Contributed By Tauil & Chequer Advogados in association with Mayer Brown
The Brazilian Constitution of 1988 provides that the federal government has ownership over the petroleum and mineral resources located in the subsoil, in the continental shelf and in the exclusive economic zone (ZEE) (Articles 20 and 176). Also, pursuant to the Brazilian Constitution, oil and natural gas exploration and production activities, refining, the importation and exportation of by-products, maritime transportation of crude oil or by-products, and pipeline transportation of petroleum and natural gas are activities under the monopoly of the federal government (Article 177).
However, the federal government can contract with state-owned or private entities to conduct the petroleum activities referred to above, subject to certain conditions set forth in the applicable laws.
End of the Petrobras Monopoly
After several years of monopoly over petroleum activities (exclusive to Petróleo Brasileiro SA or Petrobras since 1953), the government authorities concluded that keeping the federal government's monopoly on the exploration and production of oil and natural gas could be an obstacle to the development of the petroleum industry.
Thus, aiming to provide legal mechanisms to attract both domestic and international private capital to Brazil, the Brazilian Congress enacted Constitutional Amendment No 9/95, which amended the first paragraph of Article 177 of the constitution and allowed petroleum activities to be contracted by the federal government with state-owned or private entities (subject to certain conditions set forth in the applicable laws).
In this context, Law No 9,478/97 (the "Petroleum Law") was enacted and, among other provisions, it implemented the concession regime for the award of E&P rights by the federal government in Brazil. A few years later, following the discoveries of huge oil reserves in the ultra-deep waters of the pre-salt layer in the Campos and Santos basins, announced by Petrobras in 2007, and several discussions within the federal government and congress about the best way to exploit those resources, Law No 12,351/2010 (the "Pre-Salt Law") introduced the production-sharing regime in Brazil, which is applicable to areas located within the pre-salt areas (within the limits of a defined pre-salt polygon) and other strategic areas.
In addition, in the face of the massive investments that Petrobras was required to make in the oil and gas sector, Law No 12,276/2010 introduced the so-called "Transfer of Rights" (ToR), which defined a special capitalisation of Petrobras at the time and gave Petrobras (upon consideration) the right to produce up to five billion BOE (barrels of oil equivalent) in certain pre-salt areas.
Petroleum activities are regulated by the following main government bodies:
The Ministry of Mines and Energy
The Ministry of Mines and Energy (MME) was originally created by Law No 3,782/1960 and then later recreated by means of Law No 8,422/1992, which governs its organisational structure. The MME’s main activities are focused on political co-ordination and interaction with its related entities.
The MME promotes and supervises the implementation of public policies in the following sectors:
The National Council of Energy Policy
The National Council of Energy Policy (CNPE) was created by the Petroleum Law. It is a joint ministerial entity, presided over by the Minister of Mines and Energy and formed by representatives of other ministries and relevant entities, such as the Energy Research Office (EPE).
The CNPE is a consulting body that assists the president of Brazil with recommendations and proposals regarding policies and guidelines for the energy sector. In general, it is responsible for promoting rational use of the energy resources in Brazil and ensuring a constant supply of energy throughout the country.
The attributions of the CNPE have been amplified under recent regulations. One of the main changes in this regard was brought by the Pre-Salt Law, which provides that the CNPE is entitled to define the blocks to be offered in bid rounds for the exploration and production of oil and natural gas.
The National Agency of Petroleum, Natural Gas and Biofuels
The National Agency of Petroleum, Natural Gas and Biofuels (ANP) is the regulatory agency for petroleum activities. It is connected to the MME and is part of the indirect public administration.
The ANP was created by the Petroleum Law and has the authority to regulate, intervene and oversee petroleum activities, including the creation of infra-legal rules (eg, the ANP resolutions), the institution of administrative proceedings and the application of the relevant penalties, the issuance of authorisations to companies that carry out the relevant regulated activities, and the promotion and disclosure of geological and geophysical studies related to petroleum activities, including official statistics on the national reservoirs and production.
The ANP is also authorised to promote and organise bid rounds for the award of E&P rights, and to execute concession contracts on behalf of the federal government. It must be pointed out that the attribution to execute production-sharing contracts was granted to the MME, as a representative of the federal government, in accordance with the Pre-Salt Law. The ANP executes the sharing contracts as the regulatory body responsible for supervising petroleum activities.
Petrobras was created in 1953 by Law No 2,004/1953, following a heavily nationalist debate over the most appropriate policy for oil and natural gas E&P activities in Brazil. Petrobras played the monopoly role with regulatory attributions until the opening of the market in the late 1990s.
PPSA is a state-owned company linked to the MME, the creation of which was authorised by Law No 12,304/2010 and Decree No 8,063/2013. Its main purposes are the management of production-sharing contracts – to which it is a party without assuming liabilities – and the management and marketing of the federal government’s share of oil and natural gas. The company also represents the federal government in connection with unitisation matters in pre-salt areas.
The regulatory framework for the petroleum sector in Brazil encompasses two main laws: the Petroleum Law and the Pre-Salt Law.
The Petroleum Law
The Petroleum Law was a major milestone for the petroleum sector in Brazil (both onshore and offshore) and implemented the concession regime for the award of E&P rights by the federal government. In this context, the Petroleum Law created the ANP and the CNPE (and defined their authority), outlined the relevant bidding rules and procedures to be observed in the bid round and the main provisions of the Concession Contracts, and provided for the government's policy objectives towards the rational use of the country's energy resources.
The Pre-Salt Law
In its turn, the Pre-Salt Law established an additional contractual regime – the production-sharing regime – to fields located within Brazil’s pre-salt areas (offshore) and other strategic areas, which may be onshore or offshore.
The Pre-Salt Law also gives Petrobras preferential rights to choose the areas in which the company intends to operate, and the relevant participating interest (with a minimum 30% participating interest).
The ToR (despite the debates about its classification as another legal-fiscal regime) was also put in place exclusively for Petrobras to allow for its capitalisation, formalised by means of Law No 12,276/2010, as further detailed in 6.3 Unique or Interesting Aspects of the Petroleum Industry.
Both the concession regime (governed by the Petroleum Law) and the production-sharing regime (governed by the Pre-Salt Law) allow for the acquisition of E&P rights by any company that meets certain requirements, as established by the ANP.
