Who holds title over oil reservoirs? To what extent are mineral rights on private and public lands involved? Is there a legal distinction between surface rights and subsurface mineral rights? At what stage does title to extracted oil transfer to the licensee, lessee or contractor?
Pursuant to articles 20 and 176 of the Brazilian Constitution and article 3 of the Petroleum Law, oil, natural gas reserves and hydrocarbons located within Brazilian territory are considered assets of Brazil. Despite this, article 177 of the Brazilian Constitution allows the federal government to contract with state or private companies for the E&P of oil and gas.
Companies holding concession rights to explore such reserves are entitled to the property of their production under the concession regime. Note that the transfer of ownership of the oil and natural gas produced under the concession regime takes place at the point of volumetric measurement of the production, which is defined by the concessionaires under the development plan submitted to approval by the ANP.
Companies contracted under the PSC regime are entitled to the profit oil and to recover certain costs through the cost oil. Pursuant to the Pre-Salt Law and the PSC, title to the extracted oil is originally given to the contractors regardless of whether at the measuring point or at the production sharing point (to be defined by the contractors in the development plan).
With respect to mineral rights on private lands, as in the case of onshore blocks, the companies or consortia that hold oil and gas exploration rights may negotiate the acquisition of the property or the right of way directly with the landowners, following the principles of private law.
In any event, according to the Brazilian Constitution, property is subject to public interest. In light of article 8 VIII of the Petroleum Law, the ANP has competence to declare the public use or institution of utility easements in an area to be used in E&P activities. Therefore, in the event of unsuccessful negotiations between companies and landowners, for instance, the companies or consortia that hold the oil and gas exploration rights may submit to the ANP a request for declaration of the public use of the area or institution of utility easements, such as rights of way, in accordance with the ANP’s regulations.
With the proceedings’ instructions led by the ANP, the state president may issue a decree declaring the area public use or instituting a utility easement and authorising the companies or consortia to promote, at their own expense, the total or partial expropriation or the institution of utility easements.
It is important to state that the landowners are entitled to a percentage of the production in their lands, which may vary from 0.5 per cent to 1 per cent, which is to be defined by the ANP according to article 52 of the Petroleum Law.Exploration and production – general
What is the general character of oil exploration and production activity conducted in your country? Are areas off-limits to exploration and production?
In Brazil, upstream activities are performed both onshore and offshore, although most of the oil production derives from the offshore oil and gas fields. In 2015, 93.4 per cent of the domestic production resulted from offshore activities.
In order to perform the above-mentioned activities, the concessionaire must obtain an environmental licence granted by the Federal Environmental Protection Agency (IBAMA). In the event of a bidding round carried out by the ANP, the CNPE must observe all legal and environmental restrictions concerning the offered areas.
Further, the Brazilian Constitution provides that mineral resources located on indigenous lands may only be exploited by means of a special authorisation granted by the National Congress.
In addition, article 3 of IBAMA Ordinance Rule No. 39/2006 provides that any activity related to the exploration and production of oil and gas in areas within the National Marine Park of Abrolhos is, as a general rule, expressly forbidden, while in the buffering zone of the National Marine Park of Abrolhos, such activities may only be performed by seeking specific authorisation.
Currently, there are also restrictions regarding the production of hydrocarbons through the hydraulic fracking process in the Recôncavo and the Paraná basins, because of preliminary court orders still pending final decision.
Owing to recent oil spills and accidents, some working groups were created in the National Congress in order to investigate and study the situations and alternatives of stricter rules on environmental issues. It is likely that new, stricter regulations will be enacted in view of these facts.Exploration and production – rights
How are rights to explore and produce granted? What is the procedure for applying to the government for such rights? To what extent are the terms of licences or contracts negotiable?
There are two different regulatory frameworks for the granting of exploration and production rights in Brazil.
- Under the concession regime (similar to a tax-royalty regime and the main regime for exploration and production in Brazil) the concessionaire will explore and produce the reserves at its own risk and to its own benefit. The ANP conducts bidding rounds of areas referred to as blocks, which are approved by the CNPE and jointly with the invitation to bid, it publishes in advance to the bidding session the contract models that will govern the operation of granted areas.
