Chaves2, José Otávio Silva3

Copyright 2012, Brazilian Petroleum, Gas and Biofuels Institute - IBP
This Technical Paper was prepared for presentation at the Rio Oil & Gas Expo and Conference 2012, held between September, 1720, 2012, in Rio de Janeiro. This Technical Paper was selected for presentation by the Technical Committee of the event according to the information contained in the final paper submitted by the author(s). The organizers are not supposed to translate or correct the submitted papers. The material as it is presented, does not necessarily represent Brazilian Petroleum, Gas and Biofuels Institute’ opinion, or that of its Members or Representatives. Authors consent to the publication of this Technical Paper in the Rio Oil & Gas Expo and Conference 2012 Proceedings.

Since November 2011, when Brazil and the world took notice of the oil spill from the Frade field, in the Campos Basin, operated by Chevron, it is clear that nowadays any accident involving oil and gas exploration and production, and especially involving foreign oil companies operating in Brazil, will be treated as a very sensitive issue and will generate strong emotional response. It would be possible to argue that this has to do with the experiences of past accidents involving the oil and gas industry. Nevertheless, a study of how the case was handled suggests that several inappropriate responses could bring about negative consequences, including those in the realm of economic and geopolitical risk. In order for Brazil to show to the world, and to Brazilians, that it is a serious country, and that its constitution and laws rule in such cases, political posturing must not be allowed to override technical considerations. Current laws and regulations already allow for adequate oversight, as well as for reasonable punitive and compensatory measures to be imposed, although the size of fines which can be imposed has not kept pace with the scale of projects in the oil and gas sector. Some conclusions based on the Frade spill case are that: Brazil needs to ensure that the relevant agencies involved (IBAMA and ANP) are in charge of handling such incidents; an integrated national emergency response plan must be implemented as soon as possible; higher maximum fines must be allowed; compensation sought must bear relationship to actual damages; punitive measures sought should avoid the semblance of unreasonable political motivation; and political posturing can be costly to the country. The current episode has already imposed significant costs which Brazil will have to bear for quite some time, due to the inappropriate response to the incident.

1. Introduction
For years after its discovery in 1986, the Frade deepwater field offshore Brazil was considered too technically risky to develop. The field holds medium-heavy oil in shallow reservoirs requiring long horizontal wells. Technological advances allowed the project to become technically feasible and economically viable, and production began in 2009. Peak production was projected to reach over 90,000 barrels per day. Chevron’s investment outlays in the Frade field were expected to reach US$3 billion (HIGHTABLE, 2012). The Frade field is in a block approximately 120 km from shore, near several other major oil fields of the Campos Basin, including Roncador and others, mainly operated by Petrobras (Figure 1). Chevron owns 51.74% of the Frade concession, Petrobras owns 30% and Frade Japão, a Japanese group, owns the rest. Chevron also has another oil producing asset in the Campos Basin, the Papa Terra field, some 700 km Southwest of the Frade field, where it is not the operator (it has a 37.5% interest), as well as interests in other Campos and Santos Basin blocks. The Frade field has been in production since June of 2009, and most recently produced approximately 75,000 barrels per day.

______________________________ 1 MSc, Geology, Researcher – Instituto Nacional de Ciência e Tecnologia, CNPq (INOG), at Faculdade de Geologia (FGEL), Universidade do Estado do Rio de Janeiro (UERJ) 2 PhD, Geosciences, Researcher Emeritus FAPERJ, Vice-Coordinator – INOG, at FGEL/UERJ 3 PhD, Geology, Professor – Unicarioca, RJ/RJ