Such acquisitions may be direct (through participation in the bid rounds promoted by the ANP) or indirect (through the acquisition of participating interests in a concession contract or production-sharing contract previously granted in a bid round), subject to the approval of the ANP or the MME (the latter for production-sharing contracts).
The Concession Regime
The concession regime has been in effect since 1997, pursuant to the Petroleum Law. Under the concession regime, a concessionaire will carry out E&P activities at its own risk and expense. Access to the bid rounds is open to any company that meets the legal, technical and financial requirements established by the ANP. Operators must undergo a qualification process to operate onshore or offshore (shallow and/or deep waters), depending on their prior operating experience. The criteria used by the ANP to determine the winning bidders are based on a formula that considers the amount of signature bonus (80%) and the minimum exploratory programme (20%). Local content is no longer a bidding criterion.
The concession contract is entered into by the ANP and the concessionaires. In addition to the payment of a signature bonus offered during the bid round, the concession contract determines the payment of the following:
In November 2017, the ANP approved the process of the permanent offer of areas, with the purpose of allowing, through a differentiated system, the development of relinquished fields (or fields in the process of being relinquished) and exploratory blocks that have not been awarded (or relinquished) during past bid rounds under the concession regime. The innovative factor of this initiative is that companies of different sizes may participate in the assessment and selection process of the areas to be offered in the next bid rounds, with the exception of fields or blocks in the pre-salt area or other strategic areas. Two rounds of permanent offer (also known as “cycles”) have already been held (33 blocks and 12 marginal areas were awarded in the first cycle, and 17 blocks and 1 marginal area were awarded in the second cycle).
For the areas located within the pre-salt polygon and others that are considered strategic, the CNPE decides whether a bid round will be held or whether Petrobras will be hired directly (in order to preserve the national interest and achieve other energy-policy objectives), in accordance with the Pre-Salt Law. In both cases, contracts are executed under the production-sharing regime. Bid rounds are also conducted by the ANP.
The Production-Sharing Regime
Under the production-sharing regime, a contractor will also carry out E&P activities at its own risk and expense. In the case of a commercial discovery, the contractor will have the right to be reimbursed for properly incurred E&P costs (cost oil), and will receive a percentage of the profits generated by the project (profit oil). The contractor’s share of project profits will be defined in the production-sharing contract.
The cost oil is the share of production costs that the contractor is entitled to recover (in the case of a commercial discovery) for costs it incurred and investments it made during exploration, appraisal, development, production and abandonment activities. The terms, conditions and limitations of the cost oil will be detailed in the production-sharing contract.
The profit oil is the share of production profits to be divided between the federal government and the contractor, and represents the difference between the total volume of production and the share of cost oil and royalties.
In addition to royalty payments, the production-sharing regime also establishes the payment of a signature bonus. Unlike the concession regime, the value of a signature will be determined in advance by the relevant production-sharing contract – it will not, however, be among the criteria used to determine the winners of a bid round. Rather, the criteria used by the ANP to determine winning bidders during the production-sharing regime’s bid rounds will be based exclusively on the highest share of profit oil offered to the federal government by the competing companies.
The applicable rules for a direct acquisition are outlined in the Petroleum Law or the Pre-Salt Law, and detailed in the tender protocols of each relevant bid round. In the case of an indirect acquisition, the requirements set forth in the tender protocol of the most recent bid round carried by ANP must be met.
In a nutshell, the tender protocols of bid rounds detail the relevant phases of the bidding procedures, such as registration/expression of interest, qualification (legal, technical and financial), the submission of bid bond guarantees, public sessions for the placement of offers (bids), the payment of a signature bonus and the awarding of the contract.
Registration or Qualification
In the concession regime, only an initial registration phase will take place, and the qualification process of the winning bidders occurs after the bid (offer) public session. In the bid rounds under the production-sharing regime, the qualification process must occur before the bid (offer) public session, meaning that only those companies duly qualified as operators or non-operators are eligible to participate in the bid and place their offers (individually or in consortium).
In addition to the registration (or the qualification, in the production-sharing regime), potential bidders must also pay the participation fees for their areas of interest – to acquire the data package containing technical information on the offered areas.
The Bidding Process
Bidders whose registration (or qualification, in the production-sharing regime) is approved by the ANP are eligible to place bids in the public session, as long as they provide bid bond guarantees in such amount and form, and within such term, as defined in the tender protocol. The bid bonds may be provided in the following categories:
The bids placed in a specific public session will be ranked and the winning bidder will be announced (in the same public session).
If the winning bidder either is not qualified (in the case of the concession regime) or fails to execute the relevant contract, the bid bond guarantees will be enforced, as applicable, and the penalties provided for in the tender protocol are applied. In this case, the remaining classified bidders will be called to express their interest to meet the amount of the bid placed by the previous winning bidder.
Execution of the Contract
Winning bidders must proceed with the following main steps towards the execution of the relevant contract:
The bidding process ends on the execution of the contracts.
The Approval Process
The assignment of an E&P contract – fully or partially – is allowed under Article 29 of the Petroleum Law and Article 31 of the Pre-Salt Law, provided that the assignee fulfils the technical, financial and legal requirements set forth by the ANP in the relevant E&P contract and the rules set forth in the tender protocol. The ANP’s prior approval is required before the assignment can actually be effective. For production-sharing contracts, the ANP will issue a recommendation to the MME, which is the government body required to approve the assignment. Production-sharing contracts also provide that, in any case of assignment by any contractor, the right of first refusal of the other contractors must be observed.
The Petroleum Law and Decree No 2,705/1998 set forth that the exploration, development and production of petroleum are subject to the payment of the following government takes:
Under the concession regime, the basic rate for royalties is 10%, but this can be reduced by up to 5% depending on geological risks, expected production, and other relevant factors. On 1 July 2020, the CNPE published Resolution No 04/2020, requesting the ANP to evaluate the relevant measures that would reduce royalties by up to 5% for fields granted to small or medium-sized oil companies.
Under the production-sharing regime, royalties are levied at a rate of 15%. In both cases, the royalties are calculated on the value of the production of oil and natural gas.
The special participation only applies to fields with large production volumes under the concession regime. The special participation is calculated based on the net revenue of the quarterly production of each field, after the deductions allowed by paragraph 1 of Article 50 of the Petroleum Law (royalties, exploration investments, operating costs, depreciation and taxes), and the rates range from 0% to 40%.
