General

Key commercial aspects

Describe, in general terms, the key commercial aspects of the oil sector in your country.

Concession regime and production sharing regime

Before 1995, the exploration and exploitation of oil and gas reserves were federal government monopolies carried out exclusively by the federal government-controlled company Petróleo Brasileiro SA (Petrobras). The enactment of Constitutional Amendment No. 09/1995 loosened the federal government’s monopoly over such activities, allowing the federal government to contract these from state-owned or private companies.

Additionally, Federal Law No. 9,478/1997 (the Petroleum Law), enacted on 6 August 1997, established a new regulatory framework for the performance of the aforementioned activities and introduced new regulatory bodies, such as the Brazilian National Oil, Natural Gas and Biofuels Agency (ANP) and the National Energy Policy Council (CNPE).

The CNPE was created with the main purpose of fostering rational use of the nation’s energy resources, reviewing energy matrixes for different Brazilian regions and setting guidelines, while the ANP was created to regulate the oil and natural gas sector and to promote the development and production of oil and natural gas in Brazil’s sedimentary basins through a transparent and competitive bidding process in a concession regime.

In December 2010, three separate laws, including Law No. 12,351/2010 (Pre-Salt Law) entered into force addressing the exploration and production (E&P) of strategic areas and Brazil’s offshore pre-salt reservoirs. These laws introduced a production sharing contract (PSC) regime applying for future licensing of pre-salt areas and certain other areas to be deemed strategic by the federal government, as well as the implementation of an oil fund to support social and economic development in Brazil.

In addition to the law governing pre-salt areas, a 100 per cent state-owned company, Empresa Brasileira de Administração de Petróleo e Gás Natural SA - Pré-sal Petróleo SA (PPSA), was created by Federal Law No. 12,304/2010 to represent the federal government in the consortium to be awarded the rights to explore and develop blocks within the pre-salt area. The PPSA does not perform upstream oil and gas activities and does not engage in investments, but has very important roles, such as management, audit and supervision of oil and gas activities performed under the PSC regime, as well as the negotiation of unitisation involving unlicensed acreage.

On 7 February 2013, the CNPE issued Resolution No. 01/2013 regarding incentives for the involvement of small and medium-sized players in oil and gas exploration, development and production. Pursuant to this Resolution, the ANP must hold bidding rounds focused on blocks located at mature basins and inactive areas with marginal fields. The environmental feasibility of these blocks and areas must be assessed by the ANP and the competent environmental authorities. Blocks with the potential for development of non-conventional resources will be excluded from those specific bids, and the ANP must designate criteria for the eligibility of companies that will benefit from such new policies and measures. The criteria are established in ANP Resolution No. 32/2014, and list small players as the companies qualified as operator ‘D’ or ‘C’, and whose production does not exceed an annual average of 1,000boe/d. In turn, medium-sized players are those qualified as operator ‘B’ or ‘C’, and production does not exceed an annual average of 10,000boe/d. Note that, for the purposes of calculating the production of the companies, the ANP considers the production of their corporate group, either in Brazil or abroad. As a result, in 2018 the ANP established a permanent bid round of mature blocks. In the first stage of the permanent round, 884 blocks were made available, located in 14 sedimentary basins, with 722 blocks in the onshore basins of Amazonas, Espírito Santo, Paraná, Parnaíba, Potiguar, Recôncavo, São Francisco, Sergipe and Alagoas and 162 blocks in the offshore basins of Campos, Ceará, Pará-Maranhão, Potiguar, Santos and Sergipe-Alagoas.

Onerous assignment regime

Law No. 12,276 was enacted in conjunction with the Pre-Salt Law. The objective of this Law was to allow Petrobras to attract new investors and to keep the Federal Union as the main shareholder, holding at least 50 per cent of the voting shares. The law authorised the government to sign the Onerous Assignment Agreement with Petrobras, giving the company the right to explore and to produce up to 5Bboe of crude oil in the pre-salt areas of Atapu, Buzios, Itapu and Sépia.

The federal government’s estimate, however, is that the areas could yield another 6Bboe. For this reason, the government will bid the rights to explore the exceeding volumes in the largest bid round to date, scheduled to take place on 28 October 2019, in which it expects to collect nearly $100 billion reais as the market’s expectations soar.

Market development

Since 1999, following the opening of the market, the ANP has conducted 16 bidding rounds for exploration blocks. After almost five years with no new licensing rounds, on 14 May 2013, the ANP promoted the 11th bidding round, which offered 289 blocks, among which 142 were awarded. In the same year, the ANP promoted the first pre-salt bid round for Brazil’s Libra offshore area and the 12th bidding round, which offered 240 onshore blocks with both conventional and non-conventional gas potential, out of which 72 blocks, located across five sedimentary basins, were awarded. The first specific round focused on the pre-salt area offshore of Brazil occurred on 21 October 2013; the winner was a consortium led by Petrobras with Shell, Total, CNPC and CNOOC as the other contractors.