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Figure 1 – Relative location of the Frade field, in the Campos Basin, near several other major oil fields, mostly operated by Petrobras (Source: Petrobras) The Frade FPSO, in 1,128 m of water, is the producing unit at Frade field, with a production capacity of 100,000 barrels of oil per day, a water injection capacity of 150,000 barrels per day, a gas processing capacity of over 100 mmcf/day, and a storage capacity of 1.5 million barrels of oil. The field contains estimated reserves between 200 and 300 million barrels. The Chevron drilling campaign, conducted near the Frade FPSO site, sought to further delineate the field in order to increase measured reserves and possibly allow a production increase, since the Frade FPSO spare capacity could handle additional production from new wells (CHEVRON BRASIL, 2012). Hired by Chevron for the drilling campaign, Transocean is the world’s largest offshore drilling contractor. It used its SEDCO 706 rig to drill the 9-FR-50DP-RJS well. Transocean is the same firm used by BP in the Gulf of Mexico, which resulted in the Macondo disaster in April of 2010, where up to five million barrels of oil spilled and caused major environmental damage. Before the SEDCO 706 drilling rig came to Brazil in 2011 under a five-year contract with Chevron, it underwent upgrades at the Keppel FELS shipyard in Singapore, in order to convert it into a modern, dynamically positioned rig capable of operating in water depths of 2,000 meters (KONGSBERG MARITIME, 2012). The Chevron Frade oil spill occurred around November 7 th, 2011, in well 9-FR-50DP-RJS, in the Frade field in the Campos Basin, about 370 km to the Northeast of the city of Rio de Janeiro, in Brazil. The spill incident occurred after drilling encountered unexpected pressure from an undersea oil reservoir, at a depth of over 2,000 meters. Preliminary indications are that after encountering a pressure kick, the drilling team adjusted the mud weight to compensate for the additional pressure, but that procedure may have caused damage to the integrity of the well and/or surrounding rock. A likely scenario for the oil leak mechanism is that oil from the reservoir was able to come in contact with the wellbore, probably flowing around it and towards the seabottom, until it reached intervals where it could follow faults or fissures in the shallower surface rocks, surfacing some 130 meters from the well site. The cementing plan and execution is the subject of controversy, as a possible cause of leak flow paths for the oil (FOLHA, 2012). According to Chevron, an estimated 2,400 barrels of oil escaped as a seep, through undersea rock and into the ocean, creating a thin 163 km2 oil slick (Figure 2). Independent organizations suggested that the spill was significantly larger than announced by Chevron - up to 15,000 barrels (SKY TRUTH, 2012). Chevron admitted that it miscalculated the pressure encountered as well as the strength of the cap rock. The procedures for sealing the leaking well and seeps involved a plan to cement the well, which was presented to the Brazilian petroleum regulatory agency (ANP - Agência Nacional do Petróleo, Gás Natural e Biocombustíveis), and which was quickly approved. That plan, though, faced several difficulties and delays before it was eventually able to 2

Rio Oil & Gas Expo and Conference 2012 cut off the paths for the leaking oil. Brazilian President Dilma Rousseff demanded a full investigation, and several Brazilian authorities initiated investigation (REUTERS, 2012).

Figure 2 – Approximate extent of the Chevron Frade oil spill, visible as a sheen on the ocean surface. (Source: Sky Truth, Google Earth)

2. Brazilian Operating Environment
After November 2011, when Brazil and the world took notice of the Chevron Frade oil spill, in the Campos Basin, it is clear that nowadays, any accident involving oil and gas exploration and production, and especially involving foreign oil companies operating in Brazil, will be treated as a very sensitive issue and will generate strong emotional response. It would be possible to argue that this has to do with the experiences of past accidents involving the oil and gas industry, and that we are in general less and less tolerant of any such incident. It would also be possible to argue that the most recent, major accident that comes to mind, the BP disaster involving the Deepwater Horizon rig in the Gulf of Mexico, in April of 2010, is still too fresh in our minds to allow any new accident or incident to go without comparisons, however tenuous the similarities. Nevertheless, it is important to keep some facts in mind, in order analyze how the case was handled and to base relevant discussions about possible consequences, including those in the realm of economic and geopolitical risk. The discussions so far have been perceived by international observers as having been characterized by significant harshness on the part of officials who commented on the case. This has been associated with a possible ideological bias in relation to the participation in Brazil’s oil and gas industry by foreign players (SINAVAL, 2012). Furthermore, the discussions were spearheaded by local officials and politicians, rather than by authorities from the pertinent agencies which control oil and gas operations in Brazil – the petroleum regulatory agency (ANP) and the environmental ministry regulatory agency (IBAMA - Instituto Brasileiro do Meio Ambiente e dos Recursos Naturais Renováveis). According to the ANP, the Brazilian oil and gas industry is regulated by three main bodies: the ANP, IBAMA, and the Brazilian Navy (ANP, 2012b). The ANP is charged with approving and supervising all activities involving exploration, drilling, production, treatment, storage, and shipping and transportation of all oil and gas, as well as processing of all hydrocarbons produced. It requires complete disclosure of all information relating to all aspects of exploration and production activities. Its operational safety guidelines do not mandate specific equipment or procedures, since these are subject to rapid technological evolution. This regulatory system is called non-prescriptive regulation, as opposed to prescriptive regulation, where detailed, but possibly technologically outdated requirements would be dictated. It involves demanding best practices in engineering and risk evaluation. Operators are required to present for approval all drilling programs and plans for other activities (such as exploration), which are then analyzed by its technical staff. The ANP also conducts onsite monitoring, to ensure compliance. Operators assume the responsibility for all their actions and procedures, but must 3

