a process that started in 2008. This is expected, considering the oil wealth, but in the meantime uncertainty has been building. More than 36 foreign oil companies now operate in Brazil, and reportedly twice as many are waiting for a long delayed auction of new fields and blocks of the subsalt layer. Expected in 2012, it has been delayed until Spring 2013. Authorities are negotiating on the best balance between foreign and local investment. Brazil already limits how much foreign expertise and technology can be used. Multiple permitting procedures and the kind of legal nightmare that the Frade spill exposes, on top of more expected government controls, could end up eroding investor appetite. On the other hand, officials could seize the Frade incident to overhaul the regulatory inferno it threatens to become. After all, accidents are often the best ways to catalyze progress.