Despite the oil prices and the corruption scandal involving Petrobras, the federal government held the first stage of the 13th bidding round for exploration and production of concession areas on 7 October 2015. Initially, 182 onshore and 84 offshore blocks were offered across 10 sedimentary basins: Amazonas, Parnaiba, Potiguar, Recôncavo, Sergipe-Alagoas, Jacuípe, Camamu-Almada, Espírito Santo, Campos and Pelotas, out of which 35 onshore and two offshore blocks were awarded. On 10 December 2015, the second stage of the 13th bidding round offered concessions agreements for recovery and production of oil and natural gas in more than 10 inactive areas with marginal accumulations, out of which nine were awarded.

In 2017, the ANP held the 14th concession regime bidding round, which offered 287 blocks, among which 37 were awarded, the second production-sharing bidding round - concerning areas that are to be unitised with licence areas - and the third production-sharing bidding round.

For the 2018-19 period, the federal government plans to hold four additional bidding rounds, offering areas in both concession and production-sharing regimes. The ANP has already promoted the 15th bidding round for exploratory blocks in March 2018, which resulted in an amount higher than 8 billion reais, setting the highest financial results in the history of concession regimes in Brazil. Together, the fourth and fifth production-sharing bidding rounds that took place in June and September 2018 amounted to nearly 10 billion reais in signature bonuses.

The 16th bidding round for exploratory blocks is scheduled for the second half of 2019 and plans to offer blocks in the Camamu-Almada and Jacuípe basins, as well as ultra-deepwater areas in the Campos and Santos basins, among others. The sixth production-sharing bidding round, also expected for the second half of 2019, intends to offer several blocks in the Santos basin.

As mentioned above, the government also plans to hold the Onerous Assingment Bid Round in October 2019 for the large-scale oil volumes in the areas of Atapu, Buzios, Itapu e Sépia, which is expected to be the largest bid round in history and has created great expectations among the major players.

Oil production

Oil production in Brazil has increased considerably in recent years. Brazil produced 668.3Mmbbl in 2007, and in 2017 oil production reached 988Mmbbl, representing a growth of 4 per cent compared with 2016. This increase relates to the extraordinary production in pre-salt areas, which in June 2017 surpassed post-salt production for the first time and in 2018, reached an average of 1.428Mmbbl/d a day. The volume of oil reserves in Brazil was approximately 12.9Bboe, the 15th largest amount of proven reserves in the world in 2018. According to the ANP, Brazil had more than 100 concessionaires operating in the E&P oil sector, and by the end of 2018, 329 blocks were in the exploration and evaluation phase and 458 fields were in production.

Energy mix

What percentage of your country’s energy needs is covered, directly or indirectly, by oil or gas as opposed to nuclear or non-conventional sources? What percentage of the petroleum product needs of your country is supplied with domestic production?

According to the Ministry of Mines and Energy (MME), in 2017, oil and its related products, represented 36.4 per cent of Brazil’s domestic energy supply, while natural gas represented 12.9 per cent. Renewable energy sources including hydraulic, electricity, firewood, charcoal and sugar cane products, represented 42.9 per cent.

According to the latest data published by the Brazilian Energy Balance regarding final energy consumption, during 2017, oil by-products represented 42.6 per cent, electricity represented 17.6 per cent and natural gas represented 7.3 per cent.

In 2018, the country imported 67.9Mmboe, which represented an increase of 25 per cent in comparison with 2016 (in the past 10 years, only 2007 and 2013 saw the importation of oil increase in comparison with the preceding year). During 2017, oil exports increased 12 per cent, reaching 410Mmboe. In 2018, the volume of oil byproducts imported by the country showed a slight decrease in comparison with 2017, totalling 32.7Mm3, approximately 10 per cent lower.

Even though the country produced over 110Mm3 in 2017, it is still a net importer of oil by-products, which mainly comprise naphtha, diesel and petrol. Note that the importation of oil by-products relates to Brazil’s deficiency in refinery capacity, because Brazilian refineries are only capable of refining light oil, whereas the oil produced in Brazil is mainly heavy oil.

Government policy

Does your country have an overarching policy regarding oil-related activities or a general energy policy?

