General

Development

Describe the areas of energy development in the country.

The Brazilian electricity matrix is mostly renewable, as hydropower and wind power are responsible for more than 70 per cent of the installed capacity.

Hydropower is the main source of energy – making up approximately 66.5 per cent of the installed capacity and the power generation – but environmental concerns currently limit Brazil’s ability to expand its hydropower generation capacity with large reservoirs. As a result, recent large hydropower plants constructed, such as Belo Monte, Jirau and Santo Antônio, are run-of-the-river power plants.

Thermal power generation also plays an important role as a supplementary source of energy, accounting for approximately 25 per cent of the installed capacity and 24 per cent of power generation. Oil and coal thermopower generation is being replaced by natural gas thermopower plants (including LNG-to-power projects) due to environmental concerns and also the availability of natural gas in the market.

The participation of wind power plants is around 7.5 per cent of the installed capacity and 8 per cent of power generation, while solar power installed capacity is around 0.5 per cent (with significant growth on distributed generation in recent years).

Brazil has also two nuclear power plants in operation (Angra 1 and Angra 2), representing approximately 1.3 per cent of the installed capacity. A third plant is under construction (Angra 3). Although nuclear power remains in the energy plans of Brazil, it appears that further expansion would be pursued only in the long term, rather than in the mid term.

As regards the oil and gas industry, Brazil is among the top 10 oil and gas producers in the world, and is the first producer in Latin America, with the 15th largest proven oil reserves in the world (approximately 13.4 billion barrels – most of which is in offshore deep waters). This industry plays a key role in the Brazilian economy, accounting for approximately 13 per cent of the GDP.

Specifically, as regards the natural gas industry, significant changes are expected in the regulatory framework in the short term. Please refer to the second question under the regulatory heading and to the key developments of the past year heading.

Role of government

Describe the government’s role in the ownership and development of energy resources. Outline the current energy policy.

Over the past 30 years, the electricity sector has undergone changes that help explain the Brazilian government’s current policy and legislative framework, as summarised below:

Prior to the 1990s: Electricity activities were carried out by government companies.

Mid-1990s to 2003: Due to the fiscal crisis and high inflation in the 1980s and early 1990s, a new legislative framework was approved and implemented based on privatisation of government companies and facilities and initiatives to foster private sector investments.

2003 to 2012: Severe droughts when the Brazilian electricity matrix was relying upon hydropower generation led to an energy supply crisis in the early 2000s. By the end of 2003, the government had implemented a major reform in the sector based mainly on government planning for its expansion and energy supply reliability through the obligation of distribution companies to have their demand 100 per cent contracted.

2012 until 2019: In 2012, the government approved specific rules for renewal of generation, transmission and distribution concessions, which were to expire as early as 2015. As a result of the involuntary exposure of distribution companies as well as a steep increase in thermopower generation due to consecutive years of drought, the electricity sector companies and consumers ultimately faced high costs for electricity and unprecedented delinquency or default rates. Many agents in the sector sought protective measures in the courts, resulting in a ‘judicialisation’ of the sector.

Although legislative changes to correct problems and settle disputes in the sector were originally expected by the end of 2017 and early 2018, it is hard to estimate the legislative schedule. In any event, the main principles of the legislative framework are not set to be modified.

Specifically, as regards the oil and gas industry, there were also some significant changes during the past 25 years that help explain the Brazilian government’s current policy and legislative framework, as summarised below.

  • On 9 November 1995, Constitutional Amendment No. 9 was approved and enabled the federal government to contract with companies of either the public sector or the private sector or the carrying out of the activities of the oil industry.
  • On 6 August 1997, the Brazilian Petroleum Law was approved regulating the national energy policy and activities related to the oil and gas monopoly (formerly exercised by the federal government through Petrobras).
  • On 30 June 2010, the Remunerated Assignment Law was approved and authorised the federal government to transfer exploration and production rights to Petrobras up to 5 billion oil barrels.
  • On 22 December 2010, the Production Sharing Law approved the exploration and production of oil, natural gas and other fluid hydrocarbons under the production-sharing regimen in the pre-salt and other strategic areas.
  • On 29 November 2016, an amendment to the Production Sharing Law was approved modifying the mandatory participation of Petrobras to act as operator to a priority right.

Commercial/civil law – substantive

Rules and industry standards

Describe any industry-standard form contracts used in the energy sector in your jurisdiction.