- The production-sharing regime (relating to exploration and production on pre-salt areas and areas deemed strategic by the federal government) under which the MME concludes with the oil companies and the PPSA (its interest shall be defined at the bidding auctions) a service agreement for the exploration and production of hydrocarbons and receives a part of the production as remuneration for its services. Under the PSC regime, Petrobras has a pre-emptive right to hold a minimum participating interest and be the operator of a pre-salt area.
- A third regime, the ‘onerous assignment’, applies to Petrobras exclusively and is limited to certain pre-salt areas.
- For bid-round participation in either the concession regime or production-sharing regime, companies must express their interest by making a pre-qualification and paying a participation fee, which, in addition to allowing participation in the bid, gives the right to access data of the block or blocks the companies are interested in (see question 19 for the bid-selection criteria). Those interested in participating in the round can offer comments and suggestions on the contract’s provisions during a period of public consultation, but the ANP is not obliged to accept them. Once the final version of the respective agreement is approved, its terms are non-negotiable and all consortium members have to submit to it in full.
Does the government have any right to participate in a licence? If so, is there a maximum participating interest it can obtain and are there any mandatory carry requirements for its interest? What cost-recovery mechanism is in place to recover such carry? Does the government have any right to participate in the operatorship of a licence?
Under the concession regime, the federal government has no right to participate in a licence, except indirectly through the federal government-controlled oil company, Petrobras.
Under the PSC regime, Petrobras has a pre-emptive right to hold a minimum participating interest and be the operator in the consortium to be formed with the PPSA and private companies. The costs and investments required for the performance of the PSC will be fully borne by the consortium, excluding PPSA. In spite of this, the federal government may choose to participate in the investments, in which case it will be required to bear the risks corresponding to its ownership interest. The participation of the federal government in such investments must be further regulated by the bid documents or specific legislation, or both.
The PPSA will represent the federal government in the consortium and will be responsible for the management of the PSCs. The PPSA will not perform upstream oil and gas activities and shall not make investments, but has very important responsibilities, including:
- management, audit and supervision of oil and gas activities performed under the PSC regime;
- management and control of costs arising from PSCs;
- participation in operating committees and election of half of their members (including the chair);
- the PPSA will have qualified voting rights and veto powers over operations; and
- negotiation of unitisation involving unlicensed acreage.
If royalties are paid, what are the royalty rates? Are they fixed? Do they differ between onshore and offshore production? Aside from tax, are there any other payments due to the government? Are any tax stabilisation measures in place?
Royalties are due for both onshore and offshore production, pursuant to the Petroleum Law and Decree No. 2,705/98. The rates are often 10 per cent of the total amount of the monthly volume of oil produced. Nonetheless, according to article 12 of the aforementioned decree, royalty rates may be reduced to 5 per cent, depending on the geological risks at a given field. Additionally, the royalty rate for each oilfield is determined under the concession agreement entered into by the concessionaire and the ANP.
In the PSC regime, the subject of royalties has resulted in great discussion regarding the question of the percentage to be collected from contractors. Pursuant to article 2 of Federal Law No. 12,734 of 30 November 2012, the authorities raised the amount to 15 per cent for the blocks to be granted under the PSC regime, as opposed to the present 10 per cent applicable to concession contracts.
Besides royalties, federal, state and local governments are also recompensed through other ‘government takes’, which are defined as all payments to be made by a concessionaire as a result of the activities of exploration and production of oil and natural gas, such as:
- a signing bonus: a lump sum payable in a single instalment upon execution of the concession agreement;
- special participation: extraordinary financial compensation payable in the event that high volumes of oil or natural gas are produced, or a certain field otherwise enjoys high profitability; and
- payment for area occupation or retention: this consists of a yearly sum to be paid for the occupation or retention of oil prospecting areas. The ANP sets the amounts to be paid in the bidding documents and concession agreements; nonetheless, article 28 of Decree No. 2,705/98 provides minimum and maximum standards for charging such amounts.
It is important to note that, unlike the concession model, the signature bonus under the PSC regime is not a criterion for the evaluation of the bidding offers, but a fixed amount to be defined by the MME in each concrete case. The special participation and payment for area occupation or retention, both part of the government take in the concession regime, are not applicable under the PSC regime.