Pursuant to section 2 of the Petroleum Law, the CNPE is the federal government body in charge of setting overall national energy policies for oil activities with the main purpose of:

  • fostering the rational use of the nation’s energy resources;
  • ensuring the proper functioning of the national fuels’ inventories’ system;
  • reviewing energy matrixes for different regions of Brazil; and
  • establishing general guidelines (see question 1).

The CNPE has created a working group to discuss the basic guidelines and policy for E&P activities in the oil and gas sector, and discussions are currently ongoing.

The ANP is the national regulator of the oil, gas and biofuels industry, and is generally in charge of regulating, contracting and supervising economic activities related to the oil, natural gas and biofuels industry, and establishing technical standards for various connected activities, pursuant to article 8 of the Petroleum Law. It is also responsible for establishing the national policy for oil, natural gas and biofuels.

It is important to emphasise that both the CNPE and the ANP are entities linked to the executive branch of the federal government.

Registering a licence

Is there an official, publicly available register for licences and licensees? Is there a register setting out oilfield ownership or operatorship, etc?

The process by which oil and gas E&P rights are awarded is fully public. Accordingly, in the event that a concession is awarded, an extract of the concession contract will be published in the Official Gazette.

Additionally, for each of the ANP’s bidding rounds there is a specific website containing a description of the pertinent blocks and relevant concessionaires, including information regarding winning and losing bids. Additional information regarding the blocks and fields may also be found on the website.

However, since the information on the ANP website is not always up to date, detailed analysis of other sources must be performed to obtain all the information pertaining to a specific block or field.

Legal system

Describe the general legal system in your country.

Brazil is a constitutional democracy based upon the law and the separation of powers. All acts, even though final and binding as administrative decisions, may be brought to judicial review. Inter alia, the due process of law and the principle that no individual is obliged to perform or refrain from something except if established in law, vested rights, the res judicata and consummated acts are also protected by the Brazilian Constitution.

Brazil has ratified the Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958 (New York Convention) through Decree No. 4,311/2002. However, for foreign awards to be enforceable in Brazil, they must pass through a validation process before the Brazilian Superior Court of Justice (which may take a couple of years).

Anti-corruption issues have now been further regulated by Federal Law No. 12,846/2013, such as civil and administrative liability of companies regarding corruption against the federal government. This law establishes certain criteria to input responsibility on legal entities, whether national or foreign, for any act of corruption harmful to the federal government. Parent companies, subsidiaries, affiliates and consortia will be jointly and severally liable for the performance of corrupt acts. Sanctions include the publication of the conviction and a fine that can reach 20 per cent of gross sales of the financial year preceding the initiation of administrative proceedings. If it is impossible to apply this criterion, the fine shall vary between 6,000 and 60 million reais. Such actions may also result in the suspension or partial banning of activities and, in severe cases, the compulsory dissolution of the corporation. Nevertheless, this law also provides some mitigation actions, such as the establishment of an internal compliance procedure, which may reduce the sanction to be applied.

In relation to environmental pollution, Brazil maintains a polluter-pays principle. In the Brazilian legal system, environmental liability may distinctively, and sometimes complementarily, involve administrative liability, criminal liability and civil liability.

REGULATION OVERVIEW

Legal framework for oil regulation

Describe the key laws and regulations that make up the principal legal framework regulating oil and gas activities.

The Brazilian oil and gas sector is regulated by general provisions of the Brazilian Constitution and by a number of different federal laws and ordinances and resolutions enacted by the ANP.

Pursuant to articles 20 and 176 of the Brazilian Constitution, oil and gas reserves located in Brazil (including the continental shelf, territorial waters and exclusive economic areas) are considered assets of the federal government and, according to article 177, the federal government may contract the exploration and production of deposits of oil, natural gas and other hydrocarbons.

Pursuant to Constitutional Amendment No. 09/1995, the federal government may contract with state-owned or private companies for the exploration and production of oil and gas reserves.

Federal Law No. 9,478/1997 (the Petroleum Law), enacted on 6 August 1997, establishes the regulatory framework for these activities, especially by establishing:

  • the creation of the ANP and CNPE;
  • the concession regime, which is the main regime for exploration and production in Brazil;
  • the minimum requisites for the tender protocol and concession contracts; and
  • the government takes.

Federal Law No. 12,351/2010 establishes the basic guidelines for exploration and production within pre-salt and strategic areas, which shall be made under the production sharing regime (Pre-Salt Law).

Additionally, it has established:

  • the use of a production sharing agreement (PSA) instead of a concession agreement in such areas;
  • a pre-emptive right (and not an obligation, as recently amended by Federal Law No. 13.365/2016) for Petrobras to hold a minimum participating interest and be the operator of a pre-salt area;
  • a public company (PPSA) as the manager of the PSAs;
  • the need for other companies to enter into a consortium with Petrobras and PPSA;
  • minimum requirements for the unitisation, pursuant to the ANP’s regulations; and
  • the government takes for the PSA.

