THE NEW OIL AND GAS INDUSTRY IN BRAZIL: COPING WITH PRIVATIZATION

• Jurisdiction: Derecho Internacional

Mining And Oil & Gas Development In Latin America
(2001)
CHAPTER 4B
THE NEW OIL AND GAS INDUSTRY IN BRAZIL: COPING WITH PRIVATIZATION
Marilda Rosado de Sá Ribeiro ^*
Director of Legal Affairs — Repsol YPF
Rio de Janeiro, Brazil

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I. INTRODUCTION

A. Privatization, Deregulation and Rendering the Monopoly Flexible

The understanding of the opening process applicable to oil and gas in Brazil requires a brief explanation of the principles underlying the overall process of the structural changes in the Brazilian economy. With this goal, and having in mind the proposal of the panel, we wish to address the challenges of the oil and gas industry in Brazil with a focus on the privatization process held in the country during the last decade. This will require us to do a brief outline of the scope and nature of privatization, showing the evolution and proposals of the privatization and deregulation program,¹ which aims at a switch from direct State participation in economic activities through state companies to survey and control through governmental agencies. Parallel to the transfer of activities to private enterprises, autonomous agencies, also called regulating agencies or government agencies, have been created. A corollary of the Denationalization Program, these agencies are responsible for controlling private enterprises with the purpose of maintaining their adjustment to the Program's fundamental postulates and to public interest and of preventing any type of entrepreneurial behavior that may reveal misuse of economic power.

Law 8031, the so-called Privatization Law, is considered the cornerstone of the restructuring of the State's role in the economy. Law 9491, which expressly revoked the former statute, later abandoned "privatization" and established the use of "denationalization."² Second, in accordance with Articles 1, 2, and 4 of Law 9491, one may assert that the Brazilian Denationalization Program targets the accomplishment of "a new governmental strategy, i.e., the state's withdrawal from the economy and the transfer of state-run activities and services to private enterprise." In other words, the Program announces the end of an economic intervention model in which the state undertook "many entrepreneurial activities and public services, with endless spending and low efficiency."

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That large privatization program initiated in the early 1990s set forth the basis and was strengthened with the approval of the so-called Concessions Law in 1995.³ This law allowed a framework to attract foreign and national private capital to big projects of electric generation, telecommunication, transportation, and other projects, which were formerly under state control. In a way, this process may be viewed as a revival of the concession already encountered in Brazilian law in earlier stages.⁴

Oil and gas, however, must be viewed with yet another approach, not only because it had long been under a separate track from mining in the statutory and lower level legislation.⁵ The concession law would not be applicable to oil and gas, and changes needed to be started as from constitutional level.

Beyond the constitutional framework that allowed ownership of mineral resources by the state, the legal basis for the oil and gas regime in Brazil was set forth by Law 2004/53, which created Petróleo Brasileiro S.A. (Petrobras), to carry out the activities of the monopoly.⁶

When one refers to structural changes in Oil & Gas there is a tendency to focus the upstream side of the business, where the monopoly of PETROBRAS was more visible, and to which the new law dedicated more detailed provisions. However, the subject matter of privatization should also encompass an analysis of other related segments of the market. The downstream side, for instance, had long been open for private capital in the distribution of petroleum byproducts. Some companies, like SHELL, had been in Brazil prior to the creation of PETROBRAS. We'll try to describe the major developments, as from January 1997, when the position of the six companies that were present in the market, moved to two hundred and fifty in January 1998.⁷ The distortions created by the means used for growth by certain newcomers shall be briefly summarized based on the data gathered by some entities present in such market.⁸

Gas is also a quite different issue in Brazil. Although it still represents only 3% of the energy pattern in Brazil it is subject now to a list of regulatory issues comparable to mature markets. The approach adopted for implementation of such regulatory reform is very large and intents to introduce competitive tools in this segment. The scope is clear from the following statement made by a governmental Authority: "The competitive pressure is the

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best instrument to control the manipulation of dominant positions in the market and to render the companies more efficient."⁹

We shall comment on the specific issue of the gas regulation, which has been provoking a rather intense debate over the latest controversies among significant players in the industry.

