Brazil: Energy: Oil & Gas

Brazil has an established upstream oil and gas industry, with approximately 120 companies holding a diversified portfolio of onshore and offshore exploration and producing assets. In August 2019, the Brazilian oil production reached an average of 2,989MMbbl/d, with offshore production representing 96.5% of the total output. Pre-Salt production represents 63.4% of total domestic hydrocarbon production, although this rate is expected to grow in the upcoming years.

Petróleo Brasileiro S.A. – Petrobras is by far the largest oil producer in Brazil. Its fields account for 43% of total oil & natural gas produced in the country, even though the production of other oil companies is growing fast as a result of the opening up of the upstream market.

According to the ANP’s August 2019 monthly newsletter, gas production has reached an average of 133.3 MMm³/d, with offshore production representing 81.1% of the total output.

In 2018, Brazil booked estimated reserves of 13.4 billion barrels of oil and 0.38 trillion cubic meters of gas.

The Federal government owns oil deposits, natural gas and other fluid hydrocarbons located:

• in onshore sedimentary basins;
• in territorial waters;
• on the continental shelf; and
• in the exclusive economic zone.

The oil and gas ownership is transferred to concessionaires and contractors at the measurement points established by the Petroleum Agency.

The main authorities of the oil and gas sector are as follows:

• Petroleum Agency (Agência Nacional de Petróleo, Gás Natural e Biocombustíveis – ANP);
• Ministry of Mines and Energy (Ministério de Minas e Energia – MME); and
• National Council for Energy Policy (Conselho Nacional de Política Energética -CNPE).

The Federal government is represented in the production sharing agreements by Pré-sal Petróleo S.A. – PPSA, a state-owned company.

There are two main regimes for onshore and offshore oil and gas exploration and production in Brazil:

• the concession regime regulated by Law No. 9,478/97 (Petroleum Law); and
• the production sharing regime created by Law No. 12,351/10 (Pre-Salt Law).

There is also the onerous assignment regime regulated by Law No. 12,276/10, under which Petrobras is granted rights by the Federal government to explore and produce hydrocarbons up to 5 billion barrels of oil equivalent in the open acreage located in the Pre-Salt. The onerous assignment regime provides Petrobras with pre-emptive rights to act as operator in the consortia formed for exploration and production of blocks located in the Pre-Salt.

As a rule, there are no major differences between onshore and offshore activities in Brazil. However, it is important to highlight that, on September 21st, 2018, the ANP approved the reduction of the royalties from 10% to 5% to foster investments in mature and marginal fields.

Last but not least, the production sharing and onerous assignment regimes apply to offshore activities only.

The Petroleum Law and the Pre-Salt Law (the latter regulates exploration and production of oil and gas in the Pre-Salt and in strategic areas) set forth the legal regime for the granting of exploration rights in Brazil. The ANP is in charge of the bidding rounds for the granting of O&G areas, and, so far, 21 rounds have taken place (16 under concessions contracts and 5 under production sharing agreements).

Concession contracts are executed between the ANP and the winning bidders at the bidding rounds promoted by the ANP. The purpose of the concession contract is the exploration, development and production of hydrocarbons in the concession area. Concession contracts have a term of 34 years, with the exploration and appraisal phase of up to 7 years, and the development and production phase with 27 years, counted as of the declaration of commerciality of the area. This term can be extended in case there is still hydrocarbons to be produced.

The production sharing agreements shall be entered into by the ANP and the winning bidders at one of the production sharing bidding rounds promoted by the ANP. The main goal of the production sharing agreement is the exploration and production of hydrocarbons in blocks located in the pre-salt, with or without Petrobras as the operator. Production sharing agreements have a term of 35 years, with the exploration and appraisal phase of up to 7 years, and the development and production phase with 28 years.

Any company which enters into a concession contract or a production sharing agreement must be organized and managed in Brazil. Concessionaires and contractors must discharge all of their contractual obligations, including the Minimum Exploratory Program, which represents the minimum amount of investment that the company needs to make in its exploratory activities in a certain block. Local content is another important part of both regimes and represents the percentage of local suppliers (goods and services) that a company (or the Consortium Members) must use while performing its activities in a given area. Concession contracts and production sharing agreements are both governed by Brazilian law. Any disputes arising therefrom shall be resolved via arbitration. The parties shall choose the arbitral institution by mutual agreement, and if they fail to do so, the ANP indicates one of the following: (i) International Court of Arbitration of the International Chamber of Commerce (ICC); (ii) London Court of International Arbitration (LCIA); or (iii) Hague Permanent Court of Arbitration (PCA).