Rio Oil & Gas Expo and Conference 2012 make immediate and full disclosure of all incidents. The ANP also classifies operators in different classes of operating capabilities even before approving the start of their Brazilian activities or accepting their bids at any bidding rounds, as a way of ensuring that operators are involved only in activities and projects for which they have adequate competency. The Brazilian Navy is charged with approving and supervising all vessels, including rigs, support vessels, etc., used in exploration and production activities. The Brazilian Navy has a sophisticated, real-time monitoring system to track all vessels involved in oil and gas activities. The IBAMA is charged with the environmental licensing of all activities, which also includes defining the requisites for awarding concession licenses. Among these requirements is the Individual Emergency Plan (Plano de Emergência Individual), which must be presented by each operator. The IBAMA also carries out environmental control and monitoring of all rigs and support units.

3. Reactions to the Spill
The ANP did pronounce itself initially, regarding the Chevron Frade oil spill and its relative magnitude, when, a few weeks after the incident (November 21, 2011), its director, Haroldo Lima, said that there was no comparison with the Macondo spill in the Gulf of Mexico, and the case was serious but not a major one (REUTERS, 2012). But this was a timid announcement, and no effort was made to defend that position, in the face of strident denouncements by other officials, local politicians and others. That statement contrasted sharply with that of the Rio de Janeiro State environmental department (Secretaria de Ambiente do Estado), shortly after the spill (November 11, 2011), which, even before a full investigation was begun, indicated that Chevron should be heavily penalized, should be forced to conduct an environmental audit, and should make significant payments for damages and environmental compensation, the cost of which could potentially reach into the hundreds of millions of Brazilian Reals (SEA, 2012). Even at the recent exchange rate of approximately R$1.90/US$, those fines and costs could reach well over US$100 million. Later, the ANP instituted a monitoring group for the Frade incident, and said that Chevron omitted some information to the ANP, and that it committed mistakes in executing the contingency plan, as well as in gauging the extent of the problem (ANP, 2012c). Then, in a move that surprised those unfamiliar with the extent of the autonomy to bring civil suits, which federal prosecutors have in Brazil, prosecutors at the Federal Prosecutor’s office in the city of Campos (Rio de Janeiro state), which lies across the Frade field, in the coastal region of the Campos Basin, filed suit against Chevron and Transocean for gross negligence in connection with the oil spill. They announced that they were seeking R$20 billion (approximately US$10 billion) as compensation for the spill, daily fines for noncompliance, and other punitive measures, such as total suspension of Chevron’s and Transocean’s activities in Brazil (MPF, 2012). Finally, in March of 2012, federal prosecutors brought criminal charges against George Buck, president of Chevron Brazil, and several other Chevron and Transocean employees, which, due to Brazil’s stringent environmental crimes laws, could involve long prison terms, if they were to be convicted. Prosecutors pointed out that in order to bring criminal charges, only indications of a possible crime need be present, but the initiative went way beyond what has been the norm in Brazilian cases, and surprised even local observers (AMBIENTE BRASIL, 2012). Federal Police investigators from the Environmental Division joined the initiative, preparing investigations into environmental crimes.

