Transocean's Discoverer Clear Leader, image (c) Robert Almeida

(Dow Jones) Offshore oil-drilling contractor Transocean Ltd., newly clear of some legal clouds from its role in the 2010 Gulf of Mexico disaster, faces significant operational and financial challenges that are expected to weigh on results this year.

Costly equipment upgrades to the company’s aging fleet and operational challenges, including the cancellation of a major contract, have kept Transocean from benefiting fully from a rebound in global offshore-drilling activity.

On Thursday, a federal judge in New Orleans ruled Transocean, which owned the rig at the center of the 2010 Deepwater Horizon accident, wasn’t liable for spill-cleanup costs or damage claims made by residents and businesses, upholding an indemnity agreement with BP PLC, which is seeking payment to offset its costs in the disaster.

The company could still face sizable legal liabilities related to Deepwater Horizon: punitive damage claims and fines under the Clean Water Act. But last week’s ruling lowers Transocean’s potential legal exposure and may make a settlement with BP more likely.

The past year was challenging for all offshore drillers due to costs of new safety standards put in place after the fatal Deepwater Horizon accident, the worst offshore-oil spill in U.S. history. But Transocean’s biggest competitors remained in the black and their shares have retraced much of their declines. In contrast, Transocean shares are off 44% since a March high of $85.98. They gained 87 cents, to $48.13, at 4 p.m. Friday in composite trading on the New York Stock Exchange.

A key reason for the difference: Transocean’s growth-through-acquisitions strategy has left it with a fleet older on average than most of its competitors’ fleets and more costly to maintain and upgrade.

A spokesman declined to comment on Transocean’s challenges, but said it is “intently focused on improving our performance.”

Transocean has reported losses in two of the past four quarters, including an unexpected third-quarter loss of $71 million, compared with a $368 million profit a year earlier, due in part to the costs of installing and certifying new safety equipment on its rigs.

By contrast, Transocean’s rivals posted higher income last quarter, including year-to-year profit increases of 57% at Ensco PLC, 29% at Diamond Offshore Drilling Inc. and 57% at Noble Corp. Transocean reports its fourth-quarter earnings in late February. Analysts polled by Zacks Investment Research expect it to report net income of 21 cents a share, compared with a loss of $2.49 a share a year earlier.

Transocean issued new debt and equity late last year, following the $1.4 billion acquisition of rival Aker Drilling ASA, to avoid a debt-rating downgrade. That weighed heavily on its stock price and led to the departure of its chief financial officer, said people familiar with the situation.

Transocean this month forecast its rig downtime for maintenance and equipment upgrades this year will be 7% higher than previously expected, according to analysts at UBS Securities. Transocean must still update 54% of its deep-water blowout preventers to meet new safety standards.

The Switzerland-based company has had operational stumbles, too. Earlier this month, it said a customer canceled the remaining two contract years on its Deepwater Expedition rig in Malaysia because of operational delays stemming from equipment problems.

The company also has faced the loss of top financial and operating managers in recent months. On Wednesday, it said Chief Accounting Officer Robert Shaw would resign after less than six months in the job. His departure was preceded in November by that of Arnaud Bobillier, a veteran executive who oversaw its rig maintenance.

Earlier this month, the company said Chief Financial Officer Ricardo Rosa was leaving, a move that people familiar with the situation said was initiated by Transocean’s chief executive and board of directors. Attempts to reach the three executives were unsuccessful.

The company provided little explanation for the recent departures. After Mr. Shaw left, analysts at brokerage firm Raymond James wrote “we’re curious if the buck stops here.” Some analysts described all the departures as an effort by Transocean to get its house in order.

-By Tom Fowler, The Wall Street Journal

This is good news for Transocean investors who have recently seen the value of Transocean (NYSE:RIG) stock plummet to levels not seen since the immediate wake of the Deepwater Horizon disaster.

Transocean’s stock is currently up over 6% in pre-market trading.

This ruling does not, however, indemnify Transocean from paying civil penalties or punitive damages.   A trial on the spill is set for next month.

