Introduction

It has been reported that there is no current commercial production of natural gas from shale deposits in Brazil. Nonetheless, Brazil has the potential to become an important producer of shale gas.

Shale basins in Brazil

The greatest potential shale gas deposits in Brazil are located in the Parecis Basin in the state of Mato Grosso, the Parnaíba Basin in the states of Maranhão and Piauí, the Recôncavo Basin in the state of Bahia, the Paraná Basin in the states of Paraná and Mato Grosso do Sul and the São Francisco Basin in the states of Minas Gerais and Bahia.

According to the US Energy Information Administration (EIA) report of June 2013,1 the Ponta Grossa formation in the Paraná Basin has 80 TCF of technically recoverable shale natural gas reserves and 450 TCF of risked natural gas in place. The Jandiatuba formation in the Solimões Basin has 65 TCF of technically recoverable shale natural gas reserves and 323 TCF of risked natural gas in place. The Barreirinha formation in the Amazonas Basin has 100 TCF of technically recoverable shale natural gas reserves and 507 TCF of risked natural gas in place.

Ownership of land and mineral rights

Oil and natural gas deposits existing in Brazilian territory belong to the Brazilian Federal Government, in accordance with Article 20, Item IX of the Federal Constitution and Article 3 of Law No. 9,478. After production and payment of royalties, the production is owned by the holder of the oil and/or gas concession.

The holder will always exclusively bear all costs and risks relating to the performance and consequences of its operations. In return, the holder will have the sole, exclusive ownership of the oil and natural gas produced and received by it at the Production Metering Point. The Production Metering Point, the metering methods, equipment and instruments are determined in the relevant Development Plan, as approved by the Agência Nacional do Petróleo, Gás Natural e Biocombustíveis (ANP).

Hydrocarbon regulation

Government structure

The government structure is composed of:

  • the National Energy Policy Council (Conselho Nacional de Política Energética, or CNPE)
  • the Ministry of Mines and Energy (Ministério de Minas e Energia, or MME)
  • the Brazilian National Agency of Petroleum, Natural Gas and Biofuels (Agência Nacional do Petróleo, Gás Natural e Biocombustíveis, or ANP).

Both the ANP and CNPE were created by Law No. 9,478 of August 6, 1997 (the Petroleum Law).

Relevant licensing and control body

The relevant licensing and control body is the ANP, which is the regulatory agency that integrates the oil, natural gas and biofuels industries in Brazil.

State oil companies

Currently in Brazil there are effectively two State oil companies, namely:

  • Petróleo Brasileiro SA (Petrobras): a mixed capital corporation (State and private) with shares publicly traded on the New York Stock Exchange (NYSE) and the São Paulo Stock Exchange (BOVESPA). The majority and controlling shareholder of Petrobras is the Brazilian Federal Government
  • Pré-Sal Petróleo SA (PPSA):The creation of this State company fully owned by the Brazilian Federal Government was approved on August 2, 2013, as evidenced in the Brazilian Official Gazette published Decree No. 8,063. PPSA represents the Brazilian Federal Government in joint ventures for exploration and production in the pre-salt areas under production-sharing contracts (PSCs).

Applicable legislation

The governing laws are:

  • Article 177 of the Federal Constitution
  • Law No. 9,478 for the concession contract regime
  • Law No. 12,351 for the production-sharing regime in the pre-salt areas (the Pre-Salt Law).

Changes to regulatory regime

An important discovery made in Brazil in 2007 prompted considerable change to the hydrocarbon regulatory regime. In 2007, a consortium formed by Petrobras, BG Group and Galp Energia discovered the ‘pre-salt area’ in a field called the Tupi, in southern Brazil, which is estimated to contain at least five billion barrels of recoverable oil.

Following this discovery, a new legal framework was enacted in December 2010, with the publication of the Pre-Salt Law. The new law introduced PSCs that would govern exploration and production activities in the pre-salt area and in other ‘strategic blocks’, as defined in the Pre-Salt Law.

Rights, licences and approvals

There are two petroleum regimes in Brazil: concession contracts and production sharing.

Concession contracts

Concession contracts are regulated by Law No. 9,478. The scope of the concession contract is the performance of the operations described in Annex II of each contract (‘Work and investment programme’) and any other additional activity a holder might undertake within the concession area. Concession contracts aim to enable oil and natural gas to be produced in commercial conditions, and comprise two phases – exploration and production. The exploration phase includes the evaluation and possible discovery of oil and natural gas in order to determine the commercial value of the resource. The production phase also includes development activities.

Application procedures

Any company that meets the technical, financial and legal requirements under the applicable regulations (Law No. 9,478 and Tender Protocol for the Licensing Round) may qualify and bid for the blocks offered during the licensing rounds held by the ANP, after the rounds have been approved by the CNPE.