Concerning the special participation, a controversy has stricken the industry since ANP Resolution No. 25/2013, which gives a broader concept to the term ‘field’, pursuant to which two or more geologically separate fields may be grouped as a single field based upon broad criteria, and, consequently, more easily trigger the payment of special participation.
Under the PSC regime, the oil company produces oil for the federal government in exchange for a proportion of the oil produced. The initial production, generally known as ‘cost oil’, is sold and used to reimburse the investor for certain exploration and development costs. The remaining oil, the ‘profit oil’, is allocated between the state and the contractor.
Regarding tax stabilisation, as per the applicable rules, in general terms, new provisions increasing the burden on the taxpayer will only be in force in the fiscal year following the fiscal year in which the relevant provision was enacted, with a few exceptions (taxes that regulate markets, such as tax on financial transactions (IOF), excise tax (IPI) and customs duties). In any event, it is also important to note that no bilateral investment treaties are in force in Brazil.Licence duration
What is the customary duration of oil leases, concessions or licences?
In general terms, concessions are granted for a period of 35 years, taking into account all the phases of oil activity.
Typically, the exploration phase lasts from two to eight years, usually divided into two different periods with specific commitments. By the end of the first period, which requires only seismic data acquisition, the concessionaire may relinquish from the area or decide to enter into a second exploratory period, which usually requires the commitment of one well. As from the 14th concession bid round, the federal government intends to limit the exploration phase to a single period, lasting from five to seven years.
The production phase starts upon the declaration of commerciality of a field within the exploration phase and may last for 27 years thereof.
Concessionaires are also entitled to request the extension of each of these phases in the case of, for instance, delays in the obtainment of environmental licences, a well in progress at the end of the exploration phase or to appraise a discovery in order to declare if it is commercially feasible or not. All cases must be previously approved by the ANP.
In its turn, the PSC regime has the term for its contracts limited to 35 years, as defined in the Pre-Salt Law, regardless of the duration of the exploration and production phases.Extent of offshore regulation
For offshore production, how far seaward does the regulatory regime extend?
Pursuant to the Montego Bay Treaty, of which Brazil is a signatory party and Law No. 8,617, from 4 January 1993, the exploration of oil and natural gas reserves and other mineral resources can be carried out within 200 nautical miles of the Brazilian coast, which comprises the territorial waters and the exclusive economic zone. Brazil is currently requesting the extension of its continental platform limits beyond 200 nautical miles, corresponding to an area of 963,000km2, to the Commission on Continental Platform Boundaries, from the United Nations Convention on the Law of the Sea 1982. However, this request has been ongoing since 2004.Onshore offshore regimes
Is there a difference between the onshore and offshore regimes? Is there a difference between the regimes governing rights to explore for or produce different hydrocarbons?
As from the opening of the market in 1995, the ANP has conducted 14 bidding rounds on which onshore and offshore blocks were subject to the same general conditions, including the model of the concession contract and one round for the pre-salt area. Despite this, some differences, such as local content obligations and payment of compensation to landowners, are found (see question 9).
For environmental licensing, the competent authority for offshore blocks is IBAMA, while for onshore blocks that do not use the fracking process, the relevant state regulatory agencies are competent. As provided in the Federal Decree No. 8,437/2015, IBAMA is competent for the licensing of onshore blocks in the case the production of hydrocarbons is executed through the hydraulic fracking process.
It is also important to state that for areas within the pre-salt areas as defined in the Pre-Salt Laws and areas to be deemed strategic by the federal government, the PSC regime shall apply.Authorised E&P entities
Which entities may perform exploration and production activities? Describe any registration requirements. What criteria and procedures apply in selecting such entities?
All state-owned and private oil companies may participate in the bidding rounds carried out by the ANP. There is no restriction on foreign participation, provided that the foreign investor incorporates a company under the Brazilian law and complies with all technical, legal and financial requirements established by the ANP.
The tender protocol issued for each bid must establish all the technical, financial and legal requirements with which a concessionaire must comply to be qualified as a non-operator, operator A or B, or C in case it is a successful bidder.
In general terms, a ‘non-operator’ is the company that will join the consortium but will not be able to conduct the performance of the operations, operator A is the company qualified by the ANP to operate in any block offered in the bid, while operators B and C are eligible to operate in some restricted blocks to be defined by the agency.
