Brazil has an established upstream oil and gas industry, with approximately 130 companies holding a diversified portfolio of onshore and offshore exploration and producing assets. In August 2020, the Brazilian oil production reached an average of 3,087MMbbl/d, with offshore production representing 96.9% of the total output. Pre-Salt production represents 70.7% of total domestic hydrocarbon production.

Petróleo Brasileiro S.A. – Petrobras is by far the largest oil producer in Brazil. The fields in which it has 100% of the participating interest account for 42.9% of total oil & natural gas produced in the country, even though the hydrocarbon production of other operators is growing fast due to the opening up of the upstream market.

According to the ANP August 2020 monthly newsletter, gas production has reached an average of 134 MMm³/d, with offshore production representing 85.5% of the total output.

In 2019, Brazil booked reserves of 12.7 billion barrels of oil and 3.4 million 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.

Title to oil and gas is transferred to concessionaires and contractors at the ANP measurement points.

The leading 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. By this regime, Petrobras can explore and produce up to 5 billion barrels of oil equivalent in the Pre-Salt open acreage. Besides, it 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 significant differences between onshore and offshore activities in Brazil. However, we highlight that, on September 21, 2018, the ANP approved the reduction of the royalties from 10% to 5% to foster investments in mature and marginal fields.

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 strategic areas) set forth the legal regime for granting exploration and production rights in Brazil. The ANP oversees the bidding rounds for the granting of O&G areas, and, so far, 21 rounds have taken place (16 concessions contracts and 5 production sharing agreements).

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

The production sharing agreements shall be entered into by the ANP and the winning bidders at bidding rounds promoted by the ANP. Their main goal is to explore and produce 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 a 28-year development and production phase.

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, representing the minimum amount of investment that the company needs to make in its exploratory activities in a specific block. Local content is another critical part of both regimes. It 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 shall be resolved via arbitration. The parties shall choose the arbitral institution by mutual agreement. 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 shall occur in the city of Rio de Janeiro and be conducted in the Portuguese language by three arbitrators, with each party choosing one arbitrator. These two arbitrators shall select 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 Unconventional Reservoir Hydraulic Fracturing Optimization (ANP Resolution No. 21, dated April 10, 2014). However, hydraulic fracturing is still a controversial activity in Brazil, and court decisions have challenged its use.

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

Due to current restrictions on fracking activities, the role of shale oil on the Brazilian market is immaterial.

Petrobras’ shale operations are focused on shale deposits located in São Mateus do Sul (state of Paraná), processing a total of 1.5 million tons of crude shale in 2019, producing 6.7 thousand tons of shale gas.

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. The Brazilian government also participates through the MME and the CNPE. The latter is a policymaker of the upstream guidelines.

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

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 Brazilian Institute of Environment and Renewable Natural Resources (IBAMA) oversees 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.

Upstream activities performance 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.

The vast majority of potentially polluting or degrading activities are subject to environmental licensing at the state level. At the same time, federal authorities are competent in the specific cases listed in Article 7 of Complementary Law 140/2011. Onshore conventional oil activities are licenced by the relevant state environmental body (Article 8 of the Complementary Law 140/201). Licences for offshore activities must be secured at the IBAMA (Law 6,938/81).

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 disposing 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 under 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, the lifetime of the field, and output volumes); and
• Annual occupation or retention fee (landowners shall receive a monthly payment 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, except for 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.

Local content requirements apply to the exploration and production phases, being determined in the tender protocol of a bidding round and may vary for each bidding round.  As an example, the Tender Protocol of the Permanent Offer imposes the following local content requirements:

• Onshore concessions:
  • exploration phase: 50%; and
  • production development phase: 50%.
• Offshore concessions:
  • exploration phase: 18%; and
  • production development phase: well construction: 25%; collection and outflow system: 40%; stationary production unit: 25%.