Industry-standard form contracts are used in the energy sector in Brazil, more particularly in the case of contracts awarded through public bidding or as part of an auction conducted by regulatory agencies.

The exploration, development and production of oil and gas shall be carried out through concession agreements with the federal government upon bid rounds conducted by the Brazilian Petroleum, Natural Gas and Biofuels Agency (ANP). The terms and conditions of such concession agreements basically follow the same standard, even though certain changes are made from bid round to bid round. 

Similar mechanism is adopted in the electric power sector, where the winning bidder shall be granted with a concession agreement for public services of electric power transmission, distribution or for use of a public asset (hydropower potential), among others. In addition, in case of power generation auctions conducted by the Brazilian Electric Power Agency (ANEEL), when the winning bidder shall sell power in the Regulated Contract Environment – ACR, a standard power purchase agreement shall be entered into with the applicable distribution companies (the ACR PPA). 

What rules govern contractual interpretation in (non-consumer) contracts in general? Do these rules apply to energy contracts?

Contractual interpretation is mainly governed by:

  • the rights and principles under the Brazilian Federal Constitution;
  • the Brazilian Civil Code (Law No. 10,406 of 10 January 2002);
  • Law No. 13,874 of 20 September 2019, which established certain economic freedom rights under Brazilian law;
  • the Brazilian Civil Procedure Code (Law No. 13,105 of 16 March 2015); and
  • the Law of Introduction to Brazilian Norms (Decree-Law No. 4,657 of 4 September 1942).

Besides the legislation mentioned above, energy contracts shall be also subject to applicable regulation.

In summary, the following principles, among others, shall apply to Brazilian contracts, including energy contracts:

  • Brazilian parties shall observe good faith in both the negotiation and in the performance of agreements;
  • the interpretation of contracts shall consider the intention of the parties over the literal meaning of the language;
  • freedom to contract shall be limited by the social purposes of the contract, provided that private transactions shall be subject to minimum intervention and contract revision shall be an exception to the rule; and
  • no party shall be allowed to enrich itself without cause or to abuse its rights.

 

Describe any commonly recognised industry standards for establishing liability.

Liability would be generally subject to concepts of wilful misconduct (voluntary act or omission) negligence and imprudence (lack of the necessary diligence, entailing a disregard or breach of the duty to act in a diligent and careful manner as required by specific circumstances), as well as abuse of rights based on their economic and social purposes, good faith or good morals. In addition, strict liability shall apply when expressly provided by law or when the activities performed by the damaging party imply, by their very nature, risks to the rights of others.

In the oil and gas industry, standard form contracts (eg, concessions contracts) usually contemplate in certain provisions that the concessionaire shall follow best practices of the oil industry in the performance of their obligations. This concept is broadly defined in the contract itself.

Performance mitigation

Are concepts of force majeure, commercial impracticability or frustration, or other concepts that would excuse performance during periods of commodity price or supply volatility, recognised in your jurisdiction?

Brazilian law defines acts of God and force majeure events as ‘the necessary fact, the effects of which could not be avoided or impeded’. As a general rule, the party affected by an event of force majeure or an act of God shall not be liable for losses resulting thereof, unless the party has expressly agreed otherwise.

Brazilian law also establishes in contracts with continuing or deferred performance that, if the obligation of one of the parties becomes extremely burdensome, with excess advantage for the other, by virtue of extraordinary or unforeseeable events, the debtor may apply for dissolution of the contract. Dissolution may be avoided if the defendant offers to modify the conditions of the contract, on an equitable basis. If only one of the parties has obligations under the contract, that party may petition that its obligations be reduced, or that the manner of performing them be modified, so as to avoid excess burden.

Although the application of such concepts would always be on a case-by-case analysis, periods of commodity price or supply volatility have been argued as force majeure or events causing extreme burden but could also be classified as ordinary risk of business, depending on the specific transaction and circumstances.

Nuisance

What are the rules on claims of nuisance to obstruct energy development? May operators be subject to nuisance and negligence claims from third parties?

Although Brazilian law does not expressly contemplate the concept of nuisance, the Brazilian Civil Code embraces the principle that the party that, by wilful action, omission, negligence or imprudence, violates any rights and causes damage to a third party is obliged to indemnify, in addition to strict liability being applicable in certain events.

The indemnity will seek to restore the situation of the adversely affected party to that prior to the injuring act, and the damaged party would have the burden to prove in court the losses and damage suffered and the amount thereof.