Companies are qualified as ‘non-operator’, ‘operator C’ (onshore only), ‘operator B’ (onshore and shallow waters) and ‘operator A’ (onshore, shallow, deep and ultra-deep waters), depending on their expertise and/or technical staff and financial capacity.

The bidders need to pay a participation fee to the ANP and are granted access to a data package. Bids are presented in sealed envelopes during an event held by the ANP. The envelopes specify an amount for the signature bonus (to be paid if the company is awarded the contract), local content estimates and a minimum exploratory programme. The results are released immediately after all envelopes for a specific block have been opened and reviewed by the ANP.

Qualified companies may bid alone or in association with other companies through the formation of a consortium (unincorporated joint ventures) in accordance with Brazilian laws.

Award procedures

Concession contracts can only be awarded to companies incorporated in Brazil with head office and management in the country, irrespective of the nationality of the shareholders. International companies may participate in the licensing rounds. If awarded a block, they must appoint an affiliated company incorporated in Brazil to sign the concession contract.

The ANP adopts the following criteria in assessing bids: (i) the signature bonus, representing 40 per cent in the calculation of the final grade; (ii) the local content, being 5 per cent for the exploration phase and 15 per cent for the development/production phase; and (iii) the Minimum Exploratory Program.

The final results of the bids for each block are part of an Award Report, submitted to ANP’s Board of Directors for ratification, in which the ANP awards the block being licensed to the company or consortium declared the winner. The ANP publishes the results of the licensing round awards in the Official Gazette and in the media, after which it must invite the winning companies or consortiums to sign the concession contracts. Once all the contracts are executed, the ANP publishes the statements of the executed contracts in the Official Gazette.

On November 28 and 29, 2013, the ANP promoted the 12th Bid Round in which it offered areas in onshore basins with high potential for natural gas originating from unconventional reservoirs. There were 240 potential areas available for bidding, including 110 areas identified as ‘new frontiers’ in the Acre, Parecis, São Francisco, Paraná and Parnaíba bays and 130 areas in mature bays of Recôncavo and Sergipe-Alagoas.

Following bidding, 72 of the 240 areas were awarded, of which 54 are potentially productive areas of shale gas. Petrobras acquired most of the exploration blocks and will operate 27 blocks by itself and 22 blocks in consortium with other national and foreign private companies. One of the most popular areas was the Paraná Basin.

Production sharing

Despite the fact that the production-sharing regime has been approved through the Pre-Salt Law, it is not yet in place because no areas have been offered under the regime. No PSCs have been disclosed by the Brazilian Federal Government, and many details are still unknown.

PSCs are regulated by the Pre-Salt Law. The contracts will only be signed for the exploration and production of oil, natural gas and other fluid hydrocarbons in the pre-salt and other strategic areas, as defined by the Brazilian Federal Government.

Establishment of a local entity

Concession contracts

Holders of oil and gas concessions need to be established in Brazil, but the equity can be 100 per cent held by foreign entities or individuals. Affiliates of foreign companies, once incorporated in Brazil, are required to provide a parent company performance guarantee to sign the concession contract.

Production sharing

For all the new pre-salt areas to be granted under PSCs, Petrobras will be the sole operator, with a minimum participation of 30 per cent. National and foreign private companies will be able to participate only as non-operators.

Taxes, duties, royalties and incentives

Tariffs

In the concession contract, the holder is required to pay: (i) a participation fee, to be able to bid; (ii) a signature bonus, for the award of the concession contract; and (iii) an annual occupation and retention fee for the concession area. (If onshore and the land is privately owned, this latter amount goes to the landowner.)

Other taxes

Exploration and production (E&P) activities are subject to ordinary tax rules regarding taxes levied on net profits. There is no special income tax regime applicable to the oil and gas sector.

There are several taxes and contributions that are subject to a non-cumulative tax regime (VAT-alike), meaning that the amount of tax collected represents a tax credit that can be used to offset subsequent tax debts.

The remittance of funds abroad is subject to tax on financial transactions (IOF). This is a federal tax that, among other transactions, levies currency exchange contracts at a rate of 0.38 per cent.

Royalties

Royalties correspond to the financial consideration paid by the holders to the Brazilian Federal Government due to oil and gas production. From the date of the start-up of the commercial production of each field, royalties must be paid monthly, in local currency, in an amount equivalent to 10 per cent of the gross revenue deriving from the sale of oil or natural gas. In the light of any particular geological risks, production expectations and other pertinent factors, the ANP may reduce the royalties to a minimum of 5 per cent of the gross revenue.

It is worth noting that rules with regards to royalties and local content may vary per auction.

In addition to royalties, the concession contract establishes the obligation to pay a special participation fee, similar to a royalty, which applies only after a certain level of production is reached. The rates range from 10 per cent to 40 per cent, depending on the location of the field.

