CHAPTER 26 CHALLENGES TO SET UP SECURITIES IN THE BRAZILIAN OIL & GAS MARKET
| Jurisdiction | Derecho Internacional |
(Apr 2015)
CHALLENGES TO SET UP SECURITIES IN THE BRAZILIAN OIL & GAS MARKET
Antonio Giglio 2
Partner
Demarest Advogados
Rio de Janeiro
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JOãO LUIS RIBEIRO DE ALMEIDA is a partner with Demarest Advogados based in Rio de Janeiro and he has been with the firm for 14 years. He is one of the partners in charge of the Oil & Gas department. He has been involved in different transactions in the Brazilian Oil & Gas sector involving farmouts, financing, M&As, and infrastructure. He obtained his law degree from the Universidade de São Paulo and obtained postgraduate degrees in Tax Law from the Fundação Getúlio Vargas--FGV and in Oil & Gas Business and Law from the Brazilian Institute of Oil & Gas IBP in partnership with University of the State of Rio de Janeiro. He earned an LL.M in Corporate Law from New York University. He is admitted to the Brazilian and New York bars. He is mentioned as a "leading lawyer in his field" by Who's Who in Energy Area and endorsed as a "leading lawyer" by IFLR1000 in Energy and Infrastructure.
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TABLE OF CONTENTS
I. Introduction
II. Background on Brazil's oil and gas regulation
II.A. Concession regime
II.B. Production sharing regime
II.C. Onerous assignment
II.D. The role of ANP
III. Alternatives for financing
III.A. Capital markets
III.B. Bank loans
III.C. Lease Finance
III.D. Project finance
IV. Assets usually offered as security
IV.A. Project equipment
IV.B. Real estate
IV.C. Equity
IV.D. Receivables
IV.E. Exploration rights
IV.F. Oil and gas reserves and production
V. Security and related issues
V.A. Corporate Guaranty
V.B. Mortgage
V.C. Pledge
V.D. Fiduciary Types of Lien
VI. Conclusion
I. Introduction
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The purpose of this paper is to present a general overview of the challenges to set up securities in the Brazilian oil and gas market. The sector is extreme capital intensive and in Brazil the scenario is not different. Most of the local production comes from offshore fields, some of them with deep water and difficult challenges to overcome.
Financing is a constant need of the oil companies and follows certain worldwide standards of the industry with the peculiarities of the local market and regulation. Regarding the alternatives for financing, the forms vary depending on the companies involved and the specific projects. Large international oil companies will be in better position to negotiate with banks the costs of financing and the extent of security. On the other hand, small companies and project finance will involve larger costs and a full set of security.
In terms of sources of funding, the players have the alternatives of equity offered in capital market or privately placed and "industry finance" with part of the assets sold through farm-in transactions or with carried interests. These are not in the scope of this paper which intends to discuss the creation of security in the context of debt financing. The forms of debt financing could be segregated into capital market debt issuance, bank debt and lease finance.3 All three categories could involve the formalization of security which will vary based on different aspects of the transaction, especially the allocation of risks among the parties involved (creditor, debtor, sponsor, owner of asset etc.). The financing could be guaranteed by the company itself and all its operation or just by the results of a certain project, under a project finance structure. Security could be created over a specific asset or over all relevant assets and with a structure to entitle the step-in of the creditor in cases of default.
Brazilian legislation allows certain well known structures, but it has some restrictions concerning particularly the exploration and production assets which assignment is subject to the prior approval of the local government. These restrictions do not put Brazil in a place where the political and legal risks should be a concern, but there are aspects of the legislation which should be taken into consideration by creditors willing to be benefited by local security.
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As in many other different jurisdictions the security agreements are usually governed by local laws and have local filing requirements to be effective. The obligation to apply Brazilian laws to security arrangements does not restrict the choice of law applicable to the financing agreement, as it is usual and well accepted by Brazilian courts that financing agreements be governed by foreign law and the local security agreements ruled by Brazilian law. In any case, the financing documents must be clearly reviewed by local legal experts to avoid any provision which can conflict with the local laws and weaken the creation of security.
II. Background on Brazil's oil and gas regulation
In order to discuss financing and the challenges for setting up security in the Brazilian oil and gas industry, it is important to understand the regimes in force for the exploration and production of oil and gas in the country. The opening of the Brazilian market for foreign investors4 was structured with the adoption of the concession regime regulated by the Petroleum Law.5 Before that, any activity of exploration and production could only be performed by Petrobras,6 the Brazilian national oil company, and there were only service providers, although some of them operating under risk agreements for the exploration. The fields already operated by Petrobras were granted to the company under the new concession regime, the so called "Round Zero". Afterwards, there were periodic bid rounds that brought several international oil companies and other national oil companies to invest and operate in Brazil.
The concession regime was consolidated as the sole regime for oil and gas exploration in Brazil until a certain deep water area shown good results and extraordinary potential. Such area known as pre-salt changed the history of the oil and gas industry in Brazil and influenced the government to change the regime and adopt a new legal framework.7 In 2007, the time of the first discoveries, certain blocks were withdrawn from the 9th Bid Round, and in 2010 different laws were enacted for the adoption of the new legal framework. The production sharing regime was adopted for the pre-salt and other strategic areas as well as a regime specific for Petrobras also for the pre-salt called onerous assignment.
II.A. Concession regime
The Brazilian concession regime follows the main standards of concession regimes worldwide. The oil company which wins a bid round or acquires the rights from a third party must enter into a concession agreement with the ANP,8 the governmental agency in charge of regulating and supervising the sector. The bid criteria are the offers regarding the signature bonus, the minimum exploratory program and percentages of local content. The oil company
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has exclusive title over the production and it is allowed to export it. The only restriction is the provision in the concession agreement that ANP is entitled to limit the exportation of the production from the oil companies in cases of emergency when the supply to the Brazilian market is at risk.9 The government take is composed of the signature bonus, royalties, special participation,10 compensation for the retention of the area and applicable taxes.
The concession agreement is divided into a period of exploration, which includes the activity of commercial valuation of the discoveries, and production, which includes the development. The oil company must follow the minimum exploratory program and such period of exploration can be extended depending on certain aspects. In most concession agreements, the production of the fields lasts up to twenty seven (27) years and counts from the commerciality declaration.
Following the industry standard the concession agreements can be granted to a consortium which must follow Brazilian law and the oil companies would have joint and several liability for the obligations under the agreement. One of the parties is the operator which, besides the responsibility for the operation, will be in charge of presenting the programs and all information required by ANP.
In the context of financing and placing security, it is important to understand that the concession agreement expressly provides for the possibility of the assignment of the rights under such agreement. It also does not have restrictions on the standard rules of joint operating agreements regarding assignment and right of first refusal. The only restriction is the prior approval of ANP in case of assignment and in certain cases of transfer of control. This will be further explained in the section regarding the pledge of rights emerging from concession agreements, but the main concept is that the parties acquiring assets must obtain prior approval from ANP in connection with its legal, technical, economic and tax qualification. It is also worth mentioning that such assignment may be subject to the Brazilian antitrust approval.
Regarding the predictability and reliability, the concession regime can be seen in Brazil by financing parties as mature and well tested by the market. It is in force for over fifteen years and major players are in Brazil working under such agreements.
II.B. Production sharing regime
Different from the concession regime, the production sharing regime was implemented in Brazil with some very specific rules. Such regime applicable to the pre-salt and other strategic areas applied the traditional concept of having the oil companies taking the risk of
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exploration, being reimbursed of their costs by the cost oil and sharing with the government the profit oil.
The only criteria for the bid round is the share of the profit oil offered to the government. The signature bonus...
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