Federal Law No. 9,847/1999 and ANP Ordinance No. 234/2003 contain the main rules regarding imposition of penalties, including fines, to companies. In 2014, the ANP enacted Resolution No. 64/2014 changing the criteria used for imposing administrative penalties on reoffending companies. In accordance with this resolution, a company will be considered a reoffender if it commits a new infraction within two years of the full payment of the precedent fine or its extinction by ANP (as opposed to ANP Resolution No. 8/2012’s wording, which refers to the moment when the final administrative decision is rendered). In the event companies decide to waive their right to appeal and pay the penalty with the 30 per cent legal discount (as set forth in Federal Law No. 9,847/99), the two-year term for reoffenders shall be reduced to six months.

The tender protocols used in the bid rounds, as well as other ordinances and resolutions enacted by the ANP from time to time, as the main regulator of the activity, are also key instruments for the performance of the E&P activities and bind all concessionaires.

Expropriation of licensee interest

Are there any legislative provisions that allow for expropriation of a licensee’s interest and, if so, under what conditions?

No law allows the federal government to terminate the concession contract or PSC at its discretion or, otherwise, to expropriate.

Revocation or amendment of licences

May the government revoke or amend a licensee’s interest?

Both the concession contract and the PSA contain provisions that allow the federal government to terminate the respective granting instrument in the following situations:

  • upon lapse of the contract’s term of effectiveness;
  • upon completion of the exploration phase without performance of the minimum exploration programme;
  • at the end of the exploration phase, in case there has been no commercial discovery;
  • in the event the contractors fully relinquish the contracted area;
  • upon failure to deliver the development plan within the term established by ANP; and
  • upon refusal of the consortium members to execute, in whole or in part, the unitisation agreement after ANP’s decision on that matter.

In addition to these specific assumptions, the concession contract and the PSC state that the federal government may unilaterally terminate the respective instrument in the event of failure by the concessionaires to perform the contractual obligations within the term established by ANP, except if they are lawfully waived by the ANP. Additionally, the federal government may revoke the interest of any given concessionaire that enters into judicial or extrajudicial reorganisation, with no submission of an approved reorganisation plan able to demonstrate to ANP its economic and financial capacity to fully perform all contractual and regulatory obligations.

Regulators

Identify and describe the government regulatory and oversight bodies principally responsible for regulating oil exploration and production activities in your country. What sanctions for breach may be imposed by the regulatory and oversight bodies?

Oversight bodies

The Petroleum Law and the Pre-Salt Law establish the regulatory framework for the performance of oil and gas activities. These laws are complementary and set forth the responsibilities of the various governmental agencies involved in the regulation of oil activities:

  • the CNPE has the main purpose of fostering rational use of Brazil’s energy resources, ensuring proper functioning of the national fuels inventories system, reviewing energy matrixes for different regions of Brazil and establishing guidelines;
  • the National Petroleum, Natural Gas and Bio-fuels Agency is the national regulator of the oil, gas and biofuels industry, and is generally in charge of regulating, contracting and supervising economic activities related to the oil, natural gas and biofuels industry, establishing technical standards for various connected activities;
  • the Ministry of Mines and Energy (MME) is primarily responsible for planning the use of oil and natural gas resources. The MME proposes to the CNPE, after consultation with the ANP, the areas that will be subject to the concession or PSC regime. The MME also proposes to the CNPE the technical and economic parameters for PSCs and approves the drafts of bid documents and PSCs prepared by the ANP;
  • the state president decides the proposals of the CNPE relating to; and
  • the Brazilian Petroleum and Natural Gas Administration Company - Pre-Salt Petroleum is a public company linked to the MME and has important roles, such as the management, audit and supervision of oil and gas activities performed under the PSC regime and the negotiation of unitisation involving unlicensed acreage.

For the sake of completeness, it is stated that although the federal government controls Petrobras, Petrobas does not issue any sort of regulation for oil exploration and production and acting as an oil company it therefore conducts activities different from the ANP, CNPE, MME and PPSA.

Sanctions

Of the bodies stated above, only the ANP has the prerogative of directly applying penalties to market agents. Usually, these sanctions are fines in cash, but the ANP may also revoke or terminate the rights and/or authorisations of any given agent for the exercise of the economic activities under its regulation. From 2011-15, the ANP issued 1,040 penalties, totalling more than 2.6 billion reais.

Government statistics

What government body maintains oil production, export and import statistics?