Payment for Occupation or Retention
The amounts to be paid as occupancy or withholding of the area, also payable only under the concession regime, are calculated in Brazilian reals per square kilometre. They must be paid and adjusted annually, as of the date of execution of the concession contract.
In addition to the government takes detailed in 2.3 Typical Fiscal Terms under Upstream Licences/Leases, companies engaged in the petroleum industry are also subject to the payment of federal, state and municipal taxes levied in different situations.
Corporate Income Taxes
Brazilian companies are subject to corporate income taxes (IRPJ and CSLL) on their worldwide income. IRPJ is levied at a rate of 15%, with a surtax of 10% levied on the taxable income exceeding BRL240,000 a year, while CSLL is levied at a rate of 9%.
Brazilian companies may elect to pay IRPJ and CSLL on a deemed income determined by a percentage of gross revenues (presumed profit methodology or PPM) or on their actual income adjusted by add-backs and exclusions determined by tax legislation (actual profit methodology or APM).
Brazilian companies engaged in the petroleum industry usually elect to have APM because it allows losses to be carried forward indefinitely and it allows up to 30% of the taxable income of subsequent tax periods to be offset, and because it is mandatory for companies whose gross revenues in the previous calendar year exceed BRL78 million.
In addition to the taxes levied on income, revenues earned by Brazilian companies are subject to PIS/COFINS at a combined rate of either 3.65% for companies under the cumulative regime, or 9.25% for companies under the non-cumulative regime. The latter regime is mandatory for companies under the APM and allows the calculation of non-cumulative credits for certain inputs, costs and expenses incurred by the company to be offset against PIS/COFINS amounts otherwise payable.
While dividends are exempt from income tax, payments of other income, capital gains and earnings to beneficiaries domiciled overseas are subject to withholding tax (WHT) at rates ranging from 0% to 25%. The remittance of fees for the charter of FPSO and other vessels used in E&P activities may be subject to a 0% tax rate if certain requirements are met. Except for dividends, payments made to beneficiaries domiciled in tax haven jurisdictions are subject to WHT at a rate of 25%, regardless of their nature.
Taxes on Importation of Services
Brazilian companies are also subject to taxes levied on the importation of services (WHT, PIS/COFINS-Importation, CIDE, ISS, and IOF) and goods (II, IPI, PIS/COFINS-Importation, ICMS and AFRMM).
The importation of goods may benefit from Repetro-Sped, which is a new special tax and customs regime applicable to the importation of goods used in E&P activities. This regime is valid until 2040 and allows the importation of certain goods expressly listed by Normative Instruction RFB No 1,781/2017 with the suspension or exemption of federal taxes otherwise levied on the temporary or definitive importation of those goods. Goods not listed may be imported under the temporary admission regime with the proportional payment of taxes.
Repetro-Sped also encompasses the so-called "Repetro-Industrialização regime", which allows both the importation and the local acquisition of raw materials, intermediate products and packaging materials for the manufacturing of products to be used in E&P activities, with the suspension of federal taxes.
Although state VAT (ICMS) is not regulated by Repetro-Sped legislation, ICMS Agreement No 03/2018, with the changes implemented by ICMS Agreements No 220/2019 and 137/2020, grants the reduction of ICMS levied on the definitive import of goods to 3% provided that Repetro-Sped requirements are met. Goods imported on a temporary basis are exempt from ICMS and this rule is now expressly mentioned in the ICMS Agreement.
It should be noted that tax reforms are under discussion in the Brazilian congress and the resumption of taxation on dividends, which became exempt from income tax in 1996, is being proposed.
Tax reform proposals also provide for the creation of a VAT-like tax levied on the operation of goods and services, with the consequent extinction of other federal, state and municipal taxes currently levied on these operations. The actual extension of the reform, like the rate of this VAT-like tax and the taxes that will be extinct, varies depending on the proposal and there is still no consensus in congress regarding which proposal will advance.
The most relevant national oil company with an operational role in Brazil is Petrobras, which is still responsible for the majority of petroleum produced in the country.
Since the opening of the market, Petrobras has been carrying out the economic activities related to its corporate purpose in free competition with other companies, in line with market conditions and other principles and guidelines set forth in the Petroleum Law – and also pursuant to Section 1 of Article 3 of the Petrobras by-laws.
Over the 24 years since the enactment of the Petroleum Law, Petrobras has been given no special rights in connection with E&P contract awards. However, the Pre-Salt Law gave Petrobras certain preferential rights to choose the areas in which it intends to operate, and the relevant participating interest (with a minimum 30% participating interest).
Decree No 9,041/2017 further regulated the "preferential right" concept and provides that, counted from the publication of the CNPE resolution that sets forth technical and economic guidelines for the blocks to be offered/contracted under the production-sharing regime, Petrobras will have 30 days to express its interest in participating as an operator, and to indicate the relevant blocks and the intended participating interest, which cannot be lower than 30%.
After Petrobras has expressed its interest, the CNPE presents the potential blocks to be operated by the company to the president of the republic, indicating its minimum participation in the consortium (between a minimum of 30% and that indicated by Petrobras).
According to Decree No 9,041/2017, if Petrobras opts not to exercise its preferential right, the blocks will be offered in the bid round, and Petrobras may participate on equal terms and conditions with the other bidding companies.
Furthermore, regarding Petrobras's areas of interest, Decree No 9,041/2017 benefits the company with a “pull-out option”, allowing Petrobras to refuse to enter into a production-sharing contract with another company or consortium declared as the winner of the bid round. The "pull-out option" only applies in cases where the federal government’s profit oil percentage offered by another consortium is higher than the minimum percentage established in the tender protocol. In such cases, however, if the federal government’s profit oil percentage offered by another consortium (winner) is equal to the minimum established in the tender protocol, Petrobras will be part of the consortium, jointly with the winning bidder.
It must be pointed out that, in cases where Petrobras is not integrated into the consortium, the winning bidder must appoint the operator and the participating interest of each party to the consortium, as a necessary condition for the approval of the bidding results by the ANP.
Local content requirements in Brazil correspond to a contractual obligation arising from the concession contract or the production-sharing contract, which may vary in accordance with the tender protocol and the applicable rules of each bid round.
Compliance with local content requirements must be evidenced by the contractor or concessionaire through the submission of local content certificates to the ANP, which will run an audit process in this regard. The certificates are issued by third-party certifying entities that are accredited by the ANP.
