) -- Brazil's national oil regulator has suspended


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right to drill in the country, pending more clarity from the oil giant after the recent spill in its major Brazilian Frade field.

At the same time, the Brazilian energy regulator also suspended Chevron's right to explore for oil in Brazil's subsalt areas, considered one of the most significant global finds in recent oil market history.

The news development was not a complete surprise, as the Frade spill has been a minor nightmare for Chevron, which has already been cited by Brazil for falsifying information provided in response to the spill and criticized for its response plan. Chevron is expected to be fined for the spill. The latest development, though, is a hit to Chevron's significant hopes for its Brazilian exploration at a time of declining production for the oil majors.

Chevron's Frade oil spill began on Nov. 7.

The $3.6 billion Frade project has been one of Chevron's designated marquee "major capital projects" in 2011.

Major capital projects and new exploration are keys for the oil majors, especially given the recent decline in production levels. Investors have not rewarded the oil majors for recent record profits buoyed by crude oil prices because of the production shortfalls. This trend magnifies any hit to major capital projects, since these activities are an increasing part of Chevron's production mix. A diversified oil major like Chevron, however, doesn't rely on any one project to move its production needle.

Brazil, more generally, has been one of Chevron's key exploration zones this year. Brazil is slated for continued major capital project expansion and new exploration from 2011 to 2013 by Chevron, including the Papa-Terra project, Chevron's largest planned investment in Brazil, also located in the Campos Basin like Frade. Papa-Terra is two years out on the horizon, slated for production in 2013.

Beyond the concerns about Chevron's ambitions in Brazil, the larger worry is whether the Chevron spill has a chilling effect on the right to drill in Brazil's subsalt deepwater region, much like the


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Macondo spill set back the entire Gulf of Mexico drilling business.

Chevron shares ended Wednesday down 2.7%, with losses accelerating after the news of the Brazilian drilling suspension was released, though the energy sector as a whole was down by more than 2% on global concerns led by the continuing eurozone crisis.

-- Written by Eric Rosenbaum from New York.

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