* Police report alleges Chevron cut safety margins * Chevron says it followed industry drilling norms * Some see charges as unfair, say gov't shares blame By Jeb Blount RIO DE JANEIRO, March 19 (Reuters) - A Brazilian prosecutor plans to allege this week that Chevron and Transocean should not have drilled a deep-water well that leaked in November, legal documents showed, giving a glimpse into expected criminal charges that could slow the rush to develop Brazil's vast offshore oil wealth. The accident cracked geological structures in the reservoir and oil will continue leaking from the field until it is emptied, the prosecutor Eduardo Santos de Oliveira told Reuters in a telephone interview on Monday. The prosecutor's comments expanded on his investigations and police reports being used to assemble criminal indictments against U.S. oil company Chevron, drill-rig operator Transocean, and 17 of their executives and employees. The documents, obtained by Reuters, provided the most detailed look yet at possible causes of the oil leak off Brazil's southern coast. They also outline why prosecutors are seeking criminal charges for what industry watchers note is a relatively small spill at a well that was approved for drilling by Brazilian regulators. "We are in uncharted territory," said Cleveland Jones, a Brazilian oil geologist at the State University of Rio de Janeiro. "Do we want better environmental standards? Yes. Did the environment get really hurt? No. If you applied the same standards to the whole industry, you'd probably have to shut it down, and we aren't applying the same standards to others." Authorities on Saturday ordered Chevron's Brazil chief George Buck and 16 others to surrender their passports and remain in the country. Criminal charges could be filed by Wednesday, a spokesman for the prosecutor said. A Brazilian judge will then determine whether to proceed with formal indictments. The pending criminal case, along with a record $11 billion environmental lawsuit the prosecutor launched against Chevron in November, show heightened concern over the safety of Brazil's offshore oil boom in the wake of the 2010 BP oil disaster in the Gulf of Mexico. The Chevron leak was less than 0.1 percent of BP's massive spill and no oil reached shore, raising concern from Chevron and others that the charges may be politically motivated or unfair. Much larger and more damaging spills by Brazilian state-run energy giant Petrobras, which owns 30 percent of the Frade field operated by Chevron where the leak happened, have not led to criminal charges against Petrobras or its executives. Chevron, which says it followed accepted industry practice, sought and received permission last week to shut down production at Frade after finding small, unexplained new leaks in the field that had been producing 61,500 barrels a day. That was down from about 80,000 bpd before the November spill. Brazil's oil regulator, ANP, said on Monday it was studying the new leaks but had found no evidence they were growing in volume. The prosecutor, Santos de Oliveira, said the ongoing leaks provide evidence of irreversible damage. "There's no way to stop this leak until the reservoir is depleted," he said on Monday. "The seal was cracked and oil will leak until it's gone." Chevron spokesman Kurt Glaubitz said the company responded to the incident responsibly and dealt transparently with all 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," Glaubitz wrote in an email. Chevron said on Thursday they have no indication that recent leaks in the Frade field are related to the November accident. Natural seeps of oil are common in the Campos Basin, home to the Frade field, and are one of the reasons that oil was discovered in the region, Jones said. The basin is the source of about 80 percent of Brazil's oil. A Transocean spokesman said the company had no immediate comment on the documents. On Saturday, the company said it "has always cooperated with the authorities and will also continue to vigorously defend its people." If the charges are filed as expected, the companies and officials probably face years of legal action. Lawyers have had travel bans lifted while similar cases were being litigated, and few individuals or companies have ever been convicted of environmental crimes in Brazil and fewer have gone to jail. Reuters reported Jan. 26 that Santos de Oliveira was preparing charges. The planned indictments were based in part on an investigation by Fabio Scliar, head of the Brazilian Federal Police's Environmental Division in Rio. The well that led to the November leak "should not have been drilled," the report signed by Scliar says. When Chevron drilled into an undersea reservoir, high-pressure oil was able to "kick" and surge into the well. A safety valve on the sea floor prevented the oil from shooting up to the Transocean drill rig on the surface, which would have caused a gusher. Failure at such a valve, known as a blow-out preventer, or BOP, led to the BP disaster. The blow-out preventer trapped the kick pressure in the well, cracking the bare rock of the well bore hundreds of meters below the seabed. Oil seeped through the breech into porous rock and cracks then migrated to the sea floor and up to the surface. This should not have surprised Chevron, Scliar's report said. RECKLESS DRILLING OR MISCALCULATION? Chevron's drilling policies and environmental licensing documents required it to use a substance known as drilling mud at pressures sufficient to "overbalance" reservoir pressure kicks. Mud removes debris upward and holds oil down during drilling. In the 18 previous wells drilled in Frade, maximum reservoir pressure was between 8.4 and 8.6 pounds per gallon, Scliar said, citing interrogations of Chevron and Transocean officials. Those wells used mud at pressure of 9.2 pounds per gallon, giving the company a 0.4 to 0.6 pounds per gallon "mud window," or safety margin, the police report alleges. In the well that leaked in November, Chevron expected maximum pressure of 9.4 pounds per gallon and used mud with 9.5 pounds per gallon of pressure, the report said. This provided a mud window or overbalance of only 0.1 pound per gallon, a safety margin only a quarter to a sixth of those used in the previous wells, Scliar said in the report. Scliar alleged that this shows Chevron knew the pressure was higher than normal, and used mud with less protection. Chevron used the lower safety margin in the last well because heavier mud might have exerted enough pressure to crack the well bore on its own, according to the report. This, Scliar alleged, shows Chevron was aware of the higher pressure and weaker-than-normal rock but drilled anyway. Buck said Nov. 24 that Chevron acted responsibly. The cracking of the well wall was an unfortunate miscalculation of reservoir pressure and rock strength, a not-uncommon occurrence in a business that works in places inaccessible to humans and beneath thousands of meters of ocean and rock. Paul Bommer, a petroleum engineering professor at the University of Texas at Austin, said Chevron faced a "classic well-design problem." "Normally what happens when the mud window gets this close is people will think of stopping and cementing the well to strengthen it," he said. "This is an area where you have to be very careful." Cementing would have reinforced the bare rock of the well bore against the pressure from the kick and might have prevented the leak, but it would have cost money and time, Bommer said. Chevron's environmental licenses say the company is supposed to store liquids that can close a problem well aboard platforms. Buck has said it took four days to get mud heavy enough to kill the well from shore because storms made work dangerous. Some say Chevron is not the only one to blame for the leak. Petrobras and Japanese group Frade Japan are minority partners in the field, and Brazil's government approved drilling plans. "I wouldn't be surprised if Chevron is found to have done a bad job," said Ildo Sauer, an oil and gas expert at the University of São Paulo and Petrobras' former natural gas chief. "But Chevron got approval for its work at every step. It's a farce to attack on Chevron and let the government, with its bigger responsibility, off the hook."