4. Perspective on the Spill
Based on the approximate amount of oil spilled and the amount sought by prosecutors for just one of the civil suits proposed, the potential cost to Chevron could be over US$3 million per barrel spilled, which many analysts point out is on the order of a thousand times more than the maximum U.S. penalties of around $4,300 per barrel spilled (BLOOMBERG, 2012), and similarly much more than the equivalent fine which BP paid for its huge Macondo spill in the Gulf of Mexico in 2010, of under US$10,000 per barrel spilled, based on estimated fines of approximately US$3-4 billion, for up to five million barrels spilled. Even if the spill turns out to be larger than the 300-400 bpd estimates given so far for the peak spill rate, the total amount of oil spilled, even if it reaches five thousand barrels, is still of small dimensions, if compared to the major accidents which occurred in the past, including in Brazil. If the total reaches 15 thousand barrels, as some analysts suggest (Sky Truth, and others), it will still be relatively small, by historical standards. More important than the absolute size of the spill, however, is the environmental impact caused by the spill on local habitats, fauna, flora, biodiversity, human population, economic activities, or even physical structures and geographic features. The location of the Frade spill, far from the coast (over 100km), and favorable wind and ocean currents, which moved the oil away from the shore and more sensitive areas, such as mangroves, urban areas, beaches, 4

Rio Oil & Gas Expo and Conference 2012 and environmentally sensitive regions, contributed towards preventing more serious consequences. There are no land features near the spill site, and the area is a deepwater setting, in relatively warm waters, which favors speedier microbiological activity and biodegradation of hydrocarbons, especially at the low concentrations found in oil sheen. So far, no reliable estimates of actual, measured environmental damages have been presented. Given that natural hydrocarbon seeps and near-surface fractures are quite common in many offshore oil basins, such as the Gulf of Mexico and in the Campos Basin as well, much of the focus of the Chevron Frade oil spill case, which centers on the oil leaking from those observed seeps near the 9-FR-50DP-RJS well, may not even be appropriate. It is entirely possible that those seeps were not directly caused by any drilling activities, and may constitute a relatively common characteristic of the Frade field ocean bottom (REUTERS, 2012d). The current case may highlight the need to focus on such features in future drilling activities, in order to control drilling risks, but their presence cannot be attributed entirely to operating procedures. The reaction by the officials who first commented on the Chevron Frade oil spill, in proposing drastic measures against Chevron and its employees, overshadowed and contrasted with the statement by the ANP, on December 2nd, 2011, which provided information about how the ANP carries out oversight of the industry, and the respective responsibilities of the ANP, IBAMA and Brazilian Navy (ANP, 2012d). This information should have established the basis for actions and comments by government officials, and should have made it clear that it is these agencies which should have been the protagonists of any official comments and analyses about the situation, even if the case leads to further discussions and more investigations. To put the Frade spill in perspective, it must be noted that the quantity of oil involved in all the declared spills of Petrobras during 2010, which did not include any major accidents, was over 4,000 barrels, or more than the Chevron Frade oil spill. The volume of oil which spilled from the REDUC refinery in Rio de Janeiro into Guanabara Bay, in 2000, was approximately 10,000 barrels, and since that spill occurred in an area with extensive mangroves and other sensitive environments, that event is considered much more serious. The REPAR refinery spill in Araucaria, PR, also in 2000, was approximately 25,000 barrels, and it also occurred in an environmentally sensitive setting, since the Iguaçu River and all its fauna and flora were severely affected, as well as nearby regions. The accident with the Petrobras P-36 platform, at the time the largest in the world, besides killing eleven people, caused a major spill, estimated at 100,000 barrels or more, since its capacity was 150 thousand bpd, and also occurred in the Campos Basin, ironically, not too distant from the Frade field. The present spill was incomparably smaller than the well-known accidents involving the Exxon Valdez in 1980, which spilled more than 250,000 barrels of oil in a pristine environment, and the Macondo disaster in the Gulf of Mexico, which spilled more than 5 million barrels of oil in the Gulf of Mexico and sensitive coastal regions, with severe consequences. The fact that the Frade spilled oil formed an oil sheen on the surface of the sea, and spread over a large area, which may have reached up to several hundred square kilometers, despite being very thin (thickness measured in microns), may have called attention to the accident, more so than the volume of spilled oil. Oil sheen can be visible even as a very thin layer, but environmental damages from oil contamination are more related to the amount and type of oil, the duration that it is in contact with potential organisms affected, and the type of environment or habitat affected.