Brazilian law also establishes certain situations where governmental authorities, such as ANP and ANEEL, are entitled to expropriate and create administrative easements over private property in the public interest, mitigating operators’ risks. As a general rule, the owner of a private property over which a right-of-way is created shall be indemnified for the losses suffered as a result.

Moreover, energy projects are subject to the grant of environmental and other permits, which are dependent on the impact on affected populations.

Liability and limitations

How may parties limit remedies by agreement?

As a general rule under Brazilian law, the indemnity shall be measured by the extension of the damage caused. Therefore, it is not unusual for parties to agree on an express contractual liability limitation, in which case the parties shall be subject to the specific amount established thereunder.

When the damage is higher than the amount imposed by a penalty clause, the creditor cannot seek additional indemnification, unless otherwise expressly established by the parties. In that case, the penalty value must stand as a minimum indemnity, and the creditor must prove the excess damage.

It is also customary for Brazilian parties to negotiate no liability for indirect damage or consequential damage, as well as loss of profits.

Is strict liability applicable for damage resulting from any activities in the energy sector?

Yes. In addition, strict liability usually applies in the Brazilian energy sector for environmental damage or injuries caused to third parties affected in any way by the damage, such as employees, service providers, neighbours, fishermen, etc, which may sue the company for recovery of health injuries, actual damage, loss of profits or even for property damage.

Specifically, as regards environmental damage, Brazilian law establishes that all those who benefit economically from a pollutant activity may be held strictly liable for the environmental damage caused by that activity. This position has been consistently adopted by public prosecutors in Brazil.

Commercial/civil law – procedural

Enforcement

How do courts in your jurisdiction resolve competing clauses in multiple contracts relating to a single transaction, lease, licence or concession, with respect to choice of forum, choice of law or mode of dispute resolution?

Courts in Brazil resolve competing clauses in multiple contracts by analysing the context and evidence available to determine the intent of the parties at the time they entered into those contracts. Usually, clauses in the master agreement prevail over those in ancillary agreements. The Brazilian Superior Court of Justice (STJ) has already ruled in a specific case that an arbitration clause in the master agreement extends to ancillary agreements.

As for conflicting clauses dealing with the mechanism for dispute resolution, Brazilian courts generally try to accommodate them to the great extent possible. The courts may concurrently recognise the validity of both an arbitration clause and a choice of court clause, for instance, as arbitration has a limited scope under Brazilian law (it depends on the arbitration agreement) and non-arbitrable disputes would then have to be taken to court. Further, an arbitration clause (if any) is enforceable only on the parties to the corresponding agreement.

Although rare, there is even the possibility of bringing an arbitration clause and choice of court clause in the same contract as their wording is not contradictory. For example, a choice of court clause may only refer to non-arbitrable disputes, while all arbitrable disputes would be subject to arbitration.

There is also a legal provision in the Brazilian Act of Arbitration (Law No. 9,307/1996) that determines that the filing of a precautionary measure before the Brazilian courts is authorised despite an arbitration clause to protect a right before the establishment of the Arbitral Tribunal.

Are stepped and split dispute clauses common? Are they enforceable under the law of your jurisdiction?

Stepped and split dispute clauses, especially mediation and arbitration (med-arb) clauses, have become more frequent, mainly in contracts involving high amounts.

The stepped and split dispute clauses are enforceable under Brazilian Law, especially pursuant to Law No. 13,140 of 26 July 2015 (Mediation Law), pursuant to which if the parties have agreed to a med-arb or mediation and judication clause and one of the parties still decides to initiate the arbitration or judicial proceeding without the prior mediation, the judge or arbitrator must put the proceeding on hold until mediation is completed.

How is expert evidence used in your courts? What are the rules on engagement and use of experts?

Under Law No. 13,105/2015 (Civil Procedure Code (CPC)), expert evidence is used whenever necessary for a decision on the merits of the controversy (ie, when the dispute involves facts or issues that depend on special technical or scientific expertise).

Expert evidence may be requested by the parties or determined on the judge’s initiative. The parties may designate experts to assist the court-appointed expert and submit questions to be answered by the latter during expert works.

Experts must necessarily be registered with the court or belong to a technical or scientific body duly registered with the court. These experts must undergo periodic evaluations and reassessments to maintain their record, considering the professional training, updating of knowledge and experience.

