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Transocean gets Frade reprieve as court lifts injunction

If not lifted, the injunction would have forced the company to shut its operations

Brazil’s Superior Court has lifted an injunction that would have forced offshore drilling services company Transocean to shut down its operations in the country. Had the injunction not been lifted, much of the country’s offshore oil production may have had to be shut in.

On 27 September, both Transocean and US supermajor Chevron, which operates the Frade oilfield, were served with an injunction ordering the halt of their Brazilian operations. The injunction was issued as part of a civil case arising from last November’s oil spill at the Frade field. The injunction was sought by federal prosecutors.

While the court lifted the ban on Transocean, it mostly upheld the injunction for Chevron, saying that it was only allowed to continue monitoring and mitigation activities in the spill area. The Brazilian government argued that the ban on Chevron went so far that it would prevent the company from continuing clean-up and monitoring operations at the Frade site.

In November, Chevron experienced an unexpected spike in pressure at an appraisal well drilled at Frade. The incident did not damage the well or any surface equipment, but it forced oil up from the reservoir, causing seeps in the ocean floor near the wellhead.  Although the Frade spill was relatively small, with an estimated 3,700 barrels of oil leaking into waters off the coast of Rio de Janeiro state, none of which made it to shore, it sparked a hostile response against the companies among the public and some in the government.

The National Petroleum Agency (ANP), Brazil’s oil and gas regulator, cleared Transocean of wrongdoing. The ANP cited Chevron for minor safety and operational infractions, but only fined the company a relatively modest $17.5 million.

The country’s federal prosecution service, though, has not relented. It is seeking, via a civil lawsuit, almost $20 billion in damages from Transocean and Chevron in a civil lawsuit.

Foreign investors, keen on Brazil’s huge offshore oil potential but concerned that the country is becoming an increasingly challenging place to do business, have watched the case closely. Many see it as a measure of the country’s stance towards the industry.

Shortly after the Frade spill, some Chevron executives had their passports held by the government, a move that was seen by many as heavy handed in light of the relatively small size of the spill and limited environmental impact. The Superior Court’s decision to lift the injunction on Transocean appears to signal a less harsh stance from the judiciary, a move that foreign investors will welcome.

The court agreed with the government’s argument that Transocean was not at fault for the spill and a ban on the company, which operates about a quarter of Petrobras’ 31-strong offshore drilling fleet. would be too damaging to state-run Petrobras and Brazil’s oil industry.

Petrobras and the ANP intervened in the case on behalf of Transocean, arguing that the injunction could cost the government BRL6.71bn ($3.3bn) in royalties and the country could lose out on 126m barrels of oil output.

Transocean has 10 rigs operating in the country, eight of which are contracted to Petrobras.

“The reasons attached by the petitioner [Petrobras and the ANP], rightly accompanied by technical data, exhaustively show that the economic damage is not restricted to the companies involved," Judge Felix Fischer said in his ruling, quoted by Reuters.

Transocean investors welcomed the news, sending the company’s share price up as much as 4.6%, from $44.89 a share to $46.96 a share in early trading on 1 October after Transocean confirmed the injunction had been lifted, before settling about 3% higher at $46.27.

Analysts at Wells Fargo estimated that the injunction would have cost Transocean about $3.15m a day in lost day rates, or more than 10% of the company’s overall revenues. In the second quarter of 2012, Transocean reported total contract drilling revenues of $2.39bn, or about $26.5m a day.

The impact the loss of Transocean’s drilling units could have had on both Petrobras and Brazil’s oil sector highlights Brazil’s efforts to ramp up domestic rig construction using high levels of local supplies and personnel.

As part of its campaign in the country's pre-salt play, Petrobras plans to import 14 rigs this year, and expects that, by 2014, a total of 42 foreign units will be operating in the country. In 2007, there were just five imported units working offshore Brazil.

This year is likely to be the last in which the country imports a large number of rigs, though. Domestic shipyards, being built along the Brazilian coast, are expected to build 33 new rigs between 2016 and 2020. Petrobras has said that local content for the construction of those rigs will be between 55% and 65%. Many question whether the local supply chain will be able to meet Petrobras’ ambitious goals, but the company has vowed to press ahead anyway, and the Brazilian government has prioritised local content requirements.

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