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Brazil suspends Chevron's drilling rights

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
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

By Peter Murphy

BRASILIA (Reuters) - Brazil's government suspended Chevron Corp's drilling rights until Chevron clarifies the causes of an offshore oil spill, the latest twist in a political firestorm threatening the U.S. company's role in Brazil's oil bonanza.

The decision on Wednesday came as the head of Chevron's Brazilian unit testified before Brazil's Congress, where he apologized for the November 8 spill that leaked about 2,400 barrels of oil into the ocean off the coast of Rio de Janeiro.

Brazil's National Petroleum Agency said it decided to halt Chevron's drilling rights after determining there was evidence that the company had been "negligent" in its study of data needed to drill and in contingency planning for abandoning the well in the event of accident.

The agency, known as ANP, also rejected a request from Chevron made before the leak to drill wells in the deeper subsalt areas in the Frade field where the spill occurred. The field is located in the oil-rich Campos Basin and is the only block in Brazil where Chevron produces oil as the operator.

The Campos Basin is currently the source of more than 80 percent of Brazil's oil output.

While Chevron said late on Wednesday it had not received formal notice of the drilling halt, the company announced an indefinite voluntary suspension of all current and future drilling off Brazil, apart from plug and abandonment work.

"Chevron acknowledges, however, that ANP has posted a notice of suspension to its website," the company added.

The only rig working for Chevron off Brazil is Transocean Ltd's Sedco 706, which drilled the well that leaked.

The spill is an ominous reminder of the risks involved in offshore drilling, cooling the euphoria over vast subsalt oil reserves that Brazil found in 2007 up to 7 km (4.4 miles) below the seabed. The country is banking on those reserves of up to 100 billion barrels to speed its development.

Chevron has previously drilled for subsalt depth targets in the field, which is also owned by Brazil's state-controlled energy giant Petrobras and Frade Japao, a Japanese consortium. Chevron owns 52 percent of Frade, whereas Petrobras owns 30 percent and Frade Japao 18 percent.

Chevron, the second-largest U.S. oil company, has been fined $28 million by Brazil's environmental agency for the spill, an amount that is sure to rise when ANP and Rio's state government slap fines on the company, as they have pledged to do.

Chevron had already halted all of its local drilling operations after the leak occurred, before ANP's announced suspension. ANP said the suspension will remain in place until Chevron fully restores safety conditions in the field.

Chevron's CEO in Brazil, George Buck, told Brazilian lawmakers that the company "acted as rapidly and safely as possible" and "used all resources" to contain and stop the flow of oil from the well.

"We controlled the source in four days. We worked with transparency and cooperation with the authorities of Brazil," Buck said.

INVESTIGATIONS, RECRIMINATIONS

Chevron initially attributed the "sheen" on the sea surface to naturally occurring seepage from the seabed. The company is being investigated by the Federal Police, which noted discrepancies between Chevron's account of the spill and the government's.

The Frade leak, while small, is likely to 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 the Gulf of Mexico in 2010.

The Frade oil flow has been staunched except for residual droplets still bubbling up from a fissure in the sea floor, but this is expected to cease in a few days. Chevron said the oil "stain" on the sea surface now equated to about a barrel.

Most oil has been mechanically dispersed, while 350 cubic meters of oily water has been recovered and will undergo processing.

Addressing a crowded congressional commission through an interpreter, Buck said Chevron still did not understand how the crude rose 567 feet up to the seabed after rock "parted" while drilling in the 8.5 inch-wide column.

"We have an ongoing investigation. We will share the lessons learned with the people of Brazil to ensure that this never happens here or anywhere else in the world," Buck said.

Lawmakers, some calling the spill a "crime," also turned their ire on ANP in the four-hour hearing and which they said had proven ill-equipped and ill-prepared, even as Brazil pursues its ambitions to rapidly increase oil output.

Production is unaffected at Frade, which produces 79,000 barrels per day of oil, or 4 percent of the country's output. Chevron, with a share of Frade production that amounts to just over 1 percent of its worldwide output, had originally targeted peak capacity of about 72,000 barrels per day from the field.

Petrobras has so far dodged the criticism Chevron has faced despite having approved the development plans for Frade field.

Chevron, based in San Ramon, California, is also a 30 percent partner in the nearby $5.2 billion Papa-Terra project, which is operated by Petrobras. Petrobras and Chevron expect to produce 140,000 bpd oil and equivalent gas from Papa-Terra in 2013.

(Additional reporting by Jeb Blount in Rio de Janeiro and Braden Reddall in San Francisco; Writing by Todd Benson and Reese Ewing; Editing by Bob Burgdorfer, Gary Hill and Matt Driskill)

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