CHAPTER 18 THE FUTURE OF UPSTREAM IN BRAZIL

• Jurisdiction: Derecho Internacional

Mining and Oil and Gas Law, Development, and Investment - Book 2
(Apr 2007)
CHAPTER 18
THE FUTURE OF UPSTREAM IN BRAZIL
Paulo Valois Pires
Attorney
Ulhoa Canto, Rezende e Guerra Advogados
Rio de Janeiro, Brazil

PAULO VALOIS PIRES

Paulo Valois Pires' practice involves the representation of clients in O&G, energy, shipbuilding, platform and pipeline finance and construction, power generation, M&A, hotel operations and infrastructure domestic and international transactions and tax related matters.

He started his career in 1989 as in-house counsel for Shell in Brazil. During the last 14 years, he has worked at Ulhôa Canto, Rezende e Guerra -- Advogados. He was made partner and head of the O&G practice group of the firm in 2001.

He studied at the Université Robert Schuman, Strasbourg, FR, (Certificat des Hautes Études Européennes - 1992) and has a Master Degree in International Law by the University of São Paulo (1999).

He is author of the book "The Evolution of the Oil State Monopoly" (2000) and coordinator of the book of writings ("Oil and Gas Issues", Lumen Juris, 2001/2002) and author of several publications on magazines and journals of oil & gas and energy sectors. He was quoted in "2003 Energy Survey" of Latin Lawyer and nominated as a leading lawyer in "Energy and Natural Resources" by Chambers and Partners 2006 and 2007 editions. Member: Tax Committee of the ONIP; Gas Committee of the Brazilian O&G Institute (IBP); Brazilian Association of Financial Law (ABDF); International Fiscal Association - IFA; and Oil Committee at the State of Rio de Janeiro Bar Association (Comissão do Petróleo e Derivados da Ordem dos Advogados do Brasil -- RJ); Vice-chairman of the Energy Committee of the American Chamber of Commerce of Rio de Janeiro (2000). Professor: Master Business in Petroleum - MBP at UFRJ/COPPE; and Master Business in Natural Gas at PUC/RJ.

By Paulo Valois Pires'

The National Energy Policy Council (CNPE) recently issued Resolution # 3/06 authorizing the 8^th Bid Round and offering 284 blocks in seven sedimentary basins. Surprisingly, the resolution did not mention the offer of areas in 11 sedimentary basins, such as the Campos and Potiguar Basins. The number of blocks offered in the 8th Bid Round (284) is also much lower than that in the 7^th Bid Round (1,134).

Resolution # 3/06 should be carefully reviewed since the reasons behind its approval are not clearly defined. The lack of transparency leaves room for various interpretations in an attempt to identify the reasons that caused the CNPE to reduce the number of sedimentary basins being offered.

It is hard to understand the reasoning that prevailed when the Resolution # 3/06 was published. There are some who believe that the main purpose of the CNPE was to preserve certain areas that are more interesting geologically to meet domestic demand in the future, given a scenario of a sharp decline in world reserves. Others argue that the CNPE wants the 8th Bid Round to foster exploratory activity in "New Frontier Basins" and in areas where there is a greater probability of natural gas findings. But none of this is clear in the context of Resolution # 3/06.

From a legal standpoint, it is important to highlight that, in accordance with Art. 23 of Law # 9.478/96, the "Petroleum Law", the authority to define the blocks that will be included in the bid rounds is under the jurisdiction of the National Petroleum, Natural Gas and Biofuels Agency (ANP).

The CNPE is an entity linked to the Office of the Presidency and has the power to propose "national policies" for the sector. The Petroleum Law does not grant the CNPE the attribution to determine which blocks should be included in the bid rounds of ANP. The legality of Resolution # 3/06 is, therefore, highly doubtful; one may even reach the conclusion that technical decisions of the ANP are now subject to the decisions of the Executive Power. In other words, Resolution # 3/06 could be interpreted as another attempt to "place in check" the autonomy of the regulatory agencies.

For others, Resolution # 3/06 constitutes a reversal of the policy of opening the upstream sector in Brazil and is consistent with and part of a set of measures adopted by other countries in Latin America to limit the participation of oil companies in exploration and production activities.

It is clear that Resolution # 3/06 is less radical than the expropriation measures adopted by the government of Evo Morales in Bolivia, and less incisive than the sudden increase in royalties in Venezuela. But, it is impossible to deny that Resolution # 3/06 has contributed to the "deceleration" of the opening-up of the sector.

Actually, the concentration of blocks in only seven sedimentary basins limits the investments by companies that intend to bid for areas adjacent to the blocks acquired in past auctions at the Campos or the

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Camamu-Almada Basins. That is to say, Resolution # 3/06 has an adverse material impact on the investment policy of the oil companies that already have their own financial resources approved by the shareholders for the acquisition of new exploratory areas.

From a different perspective, Resolution # 3/06 will benefit companies with assets in sedimentary basins that were removed from the first list of 8^th Bid Round, specially those companies which are planning to perform "farm-out" transactions. That is because there are no guarantees that the Government will offer blacks on those regions in the coming rounds. Thus, the blocks located in the Campos, Potiguar and Camamu-Almada Basins might now have a higher market value.

This same reasoning applies to the Petrobras' blocks located in the basins withheld by CNPE...