Brazil: Energy – Oil & Gas

Brazil is, as of November/2022, the 8^th largest oil producer in the world. From January to September 2022 the average daily crude oil production is 2.8 million barrels per day while the natural gas production is 123 million cubic meters per day. The total amount of 3P oil reserves in Brazil (last data available of 2021) is 13.2 billion barrels of oil and 379 billion cubic meters of natural gas.

According to Brazilian Federal Constitution, Federal government owns the reserves of oil and natural gas. The rights to explore and produce (E&P) oil and natural gas in Brazil are granted under the concession (pursuant to Law No. 9,478/1997) or production sharing regime (pursuant to Law No. 12,351/2010).

In both regimes, the Federal Government, through its Oil, Natural Gas and Biofuels Agency (“ANP”) carries out bidding rounds for the granting of oil and Gas polygons for exploration and production. The criteria of selection is included in the tender and usually related to the higher bonus payment to the government. The form of concession or production sharing contract is an integral part of the tender protocol. ANP enters into the contract with the winning bidder.

The concession regime is applicable to onshore and offshore fields, except in areas where the production sharing regime is required. In the concession regime, the contractor owns all the oil and gas that may be discovered and produced in the concession area and pays to the Federal Government participations, such as: signature bonus, payment for occupying or retaining an area (in the case of onshore blocks), royalties and, in the case of large production fields, special participation.

The production sharing regime is adopted in operations carried out in the Pre-Salt Polygon (located offshore, as set forth in the applicable) and in strategic areas as defined by the Federal Government. In the production sharing regime, the ownership of the oil produced is shared between the contractor and the federal government. The contractor bear all the costs of the project and, in case of exploratory success, the contractor is reimbursed with a volume of hydrocarbons called “cost in oil”. In order to calculate the share of oil and natural gas owned by the Federal Government and by the contractor, the volume corresponding to the royalties due and all necessary investment and operating expenses are deducted from the total production activities (cost in oil). The difference, called “profit oil”, is shared between the companies participating in the consortium and the Federal Government, on the proportions set forth in the contract.

In both regimes, the risk of investing and finding – or not – oil or natural gas belongs to the contractor.

The key features for the concession contracts, further to the typical provisions are:

a) provisions related to the exploration, development and production phases (presentation of plans, guarantees, duration of each phase, starting date of the respective phase, penalties for default to comply the applicable requirements, etc);

b) rules for the calculation and payment of royalties and special participation;

c) local content requirement for each phase. Local content represents a percentage of local suppliers that the winning bidder must hire while performing activities related to the contract (exploration and production);

d) decommissioning procedures.

e) Indication of Brazilian Law and arbitration for dispute resolution.

The key features for the production sharing contracts, further to the typical provisions are:

a) rules to calculate the cost in oil;

b) rules to calculate the profit oil and its sharing;

c) rules for the calculation and payment of royalties and special participation;

d) provisions related to the exploration, development and production phases (presentation of plans, guarantees, duration of each phase, starting date of the respective phase, penalties for default to comply the applicable requirements, etc);

e) local content requirement for each phase;

f) decommissioning procedures.

g) Indication of Brazilian Law and arbitration for dispute resolution.

There are no significant amounts of shale gas being exploited in Brazil.

In 2014, ANP regulated through ANP Resolution No. 21, dated April 10, 2014, main requirements for Unconventional Reservoir Hydraulic Fracturing Optimization.  In 2013, it was offered at the 12nd Bidding Round some blocks on shore for the exploration of shale gas, through fracking. The contract for the exploration and production at said blocks were not executed due to a decision of the judicial courts to suspend it.

There is one shale crude and gas reservoir that has been explored by Petróleo Brasileiro SA (Petrobras). However, in late November this year, Petrobras has completed the sale of its 5,800-tonne/day Unidade de Industrialização do Xisto (SIX) unit—including a mine in one of the world’s largest oil shale reserves and a shale processing plant—in São Mateus do Sul, Paraná, to Forbes Resources Brazil Holding SA (F&M Brazil), a subsidiary of privately-held Forbes & Manhattan Resources Inc. (F&M), Toronto, Ont.

The key regulators of the oil and gas industry in Brazil are: the National Council of Energy Policy (“CNPE”); the Ministry of  Mines and Energy, and; the Oil, Natural Gas and Biofuels National Agency (“ANP”).

Petrobras (Petróleo Brasileiro S.A.) is a listed company on which the Federal Government is the controlling shareholder. The company operates in the following areas: oil and gas exploration and production; oil and gas refining; transportation and trading; petrochemicals; electric power generation; biofuels production.

PPSA (Pré-sal Petróleo S.A.) is a public company on which the Federal Government is the only shareholder. The company represents the Brazilian Government in the production sharing contracts, being responsible to the management of these contracts as well as for the sale of the oil and gas of the Federal Government’s share.