What interim and emergency relief may a court in your jurisdiction grant for energy disputes?

Under the CPC, a provisional relief may be satisfactory (anticipated) or precautionary. If the provisional relief is satisfactory, the effects of the definitive remedy will be anticipated by the decision. If the provisional relief has a precautionary nature, only protective measures should be granted without advancing the effects of a definitive remedy.

As to the grounds of the request, provisional relief may be of urgency or evidence-based type. The urgent relief must meet the following requirements: the likelihood of the asserted rights and the harm in delayed remedy. In the case of evidence-based injunction, it will be necessary to prove that:

  • there is abuse of the right of defence or manifest delaying purpose of the defendant;
  • the factual allegations can be evidenced by documents and there is a relevant finding in the judgment of similar cases or in a binding decision granted by the Superior Courts;
  • it is an order based on adequate documentary evidence of a deposit agreement; and
  • the claim is evidenced by documents so that the asserted right becomes evident beyond a reasonable doubt.

A provisional urgent relief may be sought in advance or incidentally, while a provisional evidence-based injunction may only be sought incidentally. An incidental motion for injunctive relief is required within the proceeding in which the definitive relief applies when the provisional urgent or evidence-based relief is required within the context of a dispute where a definitive remedy has already been requested. In relation to the provisional relief requested in advance, the provisional urgent relief is required even before the request for definitive remedy, meaning that the provisional relief is required and the definitive remedy is sought only after.

What is the enforcement process for foreign judgments and foreign arbitral awards in energy disputes in your jurisdiction?

Enforcement of a foreign judgment or arbitral award in Brazil is conditional on its prior ratification by the Superior Court of Justice (STJ) without reconsideration of the merits. To be ratified by the STJ, a foreign judgment must:

  • be enforceable and non-appealable in the place where it was rendered;
  • have been given by a competent court after proper service of process on the parties, or after sufficient evidence of the parties’ absence, pursuant to applicable law;
  • not offend Brazilian res judicata, national sovereignty, public policy or good morals,
  • be duly authenticated by the competent Brazilian consulate or, if applicable, apostilled; and
  • be accompanied by a translation into Portuguese, made by a certified translator.

The procedure before the STJ usually takes one to four years. The duration depends mainly on the extent of the other party’s opposition. The interested party files a motion for recognition of the arbitral award and, if all formal requirements have been met, the defendant is summoned to present its defence. After a round of submissions by the parties and the Public Prosecutor's Office, the judge’s decision follows, and may be appealed. On being recognised, the foreign judgment or arbitration award is enforced via federal district courts.

Brazil is also a signatory of the New York Convention of 1968 on the recognition and enforcement of foreign arbitral awards and the Hague Convention on the Exclusion of Requirements for Legalisation of Foreign Public Documents of 1961. Judgments and arbitration awards issued in Brazil are not subject to such ratification requirement.

Alternative dispute resolution

Are there any arbitration institutions that specifically administer energy disputes in your jurisdiction?

There are no arbitration institutions that specifically administer energy disputes in Brazil. Some of the most recognised arbitration institutions in Brazil are the International Chamber of Commerce (ICC) and Center for Arbitration and Mediation of the Brazil-Canada Chamber of Commerce (CAM-CCBC). However, members of the Power Commercialization Chamber (CCEE) use the Fundação Getúlio Vargas Chamber of Meditation and Arbitration (FGV Chamber). On the other hand, recent concession agreements for exploration and production of oil and gas provide that the parties shall jointly select an arbitration institution. If no agreement is reached, ANP may appoint ICC, LCIA or Hague Permanent Court of Arbitration within a period time, and the other party may choose one of them.

Is there any general preference for litigation over arbitration or vice versa in the energy sector in your jurisdiction?

There is a general preference for arbitration over litigation in the energy sector in Brazil. In the electric energy sector, for instance, a member of the Chamber of Commercialisation of Electric Energy (CCEE), the entity tasked with administering electric energy trades among 8,000-plus agents, must necessarily agree to an arbitration clause for disputes arising within the CCEE to be resolved under the FGV Chamber. Similarly, ANP has added arbitration clauses to its oil and gas concession agreements since 1998.

Are statements made in settlement discussions (including mediation) confidential, discoverable or without prejudice?