The ANP is the federal government body responsible for maintaining updated data related to oil activities, including production, export and import statistics. All concessionaires must supply the ANP with such data. Failing to provide any required information may subject the concessionaire to administrative sanctions imposed by ANP Resolution No. 234/2003.

With respect to the public availability of such information, the ANP annually issues the Statistics Yearbook with all information and data related to the oil and gas sector.

It is important to note that the import and export of oil may only be exercised upon the licensing of the concessionaire (granted by the ANP) and must always follow the guidelines outlined by the CNPE. However, this does not affect the ANP’s responsibility for updating data, as mentioned above.

NATURAL RESOURCES

Title

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.
Government participation

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.
Royalties and tax stabilisation

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.

Concession regime

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.
Licensee liability

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.

LOCAL CONTENT REQUIREMENTS

Minimum requirements

Must companies operating in your country prefer, or use a minimum amount of, locally sourced goods, services, capital or personnel?

Minimum local content commitments

The minimum local content commitment is a criterion for evaluation of the bid in the concession regime and, in the PSC regime, it is defined in the tender protocol. Therefore, companies must comply with the respective minimum local content percentages by acquiring local services and goods. In general terms, the local content is measured by the ratio between the amount of national goods and services and the total amount of goods and services acquired during the execution of the exploratory or development activities. The local content percentage is verified by certificates issued by specific companies accredited by the ANP for this purpose. The certificates must be delivered to the concessionaires by the suppliers. In early 2017, the MME announced new minimum local content percentages for the production and exploration of oil and gas in Brazil to apply to the upcoming bid rounds. The new percentages reflect a reduction of nearly 50 per cent of the requirements previously considered and are no longer a bid criterion.

Fines

The fine to be imposed on oil companies that do not comply with the minimum local content percentages will be reduced from a minimum of 60 per cent of the required percentage that was not achieved (applicable to contracts already signed, as the case may be) to 40 per cent (applicable to future contracts). The maximum fine was also reduced to 75 from 100 per cent of the percentage not achieved by the oil companies.

On 18 January 2016, the federal government enacted Federal Decree No. 8,637/2016, establishing the Pedefor programme to foster competition in the supply chain to E&P companies. Pedefor seeks to facilitate the process for E&P companies to achieve their local content commitments through new types of investments and activities. Pursuant to this decree, E&P companies may undertake, among others, the following activities:

  • purchasing goods, services and systems from a foreign supplier in order to facilitate its establishment in Brazil;
  • directly investing in the suppliers’ technological innovation; and
  • acquiring goods and systems in Brazil for use in activities abroad.

E&P companies that choose to observe Pedefor’s guidelines will receive local content units (UCLs), which may be used by E&P companies in order to comply with their local content obligations to the ANP. Pedefor will be coordinated and implemented by a directive board and by a technical-operational board, whose members were recently appointed by the Ministry of Development, Industry and Foreign Trade Ordinance No. 94/2016, who are mostly members of the MME, the Ministry of Finance and the Ministry of Science, Technology and Innovation, as well as members of the Brazilian Development Bank and the ANP. These boards will be responsible for establishing the methodology and the areas to be promoted, the bonus E&P companies will be entitled to if they invest in Brazil and evaluating local content projects that will be rewarded with UCLs.

Social programmes

Describe any social programme payment obligations that must be made by a licensee, lessee or contractor.

Depending on the possible social and environmental impacts of each E&P activity, environmental bodies may require concessionaires or contractors to establish social programmes as a condition for granting environmental permits. The environmental bodies decide on a case-by-case basis if such social and environmental compensation programmes are required, as there is no general rule listing which activities demand such an approach.

Furthermore, as a mechanism for fostering research, development and innovation, pursuant to the contracts, the concessionaires or contractors are required to invest at least 1 per cent of the gross revenue generated by fields with great profitability or with large production volumes (the same fields where concessionaires are obliged to pay the special participation mentioned in the answer to question 15) and fields within the pre-salt area (under the PSC regime). Since 1998, the resources dedicated to research, development and innovation through this clause amounted to more than 5 billion reais. It is common for E&P companies to invest these amounts in specific programmes created by Brazilian universities to encourage research, new technological development and to establish a research centre in Brazil.

TRANSFERS TO THIRD PARTIES

Approval to transfer interests

Is government consent required for a company to transfer its interest in a licence, concession or production sharing agreement? Does a change of control require similar approval? What is the process for obtaining approval? Are there any pre-emptive rights reserved for the government?