An oil sheen from the Frade OIl Spill offshore Brazil

A Brazilian prosecutor plans to file criminal charges against Chevron Corporation and some of its managers for their role in the Frade oil spill that occurred offshore Brazil in November, according to a Reuters report citing Brazilian government officials.

Reuters says that the filing will likely include a request for an indictment of the chief executive of Chevron’s Brazilian unit, George Buck, in addition to other employees.  The report also adds that some employees working for Transocean, the owner of the rig, are also expected to be charged.

gCaptain reported in December that Brazil’s Federal Police had been asking a federal prosecutor to indict as many as 17 Chevron Corp. and Transocean Ltd. employees over the oil spill.  Both Chevron and Transocean had confirmed that the Federal Police were recommending indictments however both said that they acted appropriately and responsibly.

Some analysts believe that indictments against Chevron and Transocean employees may not be in the best interest of Brazilian authorities considering it would set a precedent for criminal charges in the case of even relatively small spills and could potentially backfire if Brazil’s state-run oil giant Petrobas has a spill.

When asked about the indictments, a Chevron spokesman told Reuters, “Chevron believes that the charges are without merit.”

Read the Reuters Report: Chevron to face criminal charges over Brazil spill

Transocean's Discoverer Clear Leader drillship

Transocean, the world’s largest offshore drilling contractor, has announced yet another senior-level executive has resigned.  Transocean made the announcement yesterday that its Vice President, Controller and Principle Accounting Officer, Robert Shaw, has resigned effective immediately.  Shaw’s resignation quickly follows on the heals of Transocean’s former CFO, Ricardo Rosa, who stepped down from the role on January 9th.

Transocean said in a press statement that Shaw will remain with the company for a “period of time sufficient to ensure a smooth transition” and added that his departure is “not related to any disagreements with the Company’s accounting, financial reporting or internal control over financial reporting.”  Shaw, 48, joined Transocean in July 2010 as Vice President and Treasurer and had served as Vice President, Controller and Principle Accounting Officer since December 1, 2011.

Shaw will be replaced by Gregory Cauthen, the same man that took over as Interim CFO following Rosa’s resignation, while the company searches for a permanent replacement.

In addition to his role as Interim CFO, Cauthen served most recently as a consultant to Transocean from September 2009 through August 2010 and was CFO of the company from December 2001 to August 2009. He was also Treasurer of the Transocean from March 2001 until July 2003 and served as Vice President of Finance from March 2001 to December 2001.

Transocean's Baltic Jack Up Rig, on contract by Chevron Nigeria to Drill Relief Well (image courtesy Transocean)

Chevron Nigeria reports they have suspended their search for the 2 missing rig workers from the jack up rig that blew out and caught fire on 16 January.  It has since partially melted into the sea and Transocean has been contracted to drill a relief well to stem the flow of hydrocarbons.

“After three days of intensive search and rescue activities for our missing colleagues, I am saddened to report that our efforts have proven unsuccessful and, therefore, we have made the difficult decision to transition to a recovery operation. On behalf of Chevron, we extend our sincere condolences to the families of the missing individuals,” said Andrew Fawthrop, managing director, Chevron’s Nigeria/Mid-Africa Strategic Business Unit.

CNL reports that it is continuing its plans and preparations to drill a relief well, and its investigation into the cause of the incident.

CNL confirms that 152 workers on the shallow water rig and associated barge were safely evacuated from the incident, which occurred about 10 kilometers (6 miles) from shore. Two workers who received medical care for burns have been released from the hospital.

For more details on this incident, please read our technical report HERE.

As you’ll notice from the images, this looks somewhat similar to the Deepwater Horizon from 2010… However the situation is fundamentally less dire.

Images courtesy Chevron

At first glance, this situation appears a lot like the Ixtoc I where 3,000,000 barrels of oil was spilled into the Gulf of Mexico in 1979 from a blown out jack-up rig…

It is actually, in many ways, except for the fact this well is spewing natural gas condensate (aka wet gas), and not crude oil.  The gas will continue to flow until the well is killed, or until it bridges off, but it seems unlikely that a catastrophic environmental disaster such as Ixtoc 1 is imminent.  From an environmental standpoint, it may make the most sense to try and keep the gas burning for as long as possible considering the fact natural gas is a far more powerful greenhouse gas than CO2.