As a rule, statements made in settlement discussions are not confidential and may be used in judicial or arbitral procedures unless the parties expressly contemplate otherwise. Mediation is an exception to this rule. As confidentiality is one of the main characteristics of mediation procedures, unless the parties agree otherwise, all statements and information produced during the mediation procedure will be confidential and may not be used in judicial or arbitral procedures.

Brazil does not adopt discovery provisions in its judicial procedures. Although there are some cases in which a party may be ordered to produce evidence against itself, the parties are generally required to produce evidence supporting their respective claims.

Privacy and privilege

Are there any data protection, trade secret or other privacy issues for the purposes of e-disclosure/e-discovery in a proceeding?

In 2018, Brazil enacted the main regulatory framework for data protection and privacy (Law No. 13,709 of 14 August 2018 – the General Data Protection Law), regulating the use, protection and transfer of personal data in Brazil, and establishing the parties involved in data exchange and their respective obligations, responsibilities and penalties in the civil sphere. The law establishes sanctions such as warning, daily fine, publication of the breach and blocking of personal data. This framework abides by the constitutional precepts of freedom, privacy, free initiative, and the economic and technology development of the country.

Therefore, personal data processing within national territory, by an individual or legal entity, when data subjects are based in Brazil, or for offering products or services in Brazil, is subject to Law No. 13,709.

What are the rules in your jurisdiction regarding attorney-client privilege and work product privileges?

Under the Brazilian Constitution, an attorney’s acts and statements during legal practice are inviolable within the limits of the law. Additionally, the Law on Rules of Legal Practice and Brazilian Bar Association (Law No. 8,906 of 4 July 1994) establishes that attorneys may refuse to testify as a witness in a case in which they acted as attorneys, even when authorised or requested by such person, as well as on a fact protected by professional secrecy.

The Rules of Legal Practice also contemplate, in respect of freedom of defence and professional secrecy, the inviolability of the attorney’s office or place of work, their working instruments, and electronic, telephone and telematics correspondence. If truthful information otherwise protected by attorney–client privilege is disclosed (in breach of the duty of confidentiality), redress of the damage may be sought.

Jurisdiction

Must some energy disputes, as a matter of jurisdiction, first be heard before an administrative agency?

No, the prevailing understanding of Brazilian courts is that unconditional access to the Judiciary as granted by the Brazilian Federal Constitution and the Brazilian Civil Procedure Code shall apply regardless of previous administrative procedure, as a general rule.

Depending on the circumstances of the case, parties may prefer to discuss the matter at administrative level before arbitration or judicial proceedings or submit the dispute directly to arbitration or courts.

Regulatory

Relevant agencies

Identify the principal agencies that regulate the energy sector and briefly describe their general jurisdiction.

The following governmental authorities are in charge of the regulation and supervision of the energy sector:

  • the Ministry of Mines and Energy (MME);
  • the Brazilian Energy Policy Committee (CNPE);
  • the Brazilian Electric Power Agency (ANEEL);
  • the Brazilian Petroleum, Natural Gas and Biofuels Agency (ANP);
  • the Power Sector Monitoring Committee (CMSE); and
  • the Energy Research Company (EPE).

Certain supervision activities may also be delegated to state regulatory authorities. In addition to governmental authorities, the National Electric System Operator (ONS) and the Electric Power Commercialisation Chamber (CCEE) also play an important role in implementation of the regulatory policy of the sector.

MME is the ministry that represents the federal government as granting authority, in charge of issuing regulations and granting concessions and authorisations.

CNPE is formed by ministries of state and representatives of civil society. Its main function is to propose to the President of Brazil national policies and specific measures to:

  • promote the rational exploitation of energy resources;
  • ensure the supply of energy inputs to remote areas or those difficult to access; and
  • establish guidelines for specific programmes, such as the usage of [other] energy sources, among others.

ANEEL is an integrated entity of the indirect federal government administration, subject to special agency regime, as the regulatory agency of the electric power sector, related to MME, responsible for regulation and overview of production, transmission, distribution and commercialisation of power, in accordance with policies and guidelines established by the federal government. ANEEL shall, among other things:

  • promote, by delegation of powers, based on policies and guidelines approved by the granting authority represented by MME, bidding procedures for hiring concessionaires and authorised entities of public services for the production, transmission and distribution of power, and the granting of concessions to exploit hydraulic potential;
  • manage concession agreements and authorisations for public services of electricity, as well as agreements for the concessions of use of public assets; and
  • resolve, at an administrative level, disputes between concessionaires, authorised entities, IPPs and self-producers, as well as any other disputes between agents and their consumers.