Upon assessment of the certificates, if the ANP verifies that the concessionaire or contractor has not complied with the relevant local content requirements, a penalty may apply, corresponding to the difference between the percentage achieved and the percentage actually committed to.
Historically, local content obligations have been encompassed in E&P contracts in Brazil ever since the first bid round under the concession regime, as they were originally bid criteria. However, at the beginning of 2017, the federal government started to implement several regulatory changes in the petroleum industry, including the removal of local content from the applicable bid criteria by means of CNPE Resolution No 07/2017.
Moreover, in order to improve the attractiveness of the bid rounds, CNPE Resolution No 07/2017 also reduced the minimum percentages of local content requirements (which were historically high), to be complied with by the concessionaire or contractor of offshore blocks, to the following:
As for onshore blocks, the CNPE established a global commitment of 50% in the exploration phase and 50% in the development phase.
This adjustment represented a significant reduction (50% on average) on local content requirements for the upcoming bid rounds at the time – it eventually contributed to the organisation of General Bid Rounds 14–16 (under the concession regime), and Pre-Salt Bid Rounds 2–6 (under the production-sharing regime), all of which were held in 2017–2019.
In 2018, further improvements were made under ANP Resolution No 726/2018, which regulated the amendments to the local content clauses of concession contracts executed up until and including the 13th bid round, and also established rules regarding exemptions (waivers), adjustments of percentage and transfers of local content excess regarding the concession contracts from the seventh to the 13th bid rounds.
See 2.8 Other Key Terms of Each Type of Upstream Licence for a comprehensive analysis of the key terms of concession and production-sharing contracts in Brazil, including the requirements to proceed to development and production.
Concession and production-sharing contracts in Brazil typically provide for two distinct phases:
During the exploration phase, concessionaires/contractors are obliged to perform all activities contemplated by the minimum exploratory programme, including conducting seismic works and drilling wells.
Concessionaires/contractors must provide the ANP with financial guarantees for the minimum exploration programme within the term established in the tender protocol.
Failure to comply with the minimum exploration programme at the end of the exploration phase may result in the lawful termination of the contract, without prejudice to the enforcement of the financial guarantees for exploration activities and the application of penalties.
After performance of the minimum exploration programme and within the expected term for the exploration phase, concessionaires/contractors may do the following, after providing written notice to the ANP:
The ANP must be informed of any discovery of oil and/or natural gas in the concession area within 72 hours. If the company decides to proceed with the appraisal of a discovery, it must submit a discovery appraisal plan for approval by the ANP.
Upon compliance with the discovery appraisal plan approved by the ANP, concessionaires/contractors may, at their sole discretion, submit the declaration of commerciality of the field, along with the final discovery appraisal report. Within 180 days of receiving a communication on the approval of the final discovery appraisal report, concessionaires/contractors must also submit the development plan to the ANP, describing in detail the activities and investments to be made in its entire life cycle.
The production phase usually lasts up to 27 years for concession contracts, counted from the submission of the declaration of commerciality. A total contractual term of 35 years will apply for production-sharing contracts.
The field must be relinquished to the ANP at the end of the production phase, in compliance with the applicable laws and regulations and the best practices of the oil industry.
Concessionaires/contractors may carry out oil and gas E&P activities either individually or through a consortium with other companies. Under a consortium agreement, a leader company must be appointed to be the operator. The other consortium members will be jointly and severally liable before the ANP and the federal government for the obligations undertaken under the relevant contracts.
Decommissioning and Abandonment
It is worth mentioning that concessionaires/contractors must also provide a decommissioning and abandonment guarantee as of the production start date, in an amount corresponding to the expected cost for the decommissioning and abandonment of the facilities in place. This guarantee may be issued in the form of a performance bond, a letter of credit, a provisioning fund, or other types of guarantees, at the ANP’s discretion.
The amount of the decommissioning and abandonment guarantee for a development area or field must be reviewed at the request of the concessionaires/contractors or the ANP if there are any events that alter the cost of the abandonment and decommissioning of the relevant operations.
Entitlement, Domestic Supply Requirements and Export Rights
Concessionaires and contractors are entitled to sell or dispose of the petroleum produced. As a rule, concession contracts and production-sharing contracts do not provide for restrictions on export rights.
However, the contracts provide for an exception in cases where the domestic supply of oil, natural gas or their by-products is put at risk (an "emergency situation"), in which case, the ANP may determine that the concessionaire/contractor must limit its exports of petroleum. An emergency situation must be declared by the president of the republic.
Concession and production-sharing contracts provide for several termination events, which are divided into three categories:
In a lawful termination, the events will apply at the following points in time:
Under any of the termination events set out above, the concessionaire/contractor will not be entitled to any reimbursement. Upon termination, the concessionaire/contractor will be liable for losses and damages arising from their default and termination, paying all applicable indemnifications and compensations, as provided by Brazilian law and the relevant contracts.
Both the concession contract and the production-sharing contract provide for arbitration as the main dispute resolution method, in accordance with the Arbitration Rules of the United Nations Commission on International Trade Law (UNCITRAL). The city of Rio de Janeiro, Brazil, will be the seat of the arbitration and the place where the arbitration award is rendered.
On the merits, arbitrators will decide based on Brazilian laws, and the arbitration proceeding will be in Portuguese. It is worth noting that there are already disputes in place against the ANP, based on the arbitration clause of the relevant contracts.
Both the Petroleum Law and the Pre-Salt Law allow for the assignment – in whole or in part – of the concession contracts and production-sharing contracts, as long as the assignee (new concessionaire/contractor) meets the technical, economic and legal requirements set forth by the ANP in the relevant E&P contract and the rules set forth in the tender protocol (summarised in an Assignment Proceeding Manual published on the website). The ANP’s prior and express approval (or recommendation for approval by the MME, for production-sharing contracts) is required before the assignment can actually be effective.
The assignment may materialise as an actual/direct assignment of participating interest from a concessionaire/contractor to another or, indirectly, by means of a corporate transaction. Thus, a change in control or a merger, amalgamation or other corporate transaction may trigger a need for the concessionaire/contractor to request the ANP’s approval.
The assignment process is initiated at the request of the assignor (concessionaire/contractor) by means of an application (filing) to be submitted to the ANP.
Upon the issuance of the technical opinions of the ANP’s internal bodies and the opinion of the partnership proposal evaluating committee (CAPP), as well as the recommendation of the Attorney-General’s Office of the Agency, the request will be submitted for approval by the ANP's board of directors. The decision of the ANP's board of directors is issued by means of a board resolution, which is published on the ANP's website and in the Official Gazette. For production-sharing contracts, the ANP will issue a recommendation to the MME on approval of the assignment.