5. Analysis of the Case
After such an accident, there is always great pressure to provide immediate analysis, even before a thorough investigation can provide answers to all the questions. A full investigation is crucial in order to reach technically sound conclusions, but even so, it is possible to make a first reading of some aspects of the case, and of the wider implications for the oil industry and for Brazil. Certain aspects have become apparent from the outset, as some analysts have asserted that there was a very big difference between the oversight process of the regulating agencies in the Frade (ANP and IBAMA) and Macondo (MMS – U.S. Minerals Management Service) cases (JONES, 2012). Whereas in the Macondo case the recently released final report asserts that the regulatory-governance processes (Federal, State, and local) charged with oversight of these operations did not provide the necessary checks and balances to prevent the disaster, evidencing significant official omission (DHSG, 2011), in the Frade case, and in Brazil in general, the ANP is generally considered effective, and does indeed demand and analyze operational plans of oil industry operators, and only after it approves each plan, are those operations allowed to proceed. While effective oversight is generally a weak link in the Brazilian framework, which is heavy on laws and light on monitoring and enforcement, in Brazil there is a much more controlled operating environment in the oil and gas industry than there was in the Gulf of Mexico. What may be questioned is whether Chevron, as the operator in the Frade case, actually followed all its obligations as set forth in its various plans, whether it observed best operating practices, and whether it omitted any 5

Rio Oil & Gas Expo and Conference 2012 relevant information which should have been communicated to ANP or other authorities, since the Brazilian operating scheme requires a much greater level of ongoing information flow to authorities. These questions will be answered after technical explanations are fully disclosed, and the investigation into the incident is completed. In the meantime, analysts suggest that it does not appear that there was any serious omission in the Chevron Frade oil spill incident, such as is considered to have occurred in the BP Macondo case, whether by the operator or the oversight agencies involved (JONES, 2012b; REUTERS, 2012). It is exactly the investigations underway which will be able to definitively establish how the accident occurred, what operational procedures and emergency responses were adopted (or not), and how the responsibilities are to be shared between Chevron (the operator of the joint venture), and its partners, Petrobras and Frade Japão Petróleo, Ltda. Until now, no mention has been made by any authorities or any of the prosecutors regarding whether and how the responsibility for charges and damages will be apportioned among the other Frade joint venture partners. Because Petrobras is one of those parties, such an omission has led to some analysts suggesting that there has been an element of protection afforded to Petrobras, at least, in relation to foreign companies, since it is a Brazilian company, in fact, the Brazilian national oil company (SMITH, 2012). Likewise, the chorus of calls for ever more serious and stringent measures against Chevron and Transocean were not considered to be in accordance with what has been the official stance in other cases of environmental accidents in Brazil (REUTERS, 2012b). The initiatives by local authorities and agents, regarding operating restrictions and other sanctions involving Chevron operations, can also be considered as challenging the rightful authority of the ANP to regulate such activities. In this regard, local authorities, without legal jurisdiction for exercising such control or applying such sanctions, go beyond any possible harm to Chevron, and weaken the institutional authority and prestige of the ANP itself, by trying to infringe on its prerogatives as the regulating agency legally charged with exerting control and applying appropriate sanctions. The same situation challenged the authority and prestige of IBAMA, as local authorities, without legal jurisdiction over environmental matters which rightfully belong to IBAMA, tried to impose environmental limitations and other sanctions on Chevron and Transocean. These actions also had the effect of weakening the institutional authority and prestige of IBAMA itself, because they infringed on its prerogatives as the regulating agency legally charged with exerting environmental control and applying environmental sanctions relating to oil and gas activities in Brazil. It is clear that the official response to the incident was extremely politicized and devoid of technical content, with nuances of an ideological stance against Chevron, and foreign companies in general. Comments by the Rio de Janeiro State Secretary of the Environment, as well as others, proposed stringent, punitive measures, even before results from an investigation could allocate responsibility (REUTERS, 2012c). This reaction ignored the reality of the situation, since Brazil still needs is willing foreign oil companies as investors in its energy sector, as they bring in capital, know-how, and critical mass to an industry that will need to make full use of these factors in order to attain the expected production targets on which the country is already counting. The punitive measures sought in inflamed speeches were legally unenforceable under the existing constitutional and legal framework in Brazil, where the federal government, through its agencies (ANP, IBAMA, and even the Brazilian Navy) has the exclusive prerogative in legislating and determining how exploration and production operations, as well as the players in the industry, are regulated (and punished). Calls for punitive measures beyond the scope of the law and without due process represent a disregard for the legal framework and a blatant disrespect for the judicial system. If Brazilian laws are too soft regarding environmental infractions and damages, as some argue, they must be changed through the legislative process, preserving existing rights, observing the rule of law, and the ensuring the continued stability and international respect which Brazil has conquered over the past decades, as a constitutional democracy with a transparent and solid legal framework, as well as a respected and effective oil and gas industry regulatory framework. The ANP has a record of effective management of Brazil’s fast growing oil and gas industry; of transparency and good communication with the players of the industry; and of effective incorporation of official government policy objectives (such as local content, industry competition, incentives for exploration in new basins, etc.) into its past concession bidding rounds. It is thus generally regarded, and rightly so, as a model national petroleum agency for countries beginning to develop their oil and gas industry, and it has successfully served as the basis for the national agencies in Colombia and other countries (FREIRE, 2010). The ANP model certainly cannot be faulted, even if specific government policy objectives may be controversial. The blatant disregard for the authority and competency of the ANP in handling the case of the Chevron Frade oil spill is damaging to the operating environment in Brazil and to the authority of the agency itself.