Foreign currency and Central Bank of Brazil requirements

As mentioned above, IOF is levied on currency exchange at a rate of 0.38 per cent.

Registration of foreign investment

Under the rules of the Brazilian foreign investment law, it is mandatory for the investor to register a foreign investment with the Central Bank of Brazil, to repatriate the capital invested and to make remittances or reinvestments of profits and other forms of remuneration of the capital brought into Brazil.

The registration of a foreign investment must be submitted electronically by the company receiving the investment (the invested company) and the foreign investor (through its representative in Brazil). The route is the Central Bank’s electronic registry system of direct foreign investments, the Registro Declaratório Eletrônico de Investimentos Externos Diretos (RDE-IED). This electronic registration must be made within 30 days of the date of entry of the investment into Brazil, except for registration of investments in goods (tangible assets), for which the term is 90 days from the date of customs clearance.

Environmental protection and socio-economic development

Shale gas is under close scrutiny in Brazil at present because of the environmental issues related to its development.

Investors must take into consideration the strict environmental legal framework, based on which the degree of fault may not be claimed by a polluter in order to avoid joint and several liability. Any party that contributes to pollution damage may therefore be liable for the costs of recovery and/or indemnification of the complete damage. Criminal and administrative sanctions are also applicable in cases of pollution damage.

Environmental impact assessment requirements

Activities that have significant polluting potential because of their nature or size, such as E&P activities, may require an environmental impact assessment (Estudo de Impacto Ambiental) and its report (Relatório de Impacto ao Meio Ambiente – RIMA) to obtain an environmental licence. In addition to the general rules issued at federal level, states can issue their own rules regarding the environmental licensing procedure.

The environmental impact assessment must follow general guidelines, such as the identification of all technological and project location alternatives, and the assessment of the environmental impact that may arise from the operations as provided in CONAMA Ordinance 01/1986. The environmental study is therefore a full assessment of the activities’ impact, including the measures that the operator proposes to adopt to compensate (indemnify) and mitigate such impacts. In some cases (when mandatory according to the law or requested by civil entities, including the Public Attorney Office), public hearings must be called to allow the public to comment on the environmental studies.

Resolution for hydraulic fracturing

Shale gas exploitation uses the technique of hydraulic fracturing, which involves the injection of water and chemicals under high pressure.

Because of the potential pollution effect, the ANP enacted Resolution No. 21/2014 on April 11, 2014, to regulate hydraulic fracturing in unconventional reservoirs. Such activities may now only begin with the ANP’s prior authorisation. Note that the resolution was subject to public consultation before Brazil Round 12 (November 2013), resulting in a legal instrument that incorporates the public contributions received.

Resolution No. 21/2014 is enacted to cover the lack of special legislation regarding hydraulic fracturing. It primarily sets out the following: (i) mandatory adoption of an environmental management system, including an effluents control, treatment and disposal plan; (ii) a requirement for preliminary studies to obtain the ANP’s operations approval (e.g. fracturing simulations and risk analysis); (iii) standards to be complied with in relation to the activity itself; and (iv) preparation of an emergency response plan.

In addition, a party seeking the ANP’s approval to carry out hydraulic fracturing activities in unconventional reservoirs must have obtained and maintained environmental permits that expressly refer to these activities.

Ongoing environmental reporting rules

CONAMA Ordinances 237/1997, 23/1994 and 350/2004 and Ordinance 422/2011 issued by the Brazilian Institute of Environment and Renewable Natural Resources (IBAMA) also require concessionaires to submit an environmental control plan or project to the competent environmental agency. This lists the measures to be adopted to mitigate environmental impacts arising from the installation and operation of an oil facility, which were evaluated in the environmental studies.

The implementation of the environmental programme and actions in the environmental control plan may give rise to an obligation to report to the competent environmental agency on a regular basis. For monitoring purposes, the frequency of such reports is normally established in the environmental licences.

Environmental audits

CONAMA Ordinance 265/2000 determines that a company that performs activities deemed to cause significant impact on the environment, such as E&P activities, must present to CONAMA a working programme and related schedule for the performance of environmental audits. According to Law No. 9,966/2000, companies that carry out offshore exploration must perform environmental audits in order to evaluate their management systems and environmental control programmes.

Pollution rules

CONAMA Ordinance 05/1989 created the National Air Quality Control Program (PRONAR). This programme stands as one of the basic environmental instruments for protecting health and welfare and improving quality of life. Its purpose is to enable Brazil’s economic and social development to proceed in an environmentally safe way that limits atmospheric pollution. It aims to improve air quality, ensure compliance with the standards established and avoid jeopardising air quality in areas considered not degraded.

In accordance with PRONAR, CONAMA Ordinance 03/1990 was published in order to establish standards for air quality. Also, CONAMA Ordinance 382/06 and 436/2011 establish standards regarding the maximum atmospheric pollutants emissions authorised for fixed sources. CONAMA Ordinances 357/2005 and 393/2007 set out the conditions and standards for effluent discharges.