How this likely occurred:

From a drilling safety standpoint, jack-up rigs are inherently more dangerous than floating rigs for two main reasons.

First, if the well blows out and catches fire, there’s no way to unlatch the rig from the wellhead and move off station, thus removing the fuel source.  Either the blowout preventer will close and the fire is extinguished, or the rig is going to burn to the waterline.   There’s very little in-between.

Secondly, because the blowout preventer is located roughly 60 feet below the rig floor, and not hundreds (if not thousands) of feet below on the sea floor, if the rig crew is unable to detect a “kick,” or influx of gas into the wellbore, before it reaches the blowout preventer (BOP), then it’s pretty much guaranteed that there will be a flammable geyser of mud, gas, and possibly oil, over the rig.  On a deepwater rig, such as the Deepwater Horizon, a huge steel pipe called a riser connects the floating rig to the blowout preventer on the sea floor.  There are added dangers in this situation as well, however there are effective means of mitigating these risks as well.

Do kicks happen often?

A kick is a well control issue that a driller will contend with dozens, if not hundreds, of times throughout a career in the oilfield.  While drilling, natural gas from the surrounding formation will quite frequently enter the wellbore as the rig crew is drilling down into the earth, and this pressurized flammable gas naturally wants to float to the surface…

So imagine a barrel-sized unit of natural gas enters the wellbore at 10,ooo feet.  According to Boyle’s Law, the volume of gas will double each time the pressure is halved.  So at 5,000 feet, it’s expanded to 2 barrels, as it migrates up to 2,500 feet, it’s at 4 barrels, 1,250 feet – 8 barrels, and so on, until the bubble has expanded to the rig floor.

Left unmitigated, this kick can cause serious disaster on board a drilling rig as witnessed in this case, and as seen in the Deepwater Horizon disaster.

So how do you know when kick is migrating up a well bore?

While drilling a well, a fine, soupy, and dense mud is continuously being pumped down the drill string (which turns the drilling bit), and it returns up the annulus of the wellbore, where it is then filtered via the “shakers”, and then recirculated back down the drill string.  Most of the time, it’s a closed loop process, meaning what is pumped down the well, eventually returns back up the wellbore to get reprocessed again.  The volume, and rate of return of the mud is highly predictable, and is easily calculated.

This scenario changes when a gas bubble enters the well bore.

As bubble migrates up the wellbore, it pushes the drilling mud (and well cuttings) above it up with greater and greater force as it continuously expands.  Drillers can sense this situation in progress when they start seeing an increase in the flow rate of mud returning from the well.   It’s not a fool-proof system however because the expansion of gas is exponential as is rises, and an increase in mud returns is not always an indication of a kick.  Without getting too technical and discussing all the different possible scenarios, the important factor is to understand that at the end of the day, if a kick goes unnoticed, and the rapid gas expansion goes unchecked, a “blowout” is guaranteed to occur.

Did this happen off Nigeria?

GSF Baltic, image courtesy Transocean

We’re still waiting on specific details, but it seems very likely the answer is yes.  Chevron is reporting that the surface well control equipment (the BOP) may have failed in some fashion.  They also report that Transocean’s GSF Baltic rig has been contracted to drill a relief well that will intercept the blown out well and kill it in a similar fashion as the BP’s Macondo well.

The unchecked flow from this well could also bridge off and kill itself naturally, but the best option in this case is certainly to try and stem the flow via the relief well.

Detail of MODIS 7-2-1 infrared image along Niger Delta coastline, January 17, 2012. Bright red spot marks inferred location of the burning K.S. Endeavor jackup drill rig.

Transocean's Discoverer Clear Leader drillship

Transocean Ltd. (NYSE: RIG), the world’s largest offshore drilling contractor, said today that its Executive Vice President and Chief Financial Officer, Ricardo Rosa, will step down from the position effective January 9, 2012 before retiring in April.  Rosa has been in the position since September 2009.  Meanwhile, Gregory Cauthen, who was previously CFO of the company for nearly eight years, will act as Interim CFO until a permanent replacement can be found.