6. Consequences of the Mishandling of the Frade Spill Response

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Irresponsible reactions, especially by political leaders, are speeding the politization of the regulation and control of the oil industry in Brazil, to the detriment of technical criteria which should be applied to such a fundamentally important sector of the economy. Unfortunately, the current discussion of the Chevron Frade oil spill has not focused on the risks and benefits of petroleum exploration in Brazil, or about its appropriate regulation and monitoring, but has been a political discourse without technical basis. The spill has been used by outspoken commentators and others to advance a political and ideological agenda which seeks to constrain foreign companies in the oil sector in Brazil (REUTERS, 2012c). The consequence of this kind of official and unofficial posturing is that the perceived political risk in Brazil will rise. But this risk will be converted to a cost, which all Brazilians will bear. Whatever value in fines is eventually obtained from Chevron and its joint venture partners, it stands a good chance that it will be much smaller than the damage caused to the Brazilian economy on account of the mishandled response to the incident. Because many comments were said by government officials, they increase the level of uncertainty and insecurity in relation to the reigning legal and operational environment which foreign companies face in Brazil. It is important to remember that both geological favorability and the attractiveness of the country’s legal, constitutional and fiscal framework are equally important in assessing investment opportunities and carrying out major investment programs on a worldwide basis. Dourado (2007) presented a compelling case for considering relative attractiveness of those factors as decisive in investment decisions, and showed that favorable geological prospects alone would not be enough to tip the scale towards investments in a country. In Brazil, despite the huge potential of the presalt region, as well as in other of its oil basins, country risk assessments, which have reached very favorable assessments, could be hurt by fallout from cases such as the Chevron Frade oil spill response, which suggest a possible change to less favorable conditions. To worsen the situation, there is the apparent discriminatory stance regarding environmental damages caused by the oil industry, in relation to the environmental damages due to deforestation, illegal logging and other environmental crimes, which can arguably be said to be even harder to remediate, since they will take much longer to recover, if ever (AMBIENTE BRASIL, 2012b). There is an obvious lack of justice in a system which immediately tries to impose multiple R$50 million fines, tries to extract billions of dollars in environmental compensation before any environmental damage is ascertained, and tries to limit legal recourse through intimidation (BLOOMBERG BUSINESSWEEK, 2012), while there are billions of dollars in outstanding fines imposed by IBAMA against perpetrators of qualified and evident environmental crimes in the Amazon region and in other biomes, yet less than 1% of those were ever paid, according to official calculations (ESTADÃO, 2011). The Chevron situation, regardless of whether the sought fines and compensation are in fact imposed and paid, or whether they are legally justified or not, imposes a risk factor on the players in the oil industry in Brazil. The result is that in order to operate in Brazil, new parameters of risk/reward must be considered for investments by these companies in new Brazilian exploration and production projects. Only those projects with greater returns will now be approved, and many which would have been acceptable before will now not go forward. The loss for Brazil is not immediately apparent, so demagogic attitudes which precipitated this situation can go on for quite some time, without political consequences, but Brazil will eventually suffer a loss of investment, and a shifting of the minimum return required to compensate for those risks, in relation to the situation prior to the Chevron Frade oil spill case. To try to arrive at one measure of the potential direct cost involved, one need only consider the reduction in bonuses offered for exploratory blocks at future concession rounds (for areas outside the pre-salt region). Given values for past rounds, new rounds with attractive areas could entail values in the half billion to billion dollar range. If a new level of risk perception reduces the bonus values which companies are willing to offer by 25% or more, the reduction could represent much more than the RS$100 million or more in fines proposed in the Chevron Frade oil spill, and possibly more than even the proposed multi-billion dollar compensation figures, which are unlikely to be paid. And these costs could last for several rounds, since country risk perceptions change quickly on the way down, but slowly on the way back. Applied across several industries, it is not inconceivable that the eventual cost to the Brazilian economy could easily surpass the value of any fines and claims eventually collected from Chevron and its joint venture partners. Brazil could thus find itself in the unenviable situation of having claims against the joint venture partners which may very well never be allowed or paid, yet it may have already incurred significant and long lasting losses of similar magnitude or even greater, due to the consequences of a mishandled response to the incident, which allowed political posturing to override the response from the agencies which should rightfully respond based on a technically sound assessment of the situation, not on emotional or political basis. And the country’s image as a safe haven for oil and gas industry investments has been stained.