Emergency preparedness

Law No. 9,966/2000 requires oil companies to create individual emergency and contingency plans. This was further regulated by CONAMA Ordinance 398/2008. Such plans must follow standards similar to those of international conventions, such as MARPOL 73/1978, CLC/1969 and OPRC/1990. However, these standards do not specify the nature of equipment applicable to safety control activities, which depends on the complexity of the activity and a risk analysis. Normally, the competent environmental agencies require the adoption of the ‘best practices and technology available’ to control E&P activity, including international standards.

Remediation rules

If environmental damage occurs, the National Environmental Policy (Federal Law No. 6,938/1981) determines that the polluting agent must first try to redress the environmental damage (in natural recovery). If environmental recovery is no longer viable, an indemnification in cash is allowed (pecuniary recovery) in order to remedy the environmental damage. In addition, the Public Civil Suit Law (Law No. 7,347/1985) allows the imposition of liability for moral damages, depending on the extent and severity of the incident.

Liabilities and responsibilities

Brazilian laws create strict liability with regards to environmental damage, which may give rise to civil, administrative and criminal issues.

On a civil basis, the operator and non-operators are jointly and severally liable for any damage caused to the environment. This includes damage due to the failure of a service provider or an equipment supplier, which is provided in the concession contract executed by and between the ANP and the concessionaire. Also, National Environmental Policy (Law No. 6,938/81) regulates civil liability for damage caused to the environment. This is of a strict liability nature and irrespective of fault by the responsible entity. This law further expanded the list of agents liable for environmental damage and established joint and several liability among polluting agents. In this sense, if the damage is caused by a service provider’s failure, the service provider will also be jointly and severally liable to the government authorities for the environmental damage.

The operator is also subject to administrative penalties, such as the payment of fines. These might be imposed on the service provider, depending on its participation in an event considered to be an environmental infraction. Environmental infractions are regulated by Law No. 9,605/1998, Federal Decree No. 6,514/2008 and also by state legislation. Oil spills are also regulated by Law No. 9,966/2000 and Federal Decree No. 4,136/2002. Penalties are imposed by the competent environmental authority and consist of, among others, fines, full or partial suspension of activities, restrictions on entering into contracts with the government, and the obligation to redress damage. Fines normally range from R$50 to R$50 million. In case of recidivism, this value may be increased by up to 300 per cent.

If environmental pollution occurs, an entity’s officer, administrator, director, manager, agent or proxy will also be subject to criminal penalties, as defined in the Environmental Crimes Act (Law No. 9,605/1998). The criminal liability is subjective in nature, which means that it is necessary to obtain proof of fault or wilful misconduct of the party. Criminal liability is not joint and several, and a party is responsible to the extent of its fault.

Domestic supply and exportation of hydrocarbons

Exportation of hydrocarbons is permitted in Brazil. However, the ANP needs to grant an authorisation to export, according to Article 60 of Law No. 9,478.

Enforcement regime in judicial and arbitral alternatives

Under a concession contract signed with the ANP, any dispute related to the terms of the concession contract will be resolved by arbitration. The arbitration procedure follows International Chamber of Commerce (ICC) rules and will take place in Rio de Janeiro. Arbitration will be conducted in Portuguese by three arbitrators, with each party choosing one arbitrator and these two arbitrators selecting the third arbitrator.

Opportunities

The government of Brazil intends to encourage production of natural gas from shale. The Government of Brazil intends to award rights to explore for natural gas in onshore shale deposits in the Parecis Basin in the state of Mato Grosso, the Parnaíba Basin in the states of Maranhão and Piauí, the Recôncavo Basin in the state of Bahia, the Paraná Basin in the states of Paraná and Mato Grosso do Sul, and the São Francisco Basin in the states of Minas Gerais and Bahia. However, environmental and legal hurdles must be overcome before these opportunities can materialise.

Summary

The greatest potential shale gas deposits in Brazil are located in the Parecis Basin in the State of Mato Grosso, the Parnaíba Basin in the States of Maranhão and Piauí, the Recôncavo Basin in the State of Bahia, the Paraná Basin in the States of Paraná and Mato Grosso do Sul, and the São Francisco Basin in the states of Minas Gerais and Bahia.

According to the EIA report of June 2013, the Ponta Grossa formation in the Paraná Basin has 80 TCF of technically recoverable shale natural gas reserves and 450 TCF of risked natural gas in place. The Jandiatuba formation in the Solimões Basin has 65 TCF of technically recoverable shale natural gas reserves and 323 TCF of risked natural gas in place. The Barreirinha formation in the Amazonas Basin has 100 TCF of technically recoverable shale natural gas reserves and 507 TCF of risked natural gas in place.