Production-sharing contracts also provide that, in any case of an assignment, the other contractors must be given the right of first refusal.
In addition to the ANP's approval, the transaction may also be subject to the approval of the Brazilian Antitrust Authority (CADE), if the gross revenues of the parties involved in the transaction (and the relevant economic groups) meet certain thresholds established in Article 88 of Law No 12,529/2011, updated by Interministerial Ordinance No 994/2012.
ANP Resolution No 785/2019, regarding the assignment of rights, consolidates the procedures for the assignment of E&P contracts (previously established in several different documents) and improves the legal certainty of the related mechanisms. This resolution also has provisions relating to upstream funding based on the reserve-based lending concept.
There are no specific legal or regulatory restrictions on production rates.
Petrobras still plays a major role in the midstream/downstream sector, although this role has been reduced over the past few years as a result of actions taken by both the antitrust authorities and the federal government to reduce the role of Petrobras and to create a competitive regulatory framework for local midstream and downstream markets. As a result of these actions, Petrobras has undertaken a major asset divestment programme involving its midstream and downstream assets, and its de facto monopoly position in the refining business and its quasi de facto monopoly position in the pipeline transportation business have been diminished. In short, the applicable legislation does not restrict private investments nor create a statutory monopoly on refining, pipelines, transportation or the distribution and retail of fuels or lubricants.
However, private investors interested in carrying out midstream/downstream activities in Brazil must be authorised by or registered with the ANP. In the course of granting these authorisations or registrations, the ANP as a public body must limit itself to verifying fulfilment of the requirements set out in the existing legislation and regulation.
There are no legal national monopolies in Brazil in relation to downstream operations. As noted in 3.1 Forms of Allowed Private Investment in Midstream/Downstream Operations, Petrobras still holds a de facto monopoly position in the refining business.
However, these dominant market positions are currently under review by CADE and, as a result, in June 2019 and July 2019 Petrobras and CADE entered into agreements for the cessation of practices (TCCs), whereby Petrobras agreed to divest approximately 40% of its refining capacity in Brazil and to exit completely from gas pipeline transportation and gas distribution activities in Brazil. The planned outcome of those TCCs is in accordance with federal government policies for the opening of the midstream and refining sectors in Brazil, set by the CNPE in April 2019.
All licences for downstream activities must be granted by the ANP in the form of authorisation issued by the ANP or registration with the ANP.
Refining activities, including construction, the expansion of capacity and the operation of refineries, are subject to prior and express authorisation from the ANP, which is granted in a two-stage process:
Companies that are interested in applying for refining-related authorisations must comply with the requirements of ANP Resolution No 16/2010, ANP Technical Regulation No 1/2010 and relevant attachments. The applicant must be a company existing and incorporated in Brazil.
Upon completion of the works relating to the construction authorisation, the applicant must formally request the ANP to inspect the facilities. To obtain the authorisations, the company must submit the relevant environmental licences, a specific fire safety certificate, and proof of ownership of the facilities or a lease agreement for a minimum period of five years to the ANP, among other documents and information.
The authorised refiner can only market refined products with distributors that are authorised to operate by the ANP. Such distributors must exclusively market the refined products with retail carriers (TRRs) and retailers of automotive fuels, liquefied petroleum gas (LPG) and aviation fuels.
Distribution is also subject to prior authorisation by the ANP following a process of staged application and the filing of documents as specified by ANP Resolution No 58/2014.
Only companies incorporated in Brazil, with the business purpose of distributing fuels, may be authorised by the ANP. Such companies must also have a minimum paid-in capital of BRL4.5 million (updated periodically by the ANP) and storage capacity of 750 cubic metres.
The applicant must also own at least one storage facility or have a participating interest percentage in “pooled” facilities that meet the minimum storage capacity.
It is important to highlight that the applicable law also establishes that the distributor’s share capital cannot be owned by the following entities:
Lastly, the retail sale of automotive fuels may only be exercised by companies incorporated in Brazil that are authorised by the ANP to sell automotive fuels, and that comply with the provisions set forth in ANP Resolution No 41/2013.
Restrictions on the ownership of the retailer’s share capital apply to the following entities:
In April 2019, the ANP issued ANP Resolution No 784/2019, establishing new rules regarding the authorisation of operations of storage facilities for automotive liquid fuels, aviation fuels, solvents, basic and finished lubricant oils, LPG, fuel oil, illuminating kerosene and asphalts.
Such authorisation may only be granted to distributors, TRRs, producers of finished lubricant oil, collectors of used or contaminated lubricant oil, and re-refiners of used or contaminated lubricant oil.
To obtain operation authorisation for storage activities, the interested company must file certain documents listed in ANP Resolution No 784/2019 before the ANP, per facility, including:
Unlike upstream activities, midstream/downstream operations in Brazil are not granted or awarded by the federal government to a private investor. Any private investor that is eligible and capable of complying with the existing requirements may apply for authorisation or registration with the ANP. This application has no costs attached to it, and if it is accepted by the ANP, the applicant is not required to submit to any specific fiscal terms vis-à-vis the federal government.
The main transactional taxes applicable to midstream/downstream activities are PIS/COFINS, CIDE-Fuel and ICMS, which are detailed further in 3.5 Income or Profits Tax Regime Applicable to Midstream/Downstream Operations.
Comments regarding IRPJ and CSLL made in 2.4 Income or Profits Tax Regime Applicable to Upstream Operations also apply to midstream/downstream activities. The other key taxes are as follows:
The Special Regime of Incentives for the Development of Infrastructure (REIDI) may apply to projects related to the construction of infrastructure necessary for producing or processing natural gas and related pipelines. If so, such projects will be exempt from the PIS and COFINS normally levied on certain acquisitions used in pre-approved projects.
On the other hand, the REPETRO-SPED regime usually does not apply for importation or local purchase of assets or goods used in midstream/downstream operations. As a general rule, REPETRO-SPED applies only to operations related to exploration, development and production of oil and gas.
As mentioned in 2.4 Income or Profits Tax Regime Applicable to Upstream Operations, tax reform proposals currently under discussion in the Brazilian congress may also affect the taxes levied on midstream/downstream operations.