Prior authorisation by the ANP is required for any direct assignment of interests. Only Brazilian companies qualified according to the ANP’s requirements for technical, legal and financial qualifications are entitled to receive the participating interest in both the concession regime and the PSA regime. In accordance with the provisions of the recent 13th bidding round, the ANP’s approval is no longer required for the change of control, except if there is a performance guarantee issued by a parent company of the concessionaire.

No fees are required by the ANP and no preferential purchase rights upon transfer are reserved for the federal government, either in the concession regime or in the PSA regime (except for Petrobras’ minimum participating interest in the PSC consortium - if its pre-emptive rights are exercised - which cannot be assigned). The ANP takes between four to six months to approve an assignment, although the timing has recently improved.

In recent procedures, the ANP has requested new guarantees from the assignees, such as a minimum exploration programme guarantee or a performance guarantee, as the case may be, in order to approve the assignment of participating interests.

In addition to the ANP’s approval, CADE’s clearance may also be required if the groups involved in the transaction meet the following revenues threshold as set out in the Brazilian antitrust laws:

  • at least one of the groups involved (seller or buyer) registered gross revenues in Brazil in excess of 750 million reais during the fiscal year prior to the transaction; and
  • at least one of the other groups involved registered gross revenues in Brazil in excess of 75 million reais during the fiscal year prior to the transaction.

In order to obtain CADE’s approval, a fee payment is required. The transfer of licence rights for exploration and the production of oil and gas to third parties is usually analysed by CADE in the fast-track procedure. Therefore, CADE usually takes between 30 to 45 days to approve such a transaction. CADE’s approval is required by the ANP as a condition for the ANP’s approval.

After the presentation of the relevant documentation to the ANP, the agency has 60 days to issue the approval, deny it or request further documents as deemed necessary, for the agreements to be signed in rounds naught, one and two and for the agreements signed in other rounds, 90 days.

If the ANP requests the presentation of further documents, the interested party has 30 days to fulfil the obligation.

After assignment approval, the parties must present the ANP with the amendment to the concession agreement within 30 days commencing from the official communication.

No pre-emptive right is reserved for the federal government.

Approval to change operator

Is government consent required for a change of operator?

Yes. In order to transfer operatorship, the new operator must fulfil the applicable technical, legal and financial qualifications set out in the latest bid protocol for qualification purposes, and this transfer is subject to ANP approval, in the case of areas under the concession regime, or to MME approval, in the case of pre-salt areas (see question 26).

Transfer fees

Are there any specific fees or taxes levied by the government on a transfer or change of control?

No. Except for the CADE fee, if CADE approval is necessary, no other fee is applicable (see question 27).

TITLE TO FACILITIES AND EQUIPMENT

Title holder

Who holds title to facilities and equipment used for oil exploration, development and transportation activities during the term and on termination of a licence, PSC or service contract?

In the PSC and concession regimes alike, the contractors and concessionaires hold title to the facilities and equipment used during exploration, development and transportation activities (or any third party that owns or operates this facility or equipment on behalf of the contractor or concessionaire). Despite this, at the end of the PSC or concession contract, the ownership of the facilities and equipment may be required to be transferred to the federal government under the responsibility of the ANP if such facilities or equipment are needed for the maintenance of operations in the area or if in the public interest upon completion.

DECOMMISSIONING AND ABANDONMENT

Laws and regulation

What laws or regulations govern abandonment and decommissioning of oil and gas facilities and pipelines? In summary, what is the obligation and liability regime for decommissioning? Are there any other relevant issues concerning decommissioning?

The last stage of the concession is the deactivation of facilities and the return of the field’s concession area to the ANP. This is a matter that is still relatively untested in Brazil, with some technical and regulatory uncertainties to be faced.

Decommissioning is regulated by the Petroleum Law; ordinances are enacted by the ANP with specific provisions of the concession agreement applicable to the relevant field.

The procedures and costs (which shall include all activities for the final deactivation of oil wells, lines and other assets) for the decommissioning of any oil and gas field must be contemplated by the field’s development plan, which is subject to approval by the ANP before the start of production. Once the development plan is approved, the concessionaire is bound to the decommissioning obligations and liabilities provided therein, and those provisions shall be periodically revised throughout the field’s production phase by means of the annual work programmes and budgets.

Liability for decommissioning rests with the field’s concessionaire and, in case of a consortium, all consortium members are jointly liable towards the ANP. It is also important to note that the decommissioning obligations are subject to specific financial guarantees, which may be in the form of insurance, a letter of credit, provisioning fund, or other forms accepted by the ANP (among which are mortgage, corporate guarantee and pledge of oil production). The guarantee shall be financially sufficient to cover all decommissioning activities, as provided in the field’s development plan approved by the ANP.