The arbitration procedure shall take place in the city of Rio de Janeiro and be conducted in the Portuguese language by three arbitrators, with each party choosing one arbitrator, and these two arbitrators selecting the third arbitrator (which will preside over the arbitration). Farm-in and farm-out transactions require the ANP prior approval under the concession contract or the MME prior authorization, upon the ANP opinion, under the production sharing agreement.

There is no separate regime for the exploration and production of unconventional hydrocarbons. In 2014, the ANP regulated the main requirements for the performance of Unconventional Reservoir Hydraulic Fracturing Optimization (ANP Resolution No. 21, dated April 10, 2014). However, hydraulic fracturing is still a controversial activity in Brazil, and its use has been challenged by court decisions.

The key regulator for the upstream oil and gas activities is the ANP.

The Brazilian government is indirectly involved in the upstream oil and gas industry through Petrobras, whose shares are majority owned by the Federal government. Furthermore, the Brazilian government is also involved through the MME and the CNPE, the latter as a policy maker of the upstream guidelines.

The ANP is an independent regulatory body linked to the Federal administration, with the goal to promote bidding rounds, regulate and monitor the upstream activities in Brazil.

There are no restrictions on participation in the upstream oil and gas industry by foreign oil and gas companies. However, upstream hydrocarbons activities can only be performed by companies organised under Brazilian laws, with management and headquarters in Brazil.

The main provisions applicable to environmental, health and safety for oil and gas activities come from:

• the Federal Constitution.
• the Labour Code and Law No. 5,811/19720
• Ministry of Labour and Employment guidelines.
• ANP regulations.
• National Environmental Council (CONAMA) regulations.
• National Environmental Policy (Law No. 6,938/1981).

The CONAMA Resolution No. 01/1986 regulates the performance of activities deemed to cause significant harm to the environment (including oil and gas exploration and production). Such activities are subject to a prior environmental licensing procedure.
The IBAMA is in charge of the environmental licensing for the following projects and activities, amongst others:

• in Brazil and a neighbouring country.
• in the Brazilian territorial waters, continental shelf or exclusive economic zone;
• in indigenous lands;
• in conservation units established by the Brazilian government, except in Environmental Protection Areas (APAs); and
•  in two or more states of the federation.

Notwithstanding the above, the states are responsible for promoting the environmental licensing of onshore upstream activities.
The performance of upstream activities requires an environmental impact assessment (EIA) and an environmental impact report, which must be reviewed and approved by the appropriate environmental authorities.
The exploration and production of oil and gas require three types of licence:

• Preliminary licence;
• Installation licence; and
• Operation licence.

Such licences provide for the rules, obligations, conditions, and restrictions applicable to the activities to be performed by the interested party, and any compliance measures to be taken to mitigate and control environmental impact.
Law No. 12,305/2010 (which established the National Policy for Solid Waste) states that concessionaires are responsible for the disposal of solid waste from oil or gas exploration and production activities. Concessionaires must also comply with the CONAMA Resolution No. 313/02, which provides for the National Inventory of Industrial Waste.
Finally, concerning flares and vents, gas flares shall be authorised by the ANP in accordance with ANP Ordinance No. 249/2000.

The government take in Brazil could be summarized as follows:

• Signature bonus;
• Royalties;
• Special participation (which is an extraordinary financial compensation in cases of fields with high production or profitability, calculated through progressive rates that vary according to location, lifetime of the field and production volumes); and
• Annual occupation or retention fee (Landowners are entitled to receive a monthly fee in local currency between 0.5% and 1% of the total hydrocarbon production in the area).

The federal, state and local governments are also entitled to a share of the Profit Oil under the production sharing regime.

There are no restrictions to oil exports, with the exception of emergency events, during which ANP may limit the exportation. Such emergency events are those in which the domestic supply of hydrocarbons and their by-products are at risk.

Brazil has local content obligations in place. Local content represents the percentage of local suppliers (goods and services) that a company must use while performing its activities in a given area. This obligation has the goal of fostering the Brazilian O&G industry. The minimum percentage of required local content varies for each ANP Bid Round.