7. Conclusions

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Despite the Chevron Frade oil spill being much smaller than other oil spills in Brazil, in the recent past, and despite the relatively small environmental impact caused, the incident generated extreme reactions by government officials, including seeking the imposition of heavy fines and large compensation amounts for the companies cited (Chevron and Transocean), as well as preemptory travel restrictions on executives of those companies, and bringing criminal charges. The official response to the incident was extremely politicized and devoid of technical content, with nuances of an ideological bias against Chevron and foreign companies in general. Furthermore, the discussions were spearheaded by local officials and politicians, rather than by authorities from the pertinent agencies which control oil and gas operations in Brazil – the petroleum regulatory agency (ANP) and the environmental ministry regulatory agency (IBAMA). In order for Brazil to show to the world, and to Brazilians, that it is a serious country, and that its constitution and laws rule in such cases, political posturing must not be allowed to override technical considerations in cases such as the Chevron Frade oil spill. Current laws and regulations already allow for adequate oversight, as well as for reasonable punitive and compensatory measures to be imposed, although the size of fines which can be imposed has not kept pace with the scale of projects in the oil and gas sector. Brazil needs to ensure that the relevant agencies involved, that is, IBAMA and ANP, are in charge of handling such incidents. These agencies could have been firmer in asserting their prerogatives and authority in responding and determining appropriate measures for response plans, fines and compensation. The federal government could also have provided more support to the agencies legally charged with regulation and control of oil and gas activities in Brazil, and could have acted more forcefully in restraining outspoken but inopportune local authorities, who in any case do not have legal jurisdiction for regulating or exercising control, such as applying sanctions. These actions could have limited the harm inflicted on the institutional authority and prestige of the ANP and IBAMA, from efforts to infringe on their prerogatives as the regulating agencies legally charged with exerting control and applying appropriate sanctions, both operational and environmental. The Brazilian oil and gas industry regulatory system is a non-prescriptive regulation system, and the model is similar to the Safety Care system recommended by U.S. authorities for offshore oil and gas operations, after the analyzing the Macondo disaster. Analysts consider that the Brazilian system is even more complete and demanding (BRADY, SILVEIRA, SODRE, 2011). While in the Chevron Frade oil spill case no significant environmental damage to fauna, flora, biodiversity or other segments has so far been shown, in Brazil there is an obvious and urgent need to prevent and mitigate possible environmental damage in future environmental accidents. A set of rapid and effective response measures is needed, so that mitigation of possible environmental damage will not be hampered by delays, lack of resources of any type, absence of coordination, or ambiguous responsibility and control chains. That necessary incident or emergency response system should be a complete set of response measures, along with a clear plan for action according to the incident, location, seriousness, etc., and, most importantly, it should involve the integration of all players, from government agencies such as ANP, IBAMA and state agencies, to industry players and other stakeholders. It must contemplate quick and effective actions, and not be tied by bureaucratic and logistical limitations, in order to be able to respond before damages are compounded or grow out of control. In environmental emergencies, being able to avoid delays of even hours can represent the difference