As per 3.2 Rights and Terms of Access to Any Downstream Operation Run by a National Monopoly, there are no legal national monopolies in Brazil in relation to upstream/downstream activities. Also, there are no special rights for Petrobras (the national oil and gas company) or its subsidiaries in the Brazilian upstream/downstream sectors.
There are no mandatory local content requirements in connection with midstream/downstream activities in Brazil.
See 3.3 Issuing Downstream Licences.
A cornerstone of the Brazilian Constitution is the protection of private property. Property rights in Brazil can be acquired by all means admitted under Brazilian civil law, and eminent domain rights and condemnation are admitted in certain circumstances as an exception to the private property protection general regime.
Law No 8,987/1995 (the Concessions Law) sets forth that only a public authority has eminent domain rights. In Brazil, those rights translate into the power of certain public authorities to declare a property (including real estate) to be of "public interest" for the execution of a public service or work.
Condemnation in Brazil must be carried out directly by a public authority or by a private party by means of a delegation of powers, in which case, the private party will be the one liable to pay any third party(ies) the applicable financial compensation for the asset declared to be of public interest.
Regarding the expropriation of real estate properties or the establishment of an administrative servitude on a private property for the performance of petroleum activities in particular (eg, the implementation of refineries, natural gas processing, liquefaction or regasification units, storage terminals, pipelines, etc), the ANP has the authority to conduct the relevant processes and to declare any assets (including real estate) necessary for the execution of a certain public activity to be of public interest, as provided in the Petroleum Law and in Law No 14,134/2021 (the "New Natural Gas Law").
ANP Resolution No 44/2011 sets out the applicable rules and requirements to be met by the parties interested in having a property declared by the ANP as being of public interest for the purposes of expropriation and/or the establishment of an administrative servitude.
Both the Petroleum Law and the New Natural Gas Law provide interested parties with third-party access rights to transportation pipelines and maritime terminals.
Third-party access to transportation pipelines is governed by ANP Resolution No 11/16 (oil transportation pipelines) and ANP Resolution No 35/12 (gas transportation pipelines).
Under the open access regime, a transporter must give third parties non-discriminatory access to transportation facilities in exchange for adequate remuneration, calculated using criteria established by the ANP, taking into account any exclusivity rights held by the owner of the facility, if applicable.
More recently, the New Natural Gas Law extended third-party access to essential facilities (eg, gas offloading systems, gas processing facilities and LNG terminals). Such access must be negotiated in good faith and in a non-discriminatory manner by the facilities’ owners, who will retain preference for using the facilities. Furthermore, under the TCC entered into between Petrobras and CADE in July 2019 for the cessation of certain practices by Petrobras in the Brazilian gas transportation sector, Petrobras committed to negotiate in good faith non-discriminatory access for third parties to Petrobras's gas processing or treatment units, following certain guidelines set by CADE, until the ANP issues specific regulation on the matter.
Considering that Petrobras is currently the owner of nearly 100% of the gas processing or treatment units in Brazil, this obligation imposed on Petrobras by CADE will be extremely relevant to increasing access and competitiveness in the gas transportation market in Brazil.
There are no restrictions on product sales into the local market in Brazil.
In April 2019, the ANP published Resolution No 777/2019, establishing a new framework for export activities relating to biofuels and petroleum and its by-products. Such resolution revoked more than 20 diplomas governing export activities, thereby providing standard authorisation requirements and standardised administrative proceedings for both export and import licence applications.
The applicable ANP regulations, relevant requirements and available downstream licences in Brazil are addressed under 3.3 Issuing Downstream Licences. The transfer of downstream licences typically requires prior approval from the ANP, and is subject to the ability of the transferee to evidence their capacity to undertake the related downstream activity and to comply with the applicable regulatory requirements.
Brazil’s traditional position regarding the international foreign direct investment (FDI) system is usually a topic of significant discussion. Brazil is still not a major player when it comes to bilateral investment treaties and agreements (BITs) – although it signed 25 BITs between 1990 and 2014, none of them has yet come into force. Beginning in 2015, Brazil accelerated the pace, signing BITs with several countries (Post-2015 BITs) and entering into a Protocol of Co-operation and Intra-MERCOSUR Investment Facilitation (PCFI) with Argentina, Paraguay and Uruguay. Of these, only the BITs with Angola and Mexico and the PCFI (only as it pertains to Uruguay) have come into force.
Over the years, Brazil has implemented crucial domestic changes to create an appropriate climate for foreign investment, by adopting rules in favour of neutral dispute resolution and international commercial transactions, including the enactment of pro-arbitration legislation, international sales of goods, rules on the protection of property rights and free enterprise.
In the petroleum industry, arbitration has gained a prominent position in Brazil among public and private parties. For public parties, for instance, Article 43, X, of the Petroleum Law states that one of the mandatory clauses in concession contracts for oil and gas exploration and production is "the rules for the resolution of disputes (…) including conciliation and international arbitration". Moreover, Article 29, XVIII, of the Pre-Salt Law states that one of the mandatory clauses in production-sharing contracts is "the rules for the resolution of disputes, which may set forth conciliation and arbitration". With regard to private contracts such as joint operating agreements (JOA) and farm-in (or farm-out) agreements, arbitration clauses – as per the models provided by the Association of International Petroleum Negotiators (AIPN) – are used increasingly, and arbitration has become the main method of dispute resolution.
The adoption of arbitration by Brazilian law, especially in Brazilian oil and gas legislation, and its acceptance by local courts represent a great attraction for investors. The possibility of having disputes settled by an independent and impartial arbitral tribunal, whose award can be enforced in Brazil (following the ratification of the New York Convention), is considered a major advantage for foreign investors.
Under Brazilian domestic substantive law, the protection of foreign investment is included in the current legal-normative structure of Brazilian Public Administration. Pursuant to Article 172 of the Brazilian Constitution, public administration should be zealous in meeting its responsibilities for the maintenance of foreign investment. The core provisions of the Brazilian Constitution also reflect these responsibilities, establishing the guaranteed right to private ownership of property and free enterprise (Article 5, XXII, and 170).
The Brazilian Constitution provides for environmental protection (Article 225), stating that every person has the right to an ecologically balanced environment.
Pursuant to the Brazilian Constitution, federal authorities can pass general laws and regulations on environmental control, while states and municipalities can supplement federal legislation in issues of local interest. Moreover, Article 23 of the Brazilian Constitution ensures that all three administrative levels are responsible for the enforcement of environmental laws, so federal, state and municipal environmental agencies are all involved.