Finally, the Petroleum Law and the concession agreement provide that any and all assets in the concession area that, at the ANP’s sole discretion, are necessary to allow further operations in the area, or are deemed to be of public interest, shall be transferred to the federal government’s property upon the field’s decommissioning.

Security deposits for decommissioning

Are security deposits required in respect of future decommissioning liabilities? If so, how are such deposits calculated and when does their payment become due?

Upon the ANP’s request, the concessionaire must present a guarantee for decommissioning and abandonment. Such a guarantee may take the form of insurance, a letter of credit, contingency fund or other security acceptable to the ANP. The amounts are based on the field’s respective development plan and shall be revised accordingly in the event that any modification in such plan changes the costs of operations for decommissioning and abandonment. In the case of a contingency fund, any possible balance will be returned in favour of the concessionaire.

TRANSPORTATION

Regulation

How is transportation of crude oil and crude oil products regulated within the country and across national boundaries? Do different government bodies and authorities regulate pipeline, marine vessel and tanker truck transportation?

Pursuant to article 177 IV of the Brazilian Constitution, the transportation of crude oil and its by-products by maritime vessels or pipelines constitutes a federal government monopoly.

ANP Resolution No. 170/2002 provides regulation for the maritime transportation of crude oil and its by-products, while ANP Resolution No. 52/2015 sets forth the basic rules for the construction and operation of transportation facilities.

In addition, and without prejudice to the ANP regulation, the transportation of crude oil on the seas is subject to regulation of the National Waterway Transportation Agency (ANTAQ). According to the applicable rules, only Brazilian navigation companies authorised by the ANTAQ may perform waterway transportation within the country, and the charter of foreign vessels may be conditioned to prior authorisation from the ANTAQ.

Finally, tanker truck transportation in Brazil is also regulated by the National Transportation Agency.

COST RECOVERY

Determining recoverable costs

Where oil exploration and production activities are conducted under a production sharing contract, describe how recoverable costs can be determined and how recovery can be realised.

In the event of a commercial discovery, contractors will be entitled to recover a certain share of the oil and gas produced corresponding to the costs and investments made by such contractors in the execution of the activities of exploration, evaluation, development, production, decommissioning of the installations and expenses with research and development provided by the PSC - the cost oil.

The recovery costs related to such activities are subject to specific items, limits, terms and conditions established in the PSC. In general, recoverable costs cover the acquisition and transportation of raw materials, geophysical data, acquisition, leasing and chartering of services and goods, costs incurred with equipment, insurance, maritime operations and personnel costs directly linked to operations, among others. Certain costs incurred by the operator not expressly provided by the PSC, or not necessarily related to operations, may also be recovered, as provided by the PSC.

In addition, the PSC sets forth specific items not recoverable under the PSC regime:

  • government take;
  • commercial royalties paid to affiliates;
  • financial payments, loans, fees, etc;
  • permanent assets not related to operations;
  • legal fees and expenses;
  • administrative sanctions and penalties of any nature;
  • costs arising from events of force majeure or act of god that affected goods or equipment (including wilful misconduct or gross negligence);
  • tax on income and on acquisition of goods and tax credits (under specific cases); and
  • costs related to the sale and transportation of oil and natural gas, excluding those necessary for production flow.

The recoverable cost oil is determined and approved by contractors under the operating committee and validated by the PPSA, which is also responsible for managing and monitoring the amounts credited as cost oil by contractors. During the first two years of production, the contractors are allowed to recover monthly cost oil limited to a share of 50 per cent of the gross production of hydrocarbons and 30 per cent on subsequent years for each development module. The share of cost oil may be raised back to 50 per cent in the event the costs registered as cost oil are not recovered within two years following the beginning of production, in which case, the 50 per cent share will be in force until the incurred costs are fully recovered.

HEALTH, SAFETY AND ENVIRONMENT

Requirements

What health, safety and environment requirements apply to upstream oil-related facility operations onshore and offshore? What government body is responsible for this regulation; what enforcement authority does it wield? What kind of record-keeping is required? What are the penalties for non-compliance?

The ANP, IBAMA and state environmental regulatory agencies are responsible for the safety and environmental regulations regarding upstream activities. The IBAMA is competent for offshore blocks and unconventional oil and gas exploration, while the state environmental regulatory agencies are competent for onshore blocks that do not use unconventional methods. Being the oil and natural gas regulatory body, the ANP supervises the compliance with environmental standards.

The licences applicable for the oil and natural gas sector granted by the IBAMA are preliminary licences, installation licences and operating licences.

In addition, there are specific environmental licences applicable to upstream activities, such as:

  • seismic research;
  • drilling; and
  • preliminary production.