between a controlled incident and an environmental disaster. Unfortunately, usually there are delays of hours if not days, before effective measures are implemented, and even then, only after lengthy and often disorganized bureaucratic approval processes, where no clear directives exist and uncertainties abound. In fact, such a system is now recognized as a necessity by experts (O GLOBO, 2012). Authorities at the federal level also recognize this need; recently, during a public hearing in the Brazilian Congress, the oil and gas secretary of the Mines and Minerals Ministry (MME – Ministério de Minas e Energia), Marco Antonio Martins Almeida, said that the Chevron Frade oil spill motivated the ministry to rethink its oil spill contingency plans. An effective National Emergency Response Plan must also contemplate adequate equipment, supplies, resources and logistics. Petrobras, as the major and dominant player in the industry in Brazil, has numerous environmental defense centers (CDAs – Centro de Defesa Ambiental) along Brazil’s coast. Other players in Brazil’s oil and gas industry must gradually assume a similar responsibility for building a network of such CDAs, as their presence and participation in Brazil’s oil and gas industry increases, but they must do so in an integrated fashion, involving all players and government agencies, in order to maximize system-wide resources available. A good National Emergency Response Plan could achieve that goal. Mitigation measures must involve leading edge technological capabilities, such as adequate bioremediation capability, through the stocking of significant quantities of biological bioremediation products at all CDAs, for use immediately following a spill, when biological bioremediation products can be most effective, and so that dispersant and other mitigation measures with significant negative environmental impacts of their own can be minimized in favor of 8

Rio Oil & Gas Expo and Conference 2012 more natural bioremediation measures. If implemented immediately, bioremediation measures have a better chance of being effective. Today, it is recognized that dispersant and other chemical measures, besides toxicity and other concerns, may merely transfer the problem from one ecological compartment to another, such as from the surface of the ocean to the water column or the ocean bottom. Given that the oil industry has come to involve ever larger projects, with potentially ever larger environmental impacts, it is also appropriate to consider increasing the size of maximum fines which can be assessed, besides the compensation requirements which may apply, which are already unlimited under Brazil’s environmental laws. Still, fines and compensation sought must be reasonably applied, in order to ensure that the regulatory system is fair and that Brazil remains an attractive legal regime in which to do business. Likewise, compensation must bear a direct relationship to actual damages, and punitive measures sought should avoid the semblance of unreasonable political motivation. Despite the conclusions drawn herein, much harm has already been done. Unfortunately, in the Chevron Frade oil spill case, the consequences of an inappropriate and mishandled response to the incident have already imposed significant, albeit not readily visible costs, including those in the realm of subjective economic and geopolitical risk, which Brazil will have to bear far into the future, exactly when it faces immense capital, technological and cooperation requirements in order to best develop its oil and gas resource riches for the benefit of its people.

8. Acknowledgements
The authors would like to thank CAPES - Coordenação de Aperfeiçoamento de Pessoal de Nível Superior, for the financial support towards the doctoral research project of one of the authors, as well as FAPERJ - Fundação Carlos Chagas Filho de Amparo à Pesquisa do Estado do Rio de Janeiro, for the financial support towards the research work of one of the authors.

9. References
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