Bidding offers may be submitted by companies individually or jointly in consortium. In the case of a consortium, a qualified operator between them shall be indicated.
Under the concession regime, the criteria for the evaluation of bidding offers are signature bonus and minimum exploration programme.
Product sharing regime
It is important to note that, unlike the concession model, the signature bonus under the PSC regime is not a criterion for the evaluation of the bidding offers but a fixed amount to be defined by the MME in each concrete case. The special participation and payment for area occupation or retention, both part of the government take in the concession regime, are not applicable under the PSC regime.
Under a production-sharing agreement, the oil company produces oil for the federal government in exchange for a proportion of the oil produced. The initial production is sold and used to reimburse the investor for exploration costs. The remaining oil is allocated to both the state and the investor.
The use of a signature bonus in the PSC system has the objective of anticipating oil production revenues from the pre-salt fields and is a fixed amount established in the final tender protocol, which the contractor must pay to the federal government upon signature of the PSC. Through this system, the federal government is able to obtain funds that it would otherwise only have access to upon the prospect’s production start-up, four or five years later, paid out as royalties. The signature bonus is defined by the CNPE before the auction.
Under the PSC regime, Petrobras has a pre-emptive right to hold a minimum participating interest and be the operator of a pre-salt area. Private parties and even Petrobras are entitled to bid for the remaining participating interest in the PSC consortium or the entirety should Petrobras not exercise its pre-emptive rights.
The winner of the auction will be the company that proposes the highest percentage of interest in the remaining profit oil to the federal government, which will be represented in the consortium by the PPSA. In the event the winning consortium proposes a percentage of federal government profit oil that is higher than the minimum established by the CNPE, Petrobras has a walk-away right.
Therefore, under this bidding regime, Petrobras and the winner of the bid bear 100 per cent of the exploration and production costs but receive as payment a share of the profit oil and have the right of cost oil (oil and natural gas equivalent to exploration and production costs) reimbursement, subject to the payment of the government take.Regulatory powers over operators
What controls does the regulatory body have over operators? Can operatorship be revoked?
The operator of each area is the immediate responsible party of the consortium with the ANP and shall comply with a number of specific technical obligations, provide information to the Agency and undertake responsibility for all practical aspects of the implementation of the E&P activities.
The concessionaires are entitled to designate the operator of the area. Nonetheless, the operator may be removed by the ANP in case of failure to comply with any of its obligations under the contract and if it does not cure its default within 90 days of receipt of the notice from ANP indicating the default, regardless of the potential revocation of the licensee’s interests under the concession agreement. In such cases, the concessionaires must designate a new operator, subject to the ANP’s approval.
Once removed, the former operator shall transfer over all assets used in the operations, accounting records, files, and other documents related to the concession area and the operations at stake to the property’s new operator. As a condition to approve the new operator, the ANP may require the removed operator take the necessary action to transfer all information and other aspects related to the granting instrument, including the performance of audits and inventory at its own expenses.Joint ventures
What is the legal regime for joint ventures?
During the ANP concession bidding rounds, companies are allowed to bid as individuals or as consortia. Individually, the company shall carry out the operations, with no formal requirements to incorporate a new entity. As a consortium, the companies must enter into a consortium agreement, which must provide the joint and several liability for the obligations undertaken under the concession agreement. In the case of a foreign entity, it is important to emphasise that it must incorporate a company under Brazilian law, with head offices and management in Brazil.
Additionally, the parties may enter into joint operating agreements (JOAs) that usually also provide that both parties are jointly and severally liable for the obligations of the venture. Possible risks to the co-venturers are associated with the acts of the operator. The undivided interest is structured through a consortium agreement, which is widely used in the upstream sector. Other than the consortium agreement, the JOA is a private instrument between the parties and there is no obligation to submit it to the ANP.
The operator can carry out operations without obtaining the non-operating, co-venturers’ approval. Therefore, unless other co-venturers can prove negligence of the operator, they will all share the losses and damages caused by the acts of the operator.