Only companies incorporate and with administration in the Country are allowed to enter into concession or production share agreements. However, there is no restriction on foreign companies fully controlling their Brazilian subsidiaries.

Brazilian environmental regulations are based on the principle that the pollutor shall fully compensate any damage caused to the environmental and such analysis is based on strict liability.

Further, potentially polluting activities, such as Upstream activities, require an environmental impact assessment (EIA) and an environmental impact report, which must be reviewed and approved by the appropriate environmental authorities, in order to issue the necessary licenses for the performance of the activities.

The exploration and production of oil and gas require three types of licence:

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

Licenses, if granted, will state the requirements and limitations for developing the activities. There are no preliminary licensing or earned rights to environmental licensing due to being awarded an exploration area in a bid and entering into a concession or participation sharing contract.

Licensing for potentially polluting activities may be done in a state level or at Federal Level (by IBAMA) in some situations, such as when the activity is performed in Brazilian offshore continental shelf or between 2 or more states. In any case the environmental state and federal entities are independent from ANP and any other regulator.

In relation to the health and safety regimes, in addition to being compelled to follow industry standards, Brazilian operators shall also observe mandatory laws, regulations and normative regulations by labor ministry, environmental entities as well ANP’s.

From a contractual pointo of view, in summary, the Contractor shall:

a) at its own account and risk, obtain all licenses, authorizations, and permits required under the applicable laws and regulations;

b) have a safety and environment management system that complies with the best practices of the oil industry and the applicable laws and regulations;

c) ensure preservation of an ecologically balanced environment;

d) mitigate the occurrence of impacts and/or damages to the environment;

e) ensure the safety of the operations for purposes of protecting human life, the environment, and the Federal Government’s heritage;

f) ensure the protection of the Brazilian historical and cultural heritage;

g) restore degraded areas in compliance with the applicable laws and regulations and the best practices of the oil industry;

h) meet the operational safety and environmental preservation recommendations issued by ANP, pursuant to the applicable laws and regulations;

i) provide a management system for social responsibility and sustainability consistent with the best practices of the oil industry.

In addition to the signature bonus, paid before the date of execution of the contract (concession or production sharing), the contractor shall pay to Federal Government the following shares:

a) signature bonus;

b) royalties;

c) special share;

d) payment for land occupancy (landowners shall receive a monthly payment between 0.5% and 1% of the total hydrocarbon production in the area); and

The shares mentioned on items b, c and d are due, on case by case basis.

The main federal tax incentive for the oil and gas industry is named REPETRO-SPED. REPETRO-SPED is a special tax regime that grants relief of federal taxes on permanent importation or temporary admission of certain equipments listed by Brazilian Internal Revenue Service

Throughout the contract period, the contractor shall comply with local content requirements, as provided on the respective contract. The requirement varies according to the phase of the project (exploration, development and production). The local content requirements for the total amount of goods and services contracted for each phase the project.

The transportation of crude oil being exported shall be carried out by a Brazilian company.

The main ordinances applicable to decommissioning of E&P installations are:

a) From ANP: Ordinances Nos 817/2020; 41/2015; 43/2007; 46/2016 and Technical Regulation No. 2/2011;

b) From Environmental Authorities: Ordinances MMA No. 422/2011 and CONAMA No. 23/1994;

c) From Brazilian Navy: NORMAMS No. 07/DPC, 08/DPC and 11/DPC;

d) From National Commission for Nuclear Energy (CNEN): Nos. CNEN-NN 8.02; 3.01; 8.01 and 5.01;

e) From the Labour Ministry: NR-34 and NR-37.

In the concession or participation sharing contract, the operator undertakes obligations to fully decommission and abandon the area. As part of the contract, operator shall place a bond to guarantee sufficient funds for this decommissioning phase. Decomissioning obligations involve removal of all assets from the field (as a general rule, but subject to exceptions), indemnify all damages arising from the activities, promote environmental recovery of the area or monitor assets allowed to be left in the field.

The decommissioning plan must be approved by ANP and when considering offshore fields, also Brazilian Navy and IBAMA (federal environmental entity). Such plan must be presented to ANP several months before start of decommissioning activities.

Oil pipelines may be classified as transferring pipeline or transport pipeline, as provided on Law No. 9,478/1997.

Transferring oil or gas pipelines are the ones with a route that supports a specific offshore E&P unit and for this reason its construction and operation are subject to the same rules provided on the respective E&P contract.

Transport oil or gas pipelines are the ones with a route that could be used by various parties and for this reason its operation and construction shall be authorized by ANP, in accordance with ANP Ordinance No. 52/2015.