Complementary Law No 140/2011 details the activities subject to environmental licensing by federal, state and municipal environmental protection agencies, and co-ordinates the enforcement power of those agencies.
Law No 6,938/1981 implements the National Environmental Policy Act (NEPA) and details the environmental authorities at the federal, state and municipal levels. Among these authorities, it is worth mentioning the Federal Environmental Agency (IBAMA), the Federal Agency for Conservation Units (ICMBio), and state and municipal environmental agencies, which are responsible for the execution and enforcement of environmental laws at federal, state and municipal levels.
The Brazilian Constitution provides for environmental liability, which may be imposed against individuals or legal entities in three different fields, as follows.
Other laws and regulations are also important in the context of petroleum activities. At the federal level, the following should be highlighted:
Potentially polluting activities require environmental licensing, whether they are major upstream projects or involve midstream or downstream operations, through which the relevant environmental agency authorises the location, installation, operation and expansion (alteration) of the relevant projects and activities. Environmental licences usually establish a series of obligations with which companies must comply, which include measures to avoid, mitigate or compensate potential environmental impacts arising from the licensed activity.
The installation, operation or alteration of projects without proper and valid environmental licensing, or without complying with the conditions of the respective environmental licences, may subject transgressors to civil liability (in the case of environmental damage), administrative sanctions and criminal liability.
While IBAMA conducts environmental licensing for offshore E&P activities for conventional resources and onshore or offshore E&P activities for unconventional resources, state EPAs conduct the proceedings for onshore E&P activities for conventional resources and, as a general rule, for midstream and downstream activities.
MMA Ordinance No 422/2011 governs the federal environmental licensing of offshore E&P, and comprises the following:
The proceeding begins with a Term of Reference granted by IBAMA, which details the type of environmental study required. The type and level of detail of the study depend on the complexity of the project and the sensitivity of the area. More complex projects require an environmental impact assessment, a report on environmental impact (EIA/RIMA) and at least one public hearing.
Usually, before each bid round, the Ministry of Mines and Energy and the ANP convene with the Ministry of Environment and competent EPAs on the sensitivity of the field and the possibility of areas being subject to E&P activity.
As a final remark, the Brazilian congress is currently discussing a general law to govern the environmental licensing proceeding. Monitoring the development of this bill of law is recommended.
Offshore development is subject to environmental licensing proceedings and compliance with several environmental laws on the management, control and reporting of incidents; see 5.1 Principal Environmental Laws and Environmental Regulator(s) and 5.2 Environmental Obligations for a Major Petroleum Project.
It must be highlighted that the Petroleum Law appoints the ANP as the entity responsible for inspecting E&P activities, with the objective of preventing failures in the operational safety of relevant facilities and avoiding possible harm to life, the environment and property.
One of the main regulations concerning offshore facilities issued by the ANP in this regard is ANP Resolution No 43/2007, which provides for the Operational Safety Regime and establishes the Technical Operational Safety Management System Regulation (SGSO Regulation).
In addition, ANP Resolution No 41/2015 establishes the Subsea Systems Operational Safety Regime and the Technical Regulation of the Subsea System Operational Safety Management System (SGSS), which sets out requirements and minimum safety and operational standards, as well as the preservation of the environment.
From a labour law perspective, it must be pointed out that companies are legally required to implement both the Occupational Health Control Programme (PCMSO) and the Environmental Risks Prevention Programme (PPRA). Companies are also required to have an Internal Committee for Accident Prevention (CIPA) and Specialised Services in Health and Safety (SESMT) for the purposes of guaranteeing the safety of employees in the workplace and preventing the occurrence of occupational diseases and labour accidents.
The Labour Office of the Ministry of Economy is the entity responsible for the issuance of the normative rules that establish the main obligations to be complied with by companies regarding health and safety matters. For companies responsible for offshore activities, there is a specific Resolution No 37 regarding health and safety conditions to be complied with in Brazilian territory.
The relevant procedures and costs for the decommissioning of any field are detailed in the development plan of each field, subject to approval by the ANP before the start of production. Once the development plan is approved, the concessionaire/contractor is bound to the decommissioning obligations and liabilities set forth in the approved plan, and such provisions must be revised periodically throughout the field’s production phase by means of annual work programmes and budgets. The concessionaire/contractor – or, jointly, the consortium members – is/are responsible for the decommissioning liabilities of the field before the ANP.
It is important to note that decommissioning obligations are subject to specific financial guarantees – in the form of insurance, a letter of credit, a provisioning fund, or other forms accepted by the ANP – in an amount sufficient to cover all decommissioning activities, as provided in the field’s development plan approved by the ANP.
ANP Resolution No 817/2020 established guidelines, obligations and deadlines for the decommissioning of oil and gas production systems, including the content of the decommissioning programme and the final decommissioning report. This resolution attempted to establish a more integrated approach between the different existing regulatory agencies that should be involved (ie, the ANP, environmental agencies, and the navy), but this is still a work in progress.
Brazil is a signatory of several international treaties, such as the Paris Agreement, which was ratified in 2017. In signing this agreement, Brazil undertook to reduce its greenhouse gas emissions to 37% below the levels of 2005 by 2025 and to 47% below by 2030, through reaching a 45% share of renewable energy in the energy mix, and increasing biofuel consumption, ethanol supply and biodiesel content in the diesel blend, among other means.
In this context, Brazil enacted the National Policy on Climate Change Act (Law No 12,187/2009), seeking to reduce GHG emissions, strengthen carbon capture initiatives and promote the recovery of degraded areas, among other objectives.
Brazil is also known for encouraging an increase in biofuels in its energy mix, having implemented several related mechanisms, such as the mandatory addition of biofuels to fossil fuels and incentives on tax, finances and credits. More recently, additional mechanisms were created by a new national biofuel policy, called “RenovaBio” (Law No 13,576/2017).
In Brazil, exploration activities in the sedimentary basins have been carried out through two main conventional methods:
In both cases, a fracturing (fracking) process may be necessary to increase the flow area in the deposit, with the hydrocarbon lifted to the top of the well through induced fractures, considerably increasing the drainage area.
Based on the successes achieved by the United States in the production of petroleum through the direct fracturing of source rocks or low-permeability reservoirs (unconventional reservoirs), and due to the reduction of petroleum supply, price increases and the need for self-sufficiency, Brazil has tried to promote the use of such techniques to evaluate the potential of gas production in its onshore basins of Recôncavo, São Francisco and Paraná.