II. TRENDS OF CHANGE

A. Historical and Doctrinal Background

Prior to the Constitution of 1988, since there was no formal prohibition, an enlargement of the notion of service contracts already performed by Petrobras with service contractors for usual services in the industry allowed the introduction of a hybrid type of contract, called "Service Contract with Risk Clause." Such contract could fit into the classification of the hybrid contracts of the 1980s, which merged characteristics of models adopted in other countries and challenged the initial classification of exploration and production contracts.¹⁰

The petroleum legislation in Brazil, encompasses the following main phases: the first period, prior to 1938; a second from 1938, when the national Petroleum Council was created; and a third, from 1953, when Law 2004 created Petrobras. Although 1977 can be referred to as a significant year, because of the adoption of risk contracts, the third period actually lasts from 1953 until 1995, when Constitutional Amendment Number Nine introduced the change to the 1988 Constitution, which suppressed the prohibition concerning risk contracts. The fourth period started with the big change represented by Constitutional Amendment Number Nine of 1995, but started to be really implemented with the enactment of Law 9478,¹¹ which actually started the new regime for oil and gas in Brazil.

To understand properly the process by which Brazil is opening its oil industry in the nineties, we also need a closer look at what happened in the 1970s and the 1980s. On the outer frontier, Petrobras, through Braspetro, was expanding acreage and experimenting

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with partnerships. In the late 1980s, Braspetro opened subsidiaries in the first-world nations, such as Norway, United States, and Great Britain.¹²

The big trend towards change could already be identified in the internationalization of PETROBRAS, already embodied in Article 41 of Law 2004,¹³ which allowed Petrobras to perform its activities internationally directly or through subsidiaries. Such aim was attained first through the creation of Petrobras Internacional S.A. (Braspetro),¹⁴ and then through the creation of the commercial subsidiary Interbras, an outstanding expansion of Petrobras activities in the trading arena beyond the oil and related commodities,¹⁵ that was extinguished by the Collor Administration in the early 1990s.

In the domestic arena, besides the risk contacts of the late seventies, the Research Center (Centro de Pesquisa e Desenvolvimento da Petrobas (CENPES)) also contributed to the sharing of experiences with foreign entities, with the joint industry projects executed with the industry and with foreign and local universities.¹⁶

The process for the implementation of changes maybe considered long, if we take 1995 as the starting point. Two years went by from when Ninth Amendment introduced the radical change that opened the way for the new Petroleum Law until the enactment of Law 9478 in August 1997.¹⁷ Another two years elapsed from the law in 1997 until the First Bidding Round in 1999. Some of the changes affecting the downstream are also dated back to 1997, and there are still important changes under way. It is never too much to stress the importance of those transition periods to account for the present situation when we really can speak of a new Brazilian oil and gas legal regime.

B. New Agenda

The year 1999 may be considered yet another turning point in Brazil. The opening up of industry in the upstream got its real start. New opportunities were initially due to the Petrobras partnership program, since the state company had been maintaining understandings with many oil companies for many years, aimed at the farming out of some of its interests in various concession contracts executed with the National Petroleum Agency.

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They were launched in 1999. It is to be remembered that, although Petrobras had been allowed to keep certain blocks under a different legal background (Articles 31 to 34 of the Petroleum Law), the applicable concession contract was in many ways similar to that used for the Bidding Rounds.

During 1999, many legal issues that concerned the investors were thoroughly discussed by the industry, Among others, controversy concerning the legal nature of the oil and gas exploration and production concession contracts, in Brazilian Law, with a different nature than the concession as applicable to public services.

The year 2000 meant further steps in this process, since the Workshops and Seminars promoted by ANP, Brazilian Petroleum Institute (IBP), and other entitites helped pave the way for the further improvements in the Concession Agreement and the dialogue about Official Instructions prior to its final publication.

As for the downstream, major shifts in the regulation...