Law No. 14,134/2021 sets forth that the construction and operation of offshore and onshore gas pipelines to transport the natural gas from the offshore EP unit to the natural gas processing plant are subject to authorization by ANP. Third parties have the right to use such pipelines, however ANP has not yet regulated this right.

Third parties have right to use oil and gas transport pipelines as well as other essential infrastructure, such as terminals and process facilities.  The provisions for third-party access are set out in the Petroleum Law and the Gas Law. The ANP Resolutions No. 35/2012 and regulate the principle of open access.

LNG liquefaction and LNG receiving terminals are subject to ANP authorization as provided in Law No. 14,134/2021. The construction and operation are subject to the provisions of ANP Ordinance No. 52/2015. Third parties have the right to use such terminals, however ANP has not yet regulated this right.

In Brazil there are four LNG receiving terminals in operation and three under construction. There are not any LNG liquefaction terminal in Brazil.

Underground natural gas storage installations are subject to ANP authorization, as provided in Law No. 14,134/2021. Third parties have the right to use such installations, however, ANP has not yet regulated this right.

There are not any underground natural gas storage installations in Brazil.

The extension of gas transmission system in Brazil is 9,409 km. The extension of gas distribution network is about 35,500 km, which are spread in various states of the country.

The gas transmission system are owned and operated by private companies, under an authorization granted by ANP, as provided by Law No. 14,134/2021. All the capacity of the gas transmission system  is available to third parties, then, according to referred law, the operator is not authorized to trade gas.

The gas distribution network is owned and operated by private and state companies. Such right, is granted under concession contracts. Third parties may access the distribution network as free consumer, in accordance with the applicable state law and regulation. It is worth to note that in Brazil, each state has its own law for the regulation of the gas distribution network services.

In April 2021 Law No. 14,134/2021, know as New Gas Law, was published. This law aims to promote the natural gas industry in Brazil and contribute to increased competition, thus promoting a broad opening of the market.

The New Gas Law, together with other measures adopted by the Federal Government, seek to consolidate advances in transforming a model that in practice is monopolistic into a competitive, open and dynamic market, enabling price reduction, attracting new investments, access to infrastructure and development of pre-salt gas production.

The consumer of large quantities of natural gas (free consumer), the gas distribution companies and trading companies has the option to purchase natural gas from any agent that is authorized by ANP as a natural gas trader, which includes the distribution company.

According to the Federal Constitution, the regulation of the downstream gas market is made by the states.

Some states have updated their local regulations to have them in line with the New Gas Law, mainly in relation to ensure that consumers have the right to purchase gas from any trading company authorized by ANP, as a free consumer.

The recent most relevant changes in government policy and regulation in relation to the oil and gas industry are:

a) Law No. 14,134/2021, known as New Gas Law came into force. This law aims to promote the natural gas industry in Brazil and contribute to increased competition, thus promoting a broad opening of the market. Please refer to our comments at question 16;

b) ANP published Ordinance No. 881/2022, which is in force, which regulates the rights of third parties to use marine terminals which handles crude oil or products. The most relevant provisions of this ordinance are: (i) the terminal operator cannot buy, sell, import or export oil or products, except for specific operational reasons; (ii) the terminal operator shall publish regularly any capacity the terminal may have available to be contracted by any party; (iii) the rights of preference of the owner of the terminal to use the terminal to handle its own cargoes are subject to a certain period. The extension of this period is subject to ANP assessment, based on the history of operation of the cargo owner and on the capacity of the terminal;

c) Areas at continental shelf, beyond the economic exploration zone limit, where Brazil has rights to explore, pursuant to UNCLOS, were offered at a 17^th bidding round for exploration and production of oil and gas;

d) Petrobras is under a divestment program for the sale of various refineries.

The key challenges for the government and industry are: (i) the management of fuel prices in the context of high oil prices; (ii) the strengthening of natural gas market in accordance with the New Gas Law; (iii) the energy transition to carbon zero market, while there are in Brazil large opportunities on the oil and gas sectors on supply and demand sides.

In relation to the fuel prices, it is important to highlight that the VAT tax structure was reduced in order allow a relevant price reduction.

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.

We highlight the following requirements to reduce the green house gas emissions to atmosphere:

a) All gasoline consumed in the country are mixed with 27% of ethanol;

b) All gasoil consumed in the country are mixed with 10% of biodiesel;

c) Fuel distribution companies shall comply with targets of greenhouse gas emissions, which are achieved by the purchase on the market of Decarbonization Credit. The credits are sold by certified biofuel plants;

d) The production and use of biogas and biomethane is encouraged by various federal and states legislations by means of incetives;

e) The Federal Government created the National Hydrogen Program in order to develop the production and consumption of hydrogen in Brazil.