Introduction
Two regimes
Comment


Introduction

Before 1997 oil and gas exploration and production activities in Brazil were conducted by a monopoly run by Petrobras, the government-controlled oil and gas company. In 1997 the government enacted the Petroleum Law (9478), which opened up exploration and production activities to local and foreign private investors.

The concession agreement was established as the granting instrument, whereby the Federal Union - acting through its regulatory agency, the National Agency of Petroleum, Natural Gas and Biofuels (ANP) - granted Petrobras and/or international oil companies the right to carry out exploration and production activities onshore and offshore Brazil for a certain period of time. Since 1997 ANP has organised 10 bidding rounds, with an 11th round recently announced (for further details please see "Agency announces 11th oil and gas bidding round").

The new regime proved a success, helping to boost oil and gas production by 32.89% in the three years following the first bidding round (world production increased by only 2.9% during the same period).

In 2007 a consortium formed by Petrobras, BG Group and Galp Energia discovered the Tupi field 200 kilometres offshore Santos in southern Brazil. The Tupi field - which lies below 2,000 metres of water and 5,000 metres of salt, sand and rocks - is estimated to contain at least 5 billion barrels of recoverable oil, at an American Petroleum Institute gravity of 28-30º, representing the first big discovery in the region - now known as the 'pre-salt area'.

Following this discovery, and unaware of the potential impact of the pre-salt area on the country's overall oil and gas reservoirs, the government decided to withdraw 41 blocks from the ninth bidding round, while further investigations were conducted. The need to amend the Petroleum Law was debated intensively. This research and discussion led to a new legal framework being enacted in 2010, with the introduction of the Pre-salt Law (12,351/2010). The new law established the production sharing agreement as the contract that would govern exploration and production activities in pre-salt and other so-called 'strategic' blocks, as defined by government agencies.

ANP recently released a draft of the preliminary tender package for the 11th oil and gas bidding round, in which 172 blocks outside the pre-salt area will be offered. While licences to these blocks shall be granted through a concession agreement (ie, pursuant to the regime established by the Petroleum Law), the government has announced that later in 2013 there will be another bidding round for granting exploration and production rights in the pre-salt area. Pursuant to the Pre-Salt Law, these will occur under a production sharing regime.

Two regimes

Although both regimes are relatively similar to the most common types of concession agreement and production sharing agreement worldwide, there are some particularities to each.

Whereas, pursuant to the Petroleum Law, all blocks must be tendered out, the Pre-salt Law does not provide for the obligation to organise public tendering for the pre-salt and strategic areas. In fact, the Federal Union can assign exploration of these areas directly to Petrobras. Even when these areas are subject to public tendering, it is mandatory that the production sharing agreement is entered into by a consortium in which Petrobras acts as operator and holds an equity interest of at least 30%.

Moreover, inspired by other production sharing regimes worldwide, a government-owned company, Pré-Sal Petróleo SA (PPSA), was created for the purpose of representing the Federal Union on the execution of the production sharing agreements. PPSA is also responsible for transacting the state share of the oil produced under production sharing agreements.

Another significant difference between the regime set forth under the Petroleum Law and that characterised by production sharing is the decision criteria for awarding the blocks. Under the concession regime, the signing bonus, the work programme and the amount of investment indicated in the offer determine whether an international oil company is successful in its bid; however, under the production sharing regime, requirements regarding these items are set forth from the beginning in the tender package, and success is determined exclusively by the amount of the oil (after deducting the cost oil) that the international oil company is willing to give away to the PPSA.

The following table highlights the differences and similarities between the two regimes.

Production sharing agreementConcession agreement
Areas coveredPre-salt fields and strategic areasAll remaining areas
Parties involvedPetrobras, PPSA and international oil companiesPetrobras and international oil companies
Minimum mandatory participation of Petrobras30%0%
Selection criteriaShare of oil production offered to the Federal UnionSigning bonus, work programme, minimum amount of investment
Government take
  • fixed signing bonus
  • royalties of 15%
  • income tax equal to IRPJ plus CSLL (ie, 25% + 9%)*
  • share of oil production after deducting the cost oil
  • non-fixed signing bonus
  • royalties of between 5% and 10%
  • special participation proportional to the production capacity
  • income tax equal to IRPJ plus CSLL (ie, 25% + 9%)*

​​* IRPJ (corporate income tax) and CSLL (social contribution on net profit) are levied on profit.

Comment

Although the Brazilian government cannot be condemned for feeling a need to review its oil and gas policy in face of the massive discoveries in the pre-salt area, some of its decisions thereafter may raise some eyebrows.

Specialists have criticised the decision that Petrobras have a minimum 30% share in, and operate all of, the pre-salt and strategic blocks. Criticism arises not only because of the level and amount of investment that this position will require - not to mention the fact that some of these areas, although located in the pre-salt area, might not be interesting enough for a company as large as Petrobras - but also because Petrobras, although government-controlled, is owned by a majority of private investors. This raises serious questions regarding whether this is the best way to preserve national interests and whether the government is explicitly benefiting private equity investors in the company.

The practicability of entering into unitisation agreements under the new regime has also been discussed, in particular whether it will be possible to reach unitisation agreements covering blocks contracted under the two different regimes (ie, concession and production sharing), due to the significant differences between the granting instruments and the regimes.

Whether this new regime will be positive for the oil and gas sector remains to be seen - although this should soon become clear. On the one hand, the creation of a new regime rings alarm bells for foreign investors (eg, regarding political hazards and changes of law). However, the fact that ANP has finally released a new tender package and is making plans towards organising a second one for the end of 2013 is expected to reinvigorate the sector. Before the Pre-salt Law was enacted, only 28% of the blocks in recognised pre-salt areas had been allocated under concession agreements. At least 72% of such reservoirs are therefore still to be tendered out, representing more than 100,000 square kilometres of known reserves, plus areas as yet undiscovered.

For further information on this topic please contact Bashir Karim Vakil or Carlos Campos at Karim Vakil & Cruz Vizaco Advogados by telephone (+55 21 8151 0018) or email ([email protected] or [email protected]).