OIL AND GAS REFORM: NEW TRENDS IN BRAZIL

• Jurisdiction: Derecho Internacional

International Mining and Oil & Gas Law, Development and Investment
(Apr 2009)
CHAPTER 17A
OIL AND GAS REFORM: NEW TRENDS IN BRAZIL
Paulo Valois Pires
Partner, Schmidt Valois Miranda Ferreira & Agel - Advogados
Peter Lawrence de Figueiredo Landsberg
Associate, Schmidt Valois Miranda Ferreira & Agel - Advogados
Rio de Janeiro

Paulo Valois Pires is a name partner of the Brazilian law firm "Schmidt, Valois, Miranda, Ferreira & Agel - Advogados" (www.svmfa.com.br). His practice involves the representation of clients in Oil and Gas, energy, shipbuilding, platform and pipeline finance and construction, biofuels (including ethanol), 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. Between 1993 and April 2007, he worked with 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 from the University of São Paulo (1999). He also received a postgraduate degree in 1999 in "Master Business in Petroleum - MBP" from the Federal University of Rio de Janeiro (UFRJ/COPPE). He is author of the book "The Evolution of the Oil State Monopoly" (2000), and co-author and coordinator of the books "Oil and Gas Law Issues I and II" (2002/2003). He was quoted in "2003 Energy Survey" of Latin Lawyer and nominated as a leading lawyer in "Energy and Natural Resources" by the Chambers and Partners 2006, 2007, and 2008 editions. He was appointed to the 2007 Energy Arbitrators' List of the International Centre for Dispute Resolution - ICDR of the American Arbitration Association - AAA, and ranked in the "2007 and 2008 Guide to the World's Leading Energy and Natural Resource Lawyers" of Euromoney. He is a frequent speaker and author of articles on the oil and gas industry.

Background

The opening-up of the upstream activities in Brazil dates back the 70s with the signature of the first "risk contracts" between PETROBRAS and other oil companies in order to explore certain offshore areas selected by PETROBRAS.

At that time, PETROBRAS, as a national oil company ("NOC"), was the sole responsible for the performance of all upstream activities in the Brazilian sedimentary basin.

The participation of other oil companies was based on services agreements, which provided for the payment of services in kind in the case of success in the exploration phase. Development and Production activities were exclusively conducted by PETROBRAS.

This model allowed PETROBRAS to become familiar with exploration activities in shallow and deep waters located in the Brazilian sedimentary basins (especially in the Campos basin), and it is one of the main reasons of PETROBRAS' success in geological and geophysical campaigns in the subsequent years.

The opening of the upstream activities in the 90s

Constitutional Amendment # 9/95

Following the international trend started in the 80s, the Constitutional Amendment #9, dated of November 9, 1995, marked the beginning of a gradual distancing between the State and the upstream activities. This gradual distancing came from the realization that the State could no longer function as the sole provider of all society's needs, as well as the realization that the government did not have the necessary funds to invest in large scale oil exploration, in order to reduce the amount of oil imported by the country.

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This marked the opening up of the upstream activities in Brazil, with the government no longer being limited to PETROBRAS with regards to E&P Activities. This Constitutional Amendment altered Article 177 of the Brazilian Constitution and made it possible for the Brazilian government to sign agreements with government companies, as well as with private companies, to perform upstream activities in onshore and offshore areas.

This was the first time that there was a possibility private companies to perform such activities after a long spell in which PETROBRAS was the only company authorized to do so. This meant that a transition period could begin, when PETROBRAS would no longer hold the sole rights for exploration and would no longer exclusively represent the Brazilian E&P sector. From a legal standpoint, other oil companies were now able to compete on equal grounds with PETROBRAS.

Therefore this Constitutional Amendment served as a springboard for the enactment of the Brazilian Oil Law, which further opened the Brazilian O&G sector with views of achieving oil self-sufficiency, something which was very hard to be achieved while PETROBRAS had sole exploration rights.

It should be noted, however, that the State still maintained its constitutional monopoly over the oil and natural gas activities in Brazil; with the Constitutional Amendment # 9/95, a possibility was opened for the government to involve different companies in E&P activities, not having its choice limited to PETROBRAS.

The Brazilian Oil Law (Law # 9,478/97)

Once again following international trends, the Brazilian Oil Law (Law # 9,478 dated of August 7, 1997) was enacted and marked the opening of upstream activities in Brazil. The Oil Law also created the National Oil, Natural Gas and Biofuels Agency (Agência Nacional do Petróleo, Gás Natural e Biocombustíveis - ANP), to regulate O&G activities in Brazil.

Exploration rights were therefore assigned by the ANP, which would be responsible for organizing bid rounds. The ANP would also be responsible for signing Concession Contracts with the winners of said bid rounds. The Government Take in the Concession Contracts encompass the Signature Bonus, Royalties (which range from 5% to 10%), Special Participation (which range from 10% to 40%), as well as a fee for the occupation of the area. On onshore blocks, the landowner has the right to receive a royalty (which varies from 0.5% to 1%).

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After the enactment of the Oil Law, PETROBRAS had to compete with other companies for E&P rights on equal grounds, being subject to ANP awards in the Bid Rounds.

This Law effectively built on the groundwork set by the Constitutional Amendment #9/95, and was a great step for the development of the Brazilian O&G sector. The entry of several domestic and international companies in Brazil (independents, majors and "supermajors"), developing activities in all areas of the O&G sector, such as exploration, and not limiting themselves to distribution of oil by-products, was a major factor responsible for the increase in oil and natural gas production, making it possible for the country to be self-sufficient in oil.

General overview of the Brazilian upstream sector and the ANP bid rounds*

The ANP bid rounds, also know as Brazil Rounds, take place with the goal of granting concessions to O&G companies interested in exploring onshore and offshore areas in Brazil. The bids made by these companies are judged according to pre established criteria, namely the signature bonus, minimum working program and local content. The local content criterion is considered very important as it has the goal of fostering the development of domestic equipment suppliers, manpower and services.

The ANP Bid Rounds

The Brazilian Oil Law established the regulatory system for the concession of exploration rights in Brazil. ANP is now responsible for promoting bid rounds for the concession of O&G exploration areas, and, so far, 10 rounds have taken place.

The consolidated results from all 10 rounds are as follows:

• Number of Bid Rounds: 10

• Signing Bonus: US$ 2.37 billion (total from 1998 to 2008)^*

• Royalties: US$ 21.91 billion (total from 1998 to 2008 - O&G)^*

• Special Participation: US$ 21.82 billion (total from 2000 to 2008)^*

• Number of ANP Concessionaries: 72

• Total Blocks Awarded: 803

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The Brazilian O&G sector had significant results during the last few years. Here are some of the consolidated results encompassing oil and gas production and consumption.

• Oil Production: 1.845 million barrels per day (2008)

• Oil Consumption: 1.728 million barrels per day (2008)

...