The ANP set forth the procedures and obligations applicable to decommissioning and abandonment activities. Several regulatory and contractual obligations arise from the decommissioning and abandonment of facilities by the operators, including:

• to remove any equipment and goods;
• to indemnify any and all damages arising from exploration and production activities (strict liability); and
• to promote environmental recovery of the area.

The Abandonment Plan, which includes decommissioning obligations, must be submitted to, and approved by, the ANP.

The ANP regulates the construction and operation of oil and gas pipelines, onshore or offshore, by companies or consortia incorporated and headquartered in Brazil. Such activities require the ANP prior authorization. The authorisations granted for construction and operation of gas pipelines before the enactment of the Gas Law were ratified by such law. The construction, expansion and operation of new gas pipelines must be submitted to the Ministry of Mines and Energy (MME) and the ANP.

The performance of gas transportation activities shall be authorised by the ANP or granted through a concession contract preceded by a public bid. However, to date, gas transportation activities in Brazil were entirely regulated by authorizations issued by the ANP. ANP has never executed a concession contract for gas transportation.

The provisions for third-party access are set out in the Petroleum Law and the Gas Law. The ANP Resolutions No. 35/2012 and 11/2016 regulate the principle of open access. Under the open access regime, a transporter must allow non-discriminatory access by shippers to its transportation facilities, with the payment of an adequate compensation according to the criteria established by the ANP, taking into account temporary exclusivity provisions granted to the owner of the facilities, if applicable. Currently, third-party access rights are not applicable to LNG terminals and production offloading pipelines.

The construction and operation of LNG and REGAS terminals are regulated by the Petroleum Law, the Gas Law, and the ANP regulations. To date, there are very few LNG Terminals operating in Brazil. Open access rules to permit the third-party access to LNG terminals are not currently in place.

Gas storage activities are regulated by the Gas Law, and can be performed by companies or consortia incorporated and with headquarters and management in Brazil, subject to the ANP authorization or a concession regime preceded by a public auction.

The performance of gas storage in geological hydrocarbon reservoirs returned to the ANP or in other geological formations is subject to a concession contract preceded by a public bid. The MME delegated to the ANP powers to define such geological formations whose gas storage activities will be subject to a concession regime.

Currently, according to ANP Resolution No. 17/2015, only concessionaires of exploration and production activities are authorized to store natural gas in geological hydrocarbon reservoirs.

Piped gas distribution activities are under the states’ jurisdiction and can be performed by local distribution companies incorporated and headquartered in Brazil, within the territory of each state. Piped gas distribution is regulated by the legislation of each state of the Brazilian federation and is subject to the rules handed down by the states’ authorities and bodies created to monitor such activity.

Gas transportation is an activity that falls within the jurisdiction of the federal government and is currently regulated by the ANP. We refer to our comments above on third-party access to gas transportation pipelines.

The supply of natural gas to end users and consumers through pipelines is made by local gas distribution companies within their concession area. The distribution of natural gas through pipelines falls within the jurisdiction of the states of the federation, which award concession contracts to local distribution companies through public tenders. As a rule, customers located in a state of the federation shall purchase piped gas from the relevant local distribution company operating in such state.

The Gas Law and certain states´ legislations provide for a few exceptions to this rule, as in the case of the self-producer, self-imported and free consumer, when the supply of gas volumes to dedicated projects with related parties could be made without the intervention of the local distribution company (by-pass). However, in such case, the interested parties shall pay an O&M tariff to the local distribution company, as the case may be.

The supply of GLP, GNC and other by-products is regulated by the ANP. As a rule, consumers have the option to purchase such by-products from several suppliers.

We refer to our comments on question 15 regarding piped gas distribution, which falls within the jurisdiction of the Brazilian states in their territory.

The downstream market for gas by-products, LPG, GNC, and LNG is regulated by the Gas Law and by the ANP regulations, with the coexistence of multiple suppliers to end users and consumers on a competitive basis.

The marketing of natural gas by traders and gas marketing companies is subject to the ANP authorization.

Gas to Grow Program

The MME launched a programme, known as Gás para Crescer (Gas to Grow), with the purpose of analysing and preparing measures to foster competition in the gas market, as well as to improve the open access rules to permit third-party access to core infrastructure, such as natural gas processing units and LNG terminals.