Moreover, ANEEL has the authority to intervene in the concession for electric power services to ensure its adequate performance and compliance with contractual, regulatory and legal rules.

ANP is the main regulatory body for the oil and gas activities in Brazil. ANP is an integrated entity of the indirect federal government administration, subject to special agency regime, as the regulatory agency of the oil industry, linked to the MME. ANP’s main responsibility is the promotion of regulations, contracting, and inspection of the oil and gas industry economic activities, and its roles are basically the following:

  • preparation of the public notices and promoting the biddings for the concession and production-sharing regimen of oil and gas exploration, development, and production, as well as executing the agreements with state-owned and private companies related to such activities and inspecting their implementation;
  • authorising the carrying out of activities of refining, liquefaction, shipping, processing, treatment, transportation, storage and packaging;
  • establishing criteria for the calculation of the pipeline transportation fees and determining their amounts, pursuant to what is set forth in the [Petroleum] Law;
  • inspecting, directly or upon agreements with the states or the Federal District agencies, the activities of the oil, natural gas and biofuels industries, as well as applying the administrative and pecuniary sanctions established by law, regulation or agreement;
  • filing supporting documents aiming at a statement of public utility, for expropriation purposes and institution of utility easement of the areas needed for the exploration, development, and production of oil and natural gas, construction of refineries, pipelines and terminals; and
  • monitoring the Brazilian System of Fuel Stocks and implementing the Annual Plan of Strategic Fuel Stocks provided for in the Petroleum Law.

ANEEL and ANP have also issued joint resolutions with other regulatory agencies, including the Brazilian Telecommunications Agency (ANATEL) to regulate sharing of infrastructure between companies subject to these authorities.

CMSE is responsible for the permanent monitoring and analysis of the continuity and safety of the electricity supply. One of its main functions is to follow the development of generation, transmission, distribution, commercialisation, import and export activities related to electricity, natural gas and petroleum.

EPE is a government-owned company that prepares studies and undertakes research to underpin planning in the energy sector. EPE also plays an important role as regards auctions in the sector.

Access to infrastructure

Do new entrants to the market have rights to access infrastructure? If so, may the regulator intervene to facilitate access?

The Brazilian electric power sector legislative framework grants open access to transmission and distribution systems for the different agents supplying or consuming power.

Such access shall be subject to charges owing to transmission or distribution costs involved (tariff for use of the transmission system (TUST) and tariff for use of the distribution system (TUSD), respectively), and may require capital expenses by the accessing party, as would be the case for transmission facilities of exclusive interest of the power producer.

The power generator requesting access to the distribution system shall carry out technical and economic studies, and undertake projects and activities, related to its facilities of exclusive use (if any) and proper access to the system.

The oil and gas industry in Brazil is also subject to open access rules. For instance, the Brazilian Natural Gas Law (Law No. 11,909 of 4 March 2009) establishes that third parties may have access to gas transportation pipelines.

More recently, on 24 June 2019, CNPE approved 2019 Resolution No. 16, which establishes guidelines and improvements in respect of energy policies geared to promoting free competition in the natural gas market. Pursuant to this resolution, ANP shall be responsible for implementing common network codes and common codes for access to pipelines, natural gas processing units and LNG terminals, among other matters.

Both ANP and ANEEL may intervene if an operator unreasonably refuses to grant access by new entrants to its essential facilities.

Judicial review

What is the mechanism for judicial review of decisions relating to the sector taken by administrative agencies and other public bodies? Are non-judicial procedures to challenge the decisions of the energy regulator available?

ANEEL and ANP have specific regulation establishing internal administrative procedures to decide on certain conflicts or appeals. After the exhausting of the administrative sphere, the parties are entitled to request judicial review, as the Federal Constitution establishes that no breach of law shall be left out of scrutiny by the judiciary.

Fracking

What is the legal and regulatory position on hydraulic fracturing in your jurisdiction?

Certain aspects of hydraulic fracturing are currently regulated by ANP Resolution No. 21 of 11 April 2014, which establishes the requirements to be met by oil and gas producers performing hydraulic fracturing.

Notwithstanding that, there is also some civil and political resistance in Brazil with respect to such exploitation techniques due to environmental concerns. For instance, in 2019 the state of Paraná approved specific legislation prohibiting hydraulic fracturing techniques in its territory, and there are also some legal proceedings still ongoing on the matter in other states.

