Brazilian Court Orders Halt to Chevron and Transocean Activities

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August 1, 2012

RIO DE JANEIRO–U.S. oil major Chevron Corp. (CVX) and drilling company Transocean Ltd. (RIG) face another legal hurdle in Brazil, where a court late Tuesday handed down an injunction banning the companies from producing or transporting oil until an investigation into an offshore oil spill is completed.

A Brazilian court ordered Chevron and Transocean to halt their activities in Brazil in 30 days or face daily fines of 500 million Brazilian reais ($250 million), the court said. The injunction was handed down on appeal after initial attempts by a federal prosecutor to impose the ban in April were denied.

The latest court action is part of ongoing court cases related to a drilling accident last November at the Chevron-operated Frade offshore oil field. The accident caused an estimated 3,700 barrels of crude to seep from cracks in the seabed. Chevron voluntarily halted production at the field in March, when a second set of seeps was discovered at the field.

While the injunction could complicate Chevron’s efforts to get production at Frade restarted, it’s likely to have a greater impact on Transocean. Transocean operates 10 drilling rigs in Brazil, including seven for state-run energy giant Petroleo Brasileiro (PBR, PETR4.BR), or Petrobras. Transocean also has single rigs leased out to Eni, BP and Vanco.

The lack of drilling rigs capable of operating in deep waters offshore Brazil has been a major stumbling block to increasing production in the country, according to Petrobras. Petrobras is in the midst of a $237 billion investment plan through 2016 aimed at tapping recently discovered oil fields off the country’s coast, which could turn Brazil into one of the world’s leading producers and exporters of crude oil.

“Transocean rigs continue to operate in Brazil,” Transocean said in a statement, adding that it was evaluating the latest development. The company said that the case was “without merit” and that Transocean would “use every legal means necessary to prove it.”

Chevron said that it would appeal the ruling. “Chevron Brasil is confident that at all times it acted diligently and appropriately,” the company said in an emailed statement. The company said that it continues to “actively” prepare to restart production at Frade.

Last month, Brazil’s National Petroleum Agency, or ANP, cited Chevron for 25 infractions related to the incident and said that the company would be fined up to the BRL50 million allowed by law. The total fine will be determined later in August, ANP officials said at the time. Despite the incident, ANP officials said that they would meet with Chevron to discuss restarting output at Frade.

The ANP, meanwhile, said that it found no fault with steps taken by Transocean and didn’t censure the company.

Federal Judge Ricardo Perlingeiro said in his ruling that the two incidents in a span of four months, as well as the lack of proper equipment to identify and contain the seeps showed that the two companies “do not have the conditions, at the moment, to operate wells with environmental security.”

The judge also called on the ANP and environmental regulator Ibama to re-evaluate their strategy of risk evaluation and environment-accident prevention at offshore oil fields, “obliging companies to adopt efficient measures to avoid or minimize environmental damage.”

Chevron is lead operator of Frade, which holds estimated recoverable reserves of between 200 million and 300 million barrels of oil equivalent, with a 51.7% stake. Petrobras holds 30%, while the Frade Japao Petroleo Ltda. consortium has the remaining 18.3% share.

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