In this regard, the ANP published ANP Resolution No 21/2014, which addresses operational safety regarding the protection of people and the environment while using hydraulic fracturing techniques in an unconventional reservoir.
The ANP also promoted the 12th Bid Round for the exploration and production of petroleum, offering 110 exploratory blocks in areas of New Technological Frontiers and Knowledge in the basins of Acre, Parecis, São Francisco, Paraná and Parnaíba, with the objective of attracting investment to regions that are not well known from a geological standpoint or that have had technological challenges.
During the promotion of the 12th Bid Round, non-government organisations initiated a campaign against hydraulic fracturing in unconventional reservoirs, highlighting alleged uncertainties arising from this activity. The campaign was also supported by the Office of the Prosecutor General, which proposed several public civil actions in all the states where the offered blocks were located. As a result, several preliminary injunctions were rendered, suspending the execution of the E&P contracts.
See 5.5 Climate Change Laws.
The typical structures for LNG projects in Brazil are as follows:
Both the FSRU Terminal and the Onshore Regasification Terminal are classified as an LNG Terminal, pursuant to the New Natural Gas Law and ANP Resolution No 50/2011, which establish that an LNG Terminal is a facility used for the liquefaction or import, discharge and regasification of LNG and the subsequent delivery of the natural gas to the gas pipeline network or to other means of transport.
In general terms, the main permits required for the construction and operation of an LNG Terminal are environmental permits, port and maritime permits, and LNG and gas regulatory permits.
Regarding the LNG and gas regulatory permits, in particular, ANP Resolution No 52/2015 regulates the relevant authorisations for the construction and operation of LNG Terminals. Accordingly, such authorisations are granted by ANP in two phases: (i) construction authorisation; and (ii) operation authorisation.
In order to obtain the construction authorisation and the operation authorisation, the company or consortium of companies interested in the implementation of an LNG Terminal must primarily be registered as a “regulated agent", through the submission of certain corporate documents to the ANP.
In short, most of the requirements imposed by the ANP for the issuance of construction authorisation and operation authorisation are related to technical information regarding the LNG Terminal, which must be in accordance with certain specific technical requirements set forth by the ANP and other technical bodies. The ANP also requires the applicable environmental, port and maritime permits for the LNG Terminal, which must be secured by interested parties for the construction and operation of such facilities.
The Transfer of Rights (ToR)
To increase the financial capacity of Petrobras to explore and produce pre-salt reserves, Law No 12,276/2010 introduced the ToR, which defined a special capitalisation of Petrobras at the time and assigned Petrobras (upon consideration and through direct contracting) the right to produce up to 5 billion BOE in certain pre-salt areas (more specifically, the areas of Búzios, Itapu, Sul de Sapinhoá, Atapu, Sul de Sururu, Norte de Sururu, Sul de Berbigão, Norte de Berbigão, Sul de Lula and Sépia – as currently defined).
As consideration, Petrobras paid BRL74,8 million for the ToR, and the company's capitalisation process amounted to BRL120 billion (representing the largest capitalisation in world history at the time).
As mandated by Law No 12,276/2010, the federal government and Petrobras entered into a special E&P contract to govern the ToR (the "ToR Agreement").
In addition to the 5 billion BOE that Petrobras has the right to produce, studies indicate the existence of a surplus volume of oil and gas ranging from 6 billion to 15 billion BOE in the ToR area (the "ToR Surplus"). In order to encourage a bigger and more diversified presence of private investments in the petroleum sector in Brazil and to collect funds for the federal government, in November 2019 the ANP organised a specific bid round for the ToR Surplus (the "ToR Bid Round"). The ToR Bid Round was held under the production-sharing regime and offered private companies the opportunity to jointly develop the ToR Surplus with Petrobras within the Atapu, Búzios, Itapu and Sépia areas (Santos Basin).
ToR Bid Round
Under the ToR Bid Round, Petrobras acquired Itapu (100%), and a consortium formed by Petrobras (90%), CNOOC (5%) and CNODC (5%) acquired Búzios. There were no bids for the Atapu or Sépia areas. The federal government collected approximately BRL70 billion in signature bonuses, in addition to its contractual share of profit oil from eventual production.
CNOOC and CNODC entered into both a production-sharing contract and a “co-participation agreement” with Petrobras concerning Búzios. The co-participation agreement, which is currently under analysis by the ANP, governs the joint operations and the compensation due to Petrobras for the investments it previously made in the area. The total amount of compensation is USD29.4 billion, which will be recovered as cost oil by the parties. On the effective date of the co-participation agreement, Petrobras will receive from CNOOC and CNODC the amount of USD2.94 billion.
ToR Bid Round 2
In December 2021, the ToR Bid Round 2 will offer the unawarded areas (Atapu and Sépia). Petrobras has exercised its preferential rights to be the operator of the areas. Unlike in the first bid round, the tender protocol of the ToR Bid Round 2 has already established the co-participation agreement model and the amount to be paid to Petrobras as compensation (over USD3.253 billion for Atapu and over USD3.2 billion for Sépia). The signature bonus will be over USD4 billion for Atapu (with a minimum profit oil of 5.89%) and USD7.138 billion for Sépia (with a minimum profit oil of 15.02%). By disclosing the co-participation agreement model in advance, the federal government’s main goal was to provide adequate predictability and legal assurance for interested companies to participate in the ToR Bid Round 2 – hopefully resolving investors’ concerns in a consistent and economically attractive manner.
Over the past year, the main changes in oil and gas law or regulation were:
The Impact of COVID-19
At the beginning of the pandemic, the ANP issued two important resolutions. ANP Resolution No 815/2020 extended certain deadlines related to oil and natural gas exploration and production contracts. In parallel, ANP Resolution No 816/2020 (as replaced by ANP Resolution No 836/2020) established procedures to be adopted by oil industry participants regulated by the ANP during the pandemic. The ANP will likely continue to take action to minimise the impact of the pandemic on the oil and gas industry.
The pandemic has affected the bid round schedule, with the ANP board of directors suspending concession regime Bid Round 17, which was planned for 2020 and will take place in October 2021. The production-sharing regime Pre-Salt Bid Rounds 7 and 8 were scheduled for 2020 and 2021, respectively, but have not been held so far.