Other regulatory issues

Describe any statutory or regulatory protection for indigenous groups.

The Brazilian Federal Constitution establishes that the land traditionally occupied by indigenous groups belongs to the federal government, and the indigenous communities hold possession rights and rights of enjoyment over the benefits of such land.

Brazilian law also establishes that hydro and mining resources, including energetic potentials, may only be exploited on indigenous land with the authorisation of the National Congress, after hearing the communities involved. If authorisation is granted, a portion of the revenues resulting from such activities shall be distributed to the local indigenous group as set forth by specific law.

The National Indigenous Foundation (FUNAI) is the authority in charge of indigenous matters in Brazil. The suppression of vegetation or the operation in protected areas without the proper authorisations can lead to the imposition of fines or the embargo of the activities. Additionally, interference in such areas could give rise to ownership issues or create severe obstacles to any activity to be developed on the land.

Describe any legal or regulatory barriers to entry for foreign companies looking to participate in energy development in your jurisdiction.

Except with respect to nuclear activities, there are no specific requirements or limitations in the electric power legislative framework for acquisition of interests by foreign companies in Brazilian companies carrying out activities in the sector, as compared to requirements otherwise applicable to Brazilian purchasers.

In any event, certain activities shall be granted only to companies organised under Brazilian laws, with headquarters and management located in Brazil. Accordingly, foreign investors shall incorporate a special purpose company under Brazilian laws to be granted the applicable concession, permission or authorisation. If Brazilian and foreign companies bid jointly as a consortium, the Brazilian company shall be the leader of the consortium as a general rule.

Foreign companies may also be required to have a legal representative in Brazil with powers to receive service of process and to represent them in judicial and administrative proceedings.

Foreign documents (which may be necessary for review and approval of transactions by applicable authorities) must be notarised and legalised with the Brazilian consulate or apostilled abroad before being sent to Brazil. To be presented to Brazilian authorities, such documents shall also be translated by a certified translator and, if required, registered in Brazil.

Foreign companies (or Brazilian companies controlled by foreign companies) are otherwise subject to restrictions on the ownership and lease of rural land, which must be taken into consideration when developing any project.

Specifically, as regards the exploration and production of oil and gas under the production-sharing regime in pre-salt and other strategic areas, the CNPE decides whether to hold bids or whether to have Petrobras carrying out such activities directly. If a bid is to be conducted, CNPE first offers Petrobras the preference of being the operator of the blocks.

What criminal, health and safety, and environmental liability do companies in the energy sector most commonly face, and what are the associated penalties?

According to Brazilian law, an individual or legal entity that pursues activities that may harm the environment might be subject to three independent and cumulative levels of environmental liability: administrative, civil and criminal liability.

Brazilian law is very strict concerning environmental liability and anyone who benefits economically from the pollutant activity may be held liable for environmental damage caused by such activity. This position has been consistently adopted by public prosecutors in Brazil.

Within their respective spheres of authority, governmental agencies are entitled to administratively penalise any party that breaches environmental laws, by imposing recuperation measures, fines, shutdowns, losses or limitation of fiscal incentives and benefits.

Besides administrative sanctions, the breaching party is subject to civil liability for any damage caused to the environment, and is liable as well for identifying or repairing the damage, as well as criminally liable to pay fines or, in the case of individuals, imprisonment.

Pursuant to the Brazilian Environmental Law, in the case of environmental damage, the environmental authorities generally request indemnity from the company that caused the damage. If it is not feasible for the defendant company to bear its environmental liability for whatever reason (including, without limitation, the allegation that the company does not have enough assets for payment of its environmental liability), the environmental authorities can request that the judge disregard the entity’s corporate veil to seek indemnity from the shareholders.

The Federal and the State Public Prosecution Offices, the state, the municipalities and certain associations and non-governmental organisations (NGOs) are entitled to file civil lawsuits for damage caused to the environment; and the federal and state public attorneys are empowered to file criminal lawsuits. In the case of failure by the state or municipal authority in this regard, the Environmental Secretary shall be responsible for applying the relevant monetary penalties.

The regulatory agencies in the energy sector, namely ANP and ANEEL, also have resolutions regarding health and safety standards in the energy industry.

Other

Sovereign boundary disputes

Describe any actual or anticipated sovereign boundary disputes involving your jurisdiction that could affect the energy sector.