“On behalf of Transocean I offer my sincere thanks to Ricardo for his many years of service to the company and wish him all the best in his future endeavors,” said Transocean CEO, Steven Newman in an online statement.

Cauthen served most recently as a consultant to Transocean from September 2009 through August 2010 and was CFO of the company from December 2001 to August 2009. He was also Treasurer of the Transocean from March 2001 until July 2003 and served as Vice President of Finance from March 2001 to December 2001. Mr. Cauthen holds a Masters in Accounting degree from the University of Florida, Gainesville.

Transocean says an executive search firm has been hired to find a permanent replacement for Rosa.

Transocean’s stock has lost 46% of its value in the last year.

A oil sheen can be seen following the Frade Spill in November

By John Lyons And Daniel Gilbert

SÃO PAULO—Brazil’s Federal Police are asking a federal prosecutor to indict as many as 17 Chevron Corp. and Transocean Ltd. employees, including Chevron’s Brazil director, George Buck, for their alleged roles in an oil spill last month off the coast of Rio de Janeiro, a senior Brazilian police official said in a televised interview late Wednesday.

“The companies acted in a frivolous, irresponsible manner in the incident,” Federal Police investigator Fábio Scliar said on the Brazilian television station TV Globo. Mr. Scliar couldn’t be reached for comment.

In separate statements, Chevron and Transocean, the company contracted by Chevron to drill the well, confirmed that the Federal Police were recommending indictments following an investigation into possible environmental and other crimes stemming from the spill.

In their statements, both Chevron and Transocean said they acted appropriately and responsibly.

To be sure, some analysts say Brazilian authorities may resist going through with an indictment, some experts said. That is because it would set a precedent for criminal charges in the case of even relatively small spills—a precedent that could come back to haunt the government if state-run oil giant Petróleo Brasileiro SA, known as Petrobras, has a spill.

All the same, the prospect of criminal indictments of U.S. oil executives marks a serious escalation in Brazil’s already-tough response to the early November spill at the Frade oil field, which gushed some 2,400 barrels of oil into the ocean off Rio de Janeiro before it was successfully capped.

Criminal charges less than two months after a spill are unusual. For example, U.S. authorities are still investigating whether any crimes were committed in last year’s far bigger Gulf of Mexico spill.

Brazilian authorities have already hit Chevron with fines and ordered a cessation of Chevron’s drilling operations in the country. Meantime, a range of politicians have suggested that Chevron be expelled from the country, and a federal prosecutor has brought an $11 billion civil suit against the firm.

Chevron officials and even some Brazilian oil executives accuse Brazilian authorities of overreacting to the spill, which was a fraction of the 4.9 million gallons that gushed into the Gulf of Mexico last year. It is also far smaller than a string of spills at installations run by Petrobras that dumped several hundred thousand barrels into the sea.

In an earlier interview, Chevron’s head for Latin America and Africa, Ali Moshiri, said that the company acted promptly and managed to contain a spill quickly using industry best practices. He said that, unlike the Gulf of Mexico spill, last year, no equipment failed. Instead a fissure opened up in the sea floor.

Brazilian oil-industry experts say possible criminal prosecutions and threats of expelling Chevron could backfire on Brazil by scaring away potential oil partners at a time when the country is about to embark on a major push to become a destination for global oil majors. Brazil has discovered some of the world’s biggest oil finds in decades lying in ultradeep water, below miles of rock and hard-to-drill salt.

“Unfortunately, the oil industry has become politicized,” said Adriano Pires, the director of Brazilian Infrastructure Center, an energy-consulting firm.

Indeed, oil has become synonymous with political and economic success in Brazil. The governing Workers Party has promised that the deep-water finds will fund poverty eradication and lift Brazil into the first world.

Copyright 2011 Dow Jones & Company, Inc. All Rights Reserved.

This image shows a BOP being lowered down to the seafloor via it's riser system. The white pipes on the outside are the choke, kill, and boost lines. The stainless pipe on the left is the accumulator line.