Nevertheless, under the PSC regime, consortia may be formed in two different ways, either by a direct negotiation regime or the bidding regime. In the direct negotiation regime, Petrobras will join the PPSA in a PSC consortium. Petrobras will bear 100 per cent of the exploration and production costs but will receive as payment a share of the profit oil and will have the right to cost oil (the oil and natural gas equivalent to exploration and production costs) reimbursement, subject to payment of government take.
In the bidding regime, the PPSA has no participating interest in the rights and obligations of the PSC consortium, but the PPSA is assured of a participating interest of 50 per cent in the voting rights under the operating committee of the PSC consortium. Petrobras has a pre-emptive right to hold a minimum participating interest and be the operator of a pre-salt area. Private parties and even Petrobras are entitled to bid for the remaining participating interest in the PSC consortium. If Petrobras does not exercise its pre-emption rights, other private parties may bid for the entire participating interest in the PSC consortium.
The winner or winners of the bid bear 100 per cent of the exploration and production costs but receive as payment a share of the profit oil and have the right of cost oil reimbursement, subject to payment of government take.Reservoir unitisation
How does reservoir unitisation apply to domestic and cross-border reservoirs?
The Pre-Salt Law, which established the PSC regime, altered the provisions related to unitisation contained in the Petroleum Law. What follows is a brief summary of those changes and the new regulation surrounding unitisation for the PSC and concession regimes.
- In the case of domestic reservoirs, concessionaires must prepare a joint or separate evaluation plan and negotiate the corresponding unitisation agreement to be approved by the ANP.
- If concessionaires do not reach an agreement, the ANP must determine the terms of such unitisations based on best industry practices. It is important to highlight that specific rules for the unitisation procedure of a deposit extending through areas under different legal-regulatory regimes - and the calculation of government takes in such scenarios - are established in ANP Resolution No. 25/2013, which was recently amended by ANP Resolution No. 698/2017.
- Concession, the PSC and direct negotiation regimes, which are regulatory frameworks currently in force in Brazil, have different cost and taxation structures, making it hard to reconcile the rules for the payment of government takes among them. For this reason, Resolution No. 698/2017 establishes that the fiscal regimes must apply independently and proportionally to each tract comprising the unit interval, in accordance with the relevant legal and regulatory rules.
- The unitisation agreement to be entered into in those cases must establish the relevant obligations that must be discharged by parties regarding federal government and third-party takes in accordance with the contracts that govern the licensed areas comprising the unit interval.
- Brazil has not yet experienced a situation of cross-border reservoirs, which denote the negotiation and execution of an agreement between two different countries.
Is there any limit on a party’s liability under a licence, contract or concession?
No. Concessionaires are jointly and severally liable before the ANP and the federal government for their obligations under the relevant concession agreement or the PSC, regardless of being an operator or non-operator. The Pre-Salt Law establishes joint and several liability before private third parties too. Note that parent-company guarantees may also be required at the ANP’s discretion (see question 24).Guarantees and security deposits
Are parental guarantees or other forms of economic support common practice or a regulatory requirement? Are security deposits required in respect of any work commitment or otherwise?
As with the concession contract or PSA, companies must, at their sole expense and risk, provide the ANP with one or more financial guarantees to ensure compliance with minimum exploratory programmes. Acceptable guarantees include an irrevocable letter of credit (which is the most common form of financial guarantee provided by concessionaires), security bond, oil pledge or other performance certificates pursuant to the conditions set forth in the respective bidding documents and contracts.
Any letter of credit or performance bond will be released upon certification by the ANP that all required minimum exploratory programmes for the exploration period have been performed.
If the concessionaires fail to fulfil the minimum exploratory programmes, the ANP is authorised to foreclose the letter of credit or performance bond as compensation for such a failure, without prejudice to other obligations and duties that the concessionaires are obliged to comply with and the right of the ANP to pursue other possible remedies.
In spite of this, a performance guarantee (a parent company guarantee) is sometimes required at the ANP’s discretion to guarantee the performance and obligations of the concessionaire under the concession contract, especially when companies are qualified based upon its group’s experience. The performance guarantee must be issued by a company directly or indirectly controlling the concessionaire (the Brazilian entity), not necessarily being the ultimate parent, in accordance with the template provided in the relevant tender protocol, which is non-negotiable. By means of such a guarantee, the grantor is liable for all obligations undertaken by the concessionaire under the respective concession contract or PSA in relation to the ANP.