As a result of the Gas to Grow Programme, a Bill of Law with the intention to amend the Gas Law was presented to Congress, which, due to the impossibility to reach a political consensus, was substituted by Presidential Decree No. 9,616/2018. Amongst other initiatives, the Decree provides for (i) the creation of a natural gas transport System; (ii) the adoption of transport tariff based on the “entry/exit model”; (iii) the expansion of third-party access to infrastructure; and (iv) the harmonization of piped gas distribution state regulations.
Currently, different public agencies are working towards the review of several aspects concerning the unbundling of the market, new regulations for gas transportation, transparency, and the promotion of a competitive market.

On July 24, 2019, Decree No. 9,934 created a committee for monitoring the opening of the natural gas market.

The Onerous Assignment Auction

On April 17, 2019, the CNPE published the Resolution No. 6/2019, authorizing the ANP to hold the “Onerous Assignment Surplus Round” (Bidding Round), since technical assessments indicate volumes over five billion (5,000,000,000) boe (Surplus Production). In this Round, the development areas of Atapu, Buzios, Itapu, and Sepia, all located in the Santos Basin, will be offered to the market.

CNPE Resolution No. 6/2019 also approved the technical and economic guidelines applicable to the Bidding Round under the production sharing regime, amongst others:

• Brent Price of US$ 76.18;

  Average daily production of twelve thousand (12,000) barrels of oil per active producing well;

  Federal Government Profit Oil: I – in the Atapu area, 26.23%; II – in the Buzios area, 23.24%; III – in the Itapu area, 18.15%; and IV – in the Sepia area, 27.88%;

  Judgment Criterion: The highest rate of Profit Oil to the Federal Government;

  Signature Bonus: I – in the Atapu area, thirteen billion, seven hundred forty-two million reais (R$ 13,742,000,000.00); II – in the Buzios area, sixty-eight billion, one hundred and ninety-four million reais (R$ 68,194,000,000.00); III – in the Itapu area, one billion, seven hundred sixty-six million reais (R$ 1,766,000,000.00); and IV – in the Sepia area, twenty two billion, eight hundred and fifty nine million reais (R$ 22,859,000,000.00);

  Royalties: at a rate of 15% on the total volume of oil and natural gas production;

  Minimum Local Content: Buzios, Itapu, and Sepia: Development/Production Phase: 25% for well construction; 40% for the collection and disposal system; and 25% for the stationary production unit; as for the Atapu, it must meet the conditions under the Concession Contract of the adjacent area, called Oeste de Atapu, which means: 35% in the exploration phase; and 30% in the Development/Production phase;

  Payment of Financial Compensation to Petrobras: as a condition to signing the Production Sharing Agreement, the winner(s) of the Bidding Round shall compensate Petrobras for the investments made in the areas to the extent of its participation in the deposit; and

  Recovery as Cost in Oil: the amounts paid to Petrobras by the Contracted Party on the production sharing regime are recoverable as Cost Oil (as per CNPE Resolution No. 13/2019).

MME Ordinance No. 213/2019 set forth the guidelines for calculating the compensation due to Petrobras for investments made in the Buzios, Atapu, Itapu, and Sepia fields.
The final offers shall be presented up to November 6th, 2019.

ANP Permanent Offer

The Permanent Offer consists of continuous offers of fields and blocks returned to the ANP (or in the process of being relinquished), and of blocks not acquired in previous bids.
ANP is currently holding the First Cycle of Permanent Offer. In this First Cycle, 273 blocks are being offered, out of the 600 available for the Permanent Offer, as well as 14 areas with marginal accumulations. A public session was held on September 2019, and the concession contracts are expected to be signed by February 2020.

Besides the challenges and recent changes mentioned in item 18 above, we highlight the following hurdles to the oil and gas industry in Brazil:

I. Shale gas and unconventional hydrocarbon activities.
II. Access to oil and gas infrastructure
III. Upstream environmental licensing
IV. Increase of the participation of natural gas in the energy mix

Following the global trend towards the low-carbon energy transition and in accordance with the rules set forth by Law No. 13,576/2017, which created the ‘RenovaBio program’, the ANP Resolution 791/2019 forecasted annual targets for reducing greenhouse gas emissions for fuel trading.