A Shell-contracted deepwater drilling rig accidently spilled 319 barrels of oily mud into the sea yesterday while operating in in the Gulf of Mexico’s Mississippi Canyon.   This news is not as terrible as it may sound however…

Sources tell gCaptain that the leak happened at a water depth of around 5,000 feet and was due to a failed seal on the drilling riser mud boost line that went undetected.  The mud losses were indicated in the drill shack, however indications at the time pointed to downhole mud losses.   These sort of mud “losses” happen quite frequently while drilling and in fact, many thousands of gallons of drilling mud can, and sometimes do get absorbed into the “formation” while drilling.  The formation is the earth through which the drill bit passes and is made up of many different layers of material including sand, shale, or thousands of feet of pure salt.

To further explain the use of mud while drilling…

While drilling a well, a blend of synthetic and biodegradable oil, and a dense material called Barite, (plus other chemicals/materials depending on the downhole conditions) are mixed together and pumped down the drill string.  It’s a critical element of the drilling process as this weighted mud lubricates and cools the drill bit, provides a medium for the drill cuttings to be removed from the well, actually helps turn the drill bit via the downhole “mud motor”, and also provides the hydrostatic pressure needed to keep the well from collapsing in on itself (most important).

The mud is pumped down the drill string using high pressure pumps, then circulates out the drill bit and up the annulus of the well until it reaches the blow out preventer (BOP).  It then travels through the BOP and up the riser where it is then reprocessed on board the rig.

The problem yesterday occurred within the riser system.

On the outside of the riser, are 4 pipes attached to it that are used for various well control and drilling operations.  They are the Choke and Kill lines (used for well control operations), the accumulator line (used for supplying fluid to help operate the BOP), and the Boost line (used to increase the flow velocity of the mud and cuttings returning up the riser).

One of the connections of the boost line failed, and the mud leaked out of the line until the source of the leak was discovered.

Due to the biodegradeable nature of this oil, and the depth at which it was released, it’s unlikely that there will be any sort of environmental impact.

A vessel works to clean up oil from last months Frade Oil Spill offshore Brazil

SAO PAULO (Dow Jones)–Brazil’s federal prosecutor on Wednesday said it wants Chevron Corp (CVX) and Transocean Ltd (RIG, RIGN.VX) to shut down operations in Brazil, as it sues the two firms for 20 billion Brazilian reais ($11 billion) in damage allegedly caused by an oil spill in early November.

The prosecutor’s office in Campos, Rio de Janeiro state, has brought suit against Chevron and Transocean for the alleged environmental damage, and also wants a court injunction to stop the two firms’ operations while the broader case continues, according to a statement posted on the prosecutor’s web site.

The drilling accident on Nov. 7 caused an oil spill from an appraisal well at the Frade oil field, which lies in deep Atlantic waters off the coast of Rio de Janeiro state.

The prosecutor, Eduardo Santos de Oliveira, found that Chevron and Transocean “weren’t able to control the damage caused by the spill of nearly 3,000 barrels of oil, which shows a lack of planning and environmental management by the companies,” according to the statement.

The statement said the prosecutor will hold a press conference on Thursday.

On the web: www.pgr.mpf.gov.br

-By Matthew Cowley, Dow Jones Newswires

Chevron Corporation has released the following statement with regards to media reports claiming that federal prosecutors in Brazil plan on suing the oil giant for last month’s oil spill at the Frade Field offshore Brazil and requesting a complete shut down of Chevron’s (and Transocean’s) Brazil operations. Here is the statement from Chevron:

Chevron Corporation (NYSE: CVX) said a Brazilian federal district prosecutor has told reporters that he will file a civil lawsuit against Chevron and other companies seeking a reported 20 billion reais ($10.7 billion) in damages, and an injunction stopping Chevron’s activities in Brazil.  Chevron has not received any formal notice of this action.  Chevron also has not received any instruction from the regulatory agencies with oversight responsibility for our activities in Brazil regarding suspension of our operations.

From the outset, Chevron responded responsibly to the incident at its Frade Field and has dealt transparently with all Brazilian authorities. The flow of oil from the source was stopped within four days and the company continues to make significant progress in containing any residual oil. Chevron has also continued to address the surface sheen, which is now less than a single barrel. There have been no coastal or wildlife impacts.  Via Chevron