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

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

Several ANP regulations govern the procedures and liabilities arising from the guidelines established under the Petroleum Law, including:

• ANP Resolution No. 17/2015 regulates the development plan content and establishes the procedures to decommission and abandon the concession area.
• ANP Resolution No. 41/2015 approves the Technical Regulation of the Subsea Systems Operational Safety Management System.
• ANP Resolution No. 46/2016 approves the Operational Safety Regime for the Integrity of Oil and Natural Gas Wells.
• ANP Resolution No. 817/2020, which provides for decommissioning activities.

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 and gas transportation pipelines the Ministry of Mines and Energy approval.

The gas transportation authorisations issued by the ANP before the enactment of the Gas Law were ratified by such law. Requests for constructing new gas transportation pipelines must be submitted to the Ministry of Mines and Energy (MME) and analyzed by 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. To date, gas transportation activities are entirely performed through authorizations issued by the ANP. The 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 do not apply to LNG terminals and offloading production 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, a few LNG Terminals are operating in Brazil. Open access rules to permit third-party access to LNG terminals are not currently in place.

The Gas Law regulates gas storage activities. They can be performed by companies or consortia incorporated and with headquarters and management in Brazil, subject to the ANP prior 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.

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 is 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 activities are regulated by each state of the federation and the relevant concession agreement.

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.

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

The Gas Law and the states´ legislation provide a few exceptions to the supply of gas to dedicated projects with related self-producers, self-importers, and free consumers. The interested parties shall pay an O&M tariff to the local distribution company, as the case may be.

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

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

The downstream markets for gas by-products, LPG, GNC, and LNG are regulated by the Gas Law and by the ANP regulations, with multiple suppliers’ coexistence to end-users and consumers.

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

Gas to Grow Program

In July/2016, the MME launched a programme, known as Gas to Grow, to foster competition in the gas market and improve the open-access rules to permit third-party access to core infrastructures, such as natural gas processing units LNG  terminals.

As a result of the Gas to Grow Programme, Presidential Decree No. 9,616/2018 was issued to promote (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.

Bill No. 6407/2013, which will revoke the current Gas Law, was recently approved by the Chamber of Deputies and is currently under debate in the Senate. It is expected to be approved in the next few months. This Bill aims to foster the development of gas transportation activities in Brazil by creating a friendly market environment for investments in constructing a natural gas transportation system.

The Bill above also aims to revoke the current concession regarding gas transportation activities, which would be performed exclusively under the authorization regime.

Besides, Bill No. 6407/2013 is expected to introduce third-party access rights to LNG terminals and offloading production pipelines.

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 areas not acquired in previous bids.

With the First Cycle of Permanent Offer in its final stages, and the concession contracts awarded expected to be signed by March 2021, ANP is currently holding the Second Cycle of Permanent Offer. In this Second Cycle, 708 blocks and 3 areas with marginal accumulations are available. A public session for presenting the offers is scheduled to be held in December 2020, and the concession contracts will be signed by July 2021.

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

1. Shale gas and unconventional hydrocarbon activities
2. Access to oil and gas infrastructure
3. Upstream environmental licensing
4. Increase of the participation of natural gas in the energy mix

During the Covid-19 pandemic, the Brazilian oil and gas industry was deeply impacted, inducing oil companies operating in the country to reassess their plans for the foreseeable future.

Due to the devaluation of oil, projects with low profitability are more likely to lose strength. The impact of the coronavirus pandemic reduced the attractiveness of specific ongoing divestment processes. Such impact can be exemplified by Petrobras’ current strategic plan, counting on positive NPV, with the Brent spinning between USD45 and USD50 per barrel, while the breakeven of the pre-salt production development is in the range of USD35 and USD45 per barrel, as previously stated by Petrobras.

The ANP has issued several resolutions to deal with the current pandemic state and has extended deadlines of upstream agreements, loosened contractual commitments in the exploration and production stages, and suspended certain obligations regarding the demobilization of operational personnel.

Following the global trend towards the low-carbon energy transition and per 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.