Brazil is still involved in three minor sovereign boundary disputes with Uruguay and Bolivia. However, these disputes do not represent a threat to the Brazilian energy sector, as the areas are very limited compared to Brazilian territory.

Energy treaties

Is your jurisdiction party to the Energy Charter Treaty or any other energy treaty?

Brazil is currently a party to energy treaties with other South American countries, more particularly: the Itaipu Treaty of 1973; and the Framework Agreement on Regional Energy Complementation between the Mercosur States and Associated States, of 2005. Brazil is not a signatory of the Energy Charter Treaty.

Investment protection

Describe any available measures for protecting investors in the energy industry in your jurisdiction.

The Brazilian Constitution promotes a set of conditions, connected to other principles such as the principles of legality, non-retroactivity and natural justice, as well as to legal provisions such as vested right, perfect legal act and res judicata to promote concepts of legal certainty and protect investments.

Moreover, legislation in Brazil expressly contemplates general principles such as free enterprise, private property, private participation and free exercise of economic activities, minimal and exceptional state intervention in the direct exploitation of economic activities and the incentive function in the exercise of its role as regulator of economic activities to attract and promote investment in all sectors of the economy.

The Federal Constitution also warrants unconditional access to the judiciary.

Cybersecurity

Describe any legal standards or best practices regarding cybersecurity relevant to the energy industry in your jurisdiction, including those related to the applicable standard of care.

Brazil has just approved the Brazilian Data Protection Law, which will affect all sectors of the economy, including the energy industry. The Law will have extraterritorial application. Therefore, any company dealing with the personal data of users located in Brazil will also be subject to the Law.

Update and trends

Update and trends

List any major developments (case law, statute or regulation) that are anticipated to affect the energy sector in your jurisdiction in the next 12 months, including any developments related to the taxation of energy projects. What is the anticipated impact of climate change regulations, treaties and public opinion on energy disputes?

There are currently two major bills under discussion in Congress aiming to reform the electricity sector. Both bills result from contributions by players in the electricity sector made during 2017–2018 as part of a public consultation on legislative changes to correct problems and settle disputes in the sector.

Upon investiture of the current Minister of Mines and Energy in January 2019, the Ministry of Mines and Energy created a working group composed of members of the Ministry of Mines and Energy, National Electric System Operator (ANEEL), CCEE, EPE and National Electric System Operator to present new proposals for the modernisation of the electricity sector, also considering the above-mentioned contribution by the players in the sector. New proposals are expected to be presented to the ministry in 2020.

At the end of 2019, the federal government presented a new bill of law for the privatisation of Centrais Elétricas Brasileiras SA ­(Eletrobras), which is a mixed-capital company created by Law No. 3,890-A, dated 25 April 1961 and is a major participant in the electricity sector. This privatisation is expected to occur through the sale and purchase of shares owned by the federal government in the stock market, upon a corporate reorganisation to segregate certain assets and companies of Eletrobras group, such as the Itaipu hydropower plant and Eletronuclear. However, this is still pending approval of the Congress.

In 2018, Bill of Law No. 10,985 was presented in the Federal Senate purporting, among other matters, to establish new conditions for the renegotiation of the generation scaling factor GSF in the National Integrated System (ie, allowing the renegotiation of debts of the hydropower generators in the spot market).

Regulatory changes regarding renewable energy are also expected for 2020. This is a reflection of recent trends, as ANEEL also regulated in 2012 the net metering mechanism for distributed generation, which plays an important role in increasing the use of photovoltaic solar generation in Brazil, among other alternative energies.

Regarding the natural gas regulatory framework, which is expected to play a major role in the expansion of electricity generation capacity in Brazil, significant changes were recently approved by means of CNPE Resolution No. 16, dated 24 June 2019, which established guidelines to foster free competition in the natural gas market with the participation of several players. After the publication of the resolution, Administrative Council for Economic Defence and Petróleo Brasileiro SA (Petrobras) entered into (i) a cease-and-desist agreement on 11 June 2019 for the sale of its equity interest in eight of 13 refineries owned by Petrobras; and (ii) another cease-and-desist agreement, on 8 July 2019, aimed at opening up the Brazilian natural gas market, encouraging the entry of new market players, by establishing obligations for Petrobras, including divestments in natural gas transportation and local distribution companies, and also through the implementation of gas release and capacity release mechanisms.