Chevron Hits a Roadblock

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Faced with higher demand and depleting resources, global oil and natural gas companies are increasing offshore drilling operations as these fields offer huge reserves. But with new avenues come new challenges, like the one Chevron (NYS: CVX) is having to deal with at the Frade Field off the coast of Brazil.

What happened?
Chevron operates in the Frade Field with its partners Petroleo Brasileiro and Frade Japao, a Japanese consortium. Chevron underestimated the pressure at one of its wells in an underwater reservoir, which caused oil to leak through at least seven narrow fissures to the ocean floor.

The incident resulted in a spill of around 3,000 barrels of oil, according to Haroldo Lima, head of Brazil's oil and gas regulator ANP. Chevron has already been fined $28 million by Brazil's environmental agency and may face a total fine of as much as $139 million. Brazil's National Petroleum Agency has temporarily banned all drilling activities of the company in the country.

The aftermath
As a result of the oil spill, drilling companies in Brazil, such as Chevron and Halliburton (NYS: HAL) , will have to go through more stringent scrutiny. The spill has already cast its shadow, with ANP rejecting Chevron's request to drill a deepwater pre-salt well at the Frade Field, saying it poses a greater risk of oil spilling.

The Frade Field episode follows a similar spill by ConocoPhillips (NYS: COP) at the offshore operations of China's Bohai Bay and the massive Gulf of Mexico spill by BP (NYS: BP) . Such accidents have further highlighted the dangers associated with exploration and drilling of deepwater reserves.

The deepwater reserves of Brazil are expected to contain almost 100 billion barrels of recoverable oil, but the spill may affect the country's chances of emerging as a major oil producer because of stricter rules and unseen hazards. Along with Chevron, companies such as Statoil (NYS: STO) and Shell (NYS: RDS.A) (NYS: RDS.B) are also exploring in the deep waters off the coast of Brazil. Only time will tell how things turn out for them.

Foolish takeaway
Although Brazil represents only about 3% of Chevron's global assets and contributed less than 1% to the company's global production in 2010, it's an important acreage to hold because of its huge reserves. Let's hope Chevron will not have to face any severe consequences and will continue drilling in the region to reach its target of doubling output.

Fool contributor Amitabha Chakraborty does not own shares of any of the companies mentioned in this article. Motley Fool newsletter services have recommended buying shares of Chevron, Petrobras, and Statoil A. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

At the time this article was published

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