Further, ANP Resolution No. 3/2007 regulates the process for environmental licensing related to rigs and Ministry of Environment Ordinance No. 422/2011 sets forth the procedures for the federal environmental licensing of activities and projects for oil exploration and production in marine and transition zones.

The environmental licensing procedure in Brazil embraces the analysis of documents, projects and environmental studies submitted by the entrepreneur.

In order to obtain environmental licences for oil activity, the Brazilian regulation imposes the presentation of an environmental impact assessment and an environmental impact assessment report by the entrepreneur, which is mandatory for facilities that perform activities resulting in significant environmental impact. At present, the environmental licensing of these activities is also subject to the payment of an environmental compensation to a maximum amount of 0.5 per cent of the total implementation costs of the relevant undertaking.

The performance of upstream activities without the necessary environmental licensing may subject the company to administrative and criminal sanctions.

LABOUR

Local and foreign workers

Must a minimum amount of local labour be employed? What are the visa requirements for foreign labour? Are there anti-discrimination requirements? What are the penalties for non-compliance?

All foreign or Brazilian companies established in Brazil are required to hire local personnel as employees, ensuring that two-thirds of employees are Brazilian and one-third are foreign in every branch, main branch or agency. This proportion shall also be observed with respect to the payroll whereby the remuneration received by foreign employees shall observe the same proportionality relative to the number of employees.

In order to work in Brazil, a foreign employee must have a working visa and fulfil all the requirements established by the Brazilian National Immigration Council. In the case of a technical visa, the Brazilian National Immigration Council requires a technical services agreement or a cooperation agreement signed between the Brazilian company and the foreign company. In the case of a temporary visa with an agreement of employment, the main document to be analysed by the Brazilian National Immigration Council is the employment agreement signed between the foreign individual and the Brazilian company.

To this end, there are three main types of visa that allow foreign employees to work in Brazil:

  • a permanent visa granted to a foreign citizen taking a managerial position in a Brazilian company, usually granted for a maximum duration of five years;
  • a temporary visa granted to a foreign national with an employment relationship with a Brazilian company who is coming to Brazil for short periods of time (up to two years and may be renewed for a further two years); and
  • a temporary visa granted to a foreign individual without an employment relationship with a Brazilian company. This visa is called a ‘technical visa’ and can be obtained in two versions: a short-term technical visa (up to 90 days) and a long-term technical visa (up to one year that may be renewed for another year).

Law No. 6,815/80 provides the applicable penalties in the event of non-compliance with the immigration laws.

In addition to the above, the ANP also encourages use of the local workforce by establishing minimum local content requirements for the acquisition of services and goods by the concessionaires for their activities (see question 25).

TAXATION

Tax regimes

What is the tax regime applicable to oil exploration, production, transportation, and marketing and distribution activities? What government body wields tax authority?

All income generated by the exploration of oil and gas must be taxed by federal income tax, as any other income generated with the export of any other type of goods. The following taxes may apply to oil and gas activities:

  • federal taxes:
  • import duty (II);
  • excise tax (IPI);
  • contribution to social security (PIS/COFINS);
  • contribution on economic intervention (CIDE); and
  • tax on financial transactions (IOF);
  • state taxes:
  • tax on distribution of goods and services (ICMS); and
  • municipal taxes:
  • tax on services (ISS).

Other taxes and specific fees (known as taxas) may apply depending on the relevant transaction.

In addition, Brazilian companies may import assets to be used in petroleum activities (equipment and spare parts) through a special system of temporary admission of goods under the REPETRO system.

Under the REPETRO regime, taxes generally incurred on imported equipment are suspended upon the equipment’s entry into Brazilian territory. The regime operates through a special type of temporary admission regime and a symbolic export system, by which Brazilian companies are allowed to import equipment and spare parts to be used internally, as if such assets had been exported and subsequently imported in the special regime for temporary admission described above.

Accordingly, Executive Order No. 844/2008 defines which types of equipment and spare parts may benefit from the REPETRO system.

In order to enjoy the full benefits of REPETRO, a Brazilian company must fulfil certain requirements, such as the imported equipment being contractually bound to leave Brazil after a definite period of time and the property remaining with the foreign supplier during its stay in Brazil. For this reason, a rental or an operational leasing of equipment may be performed under the special temporary admission regime, in order to benefit from the REPETRO regime.

The current REPETRO regime expires on 31 December 2040, following the federal government’s recent decision.

COMMODITY PRICE CONTROLS

Crude oil mining

Is there a mandatory price-setting regime for crude oil or crude oil products? If so, what are the requirements and penalties for non-compliance?

No. Prices for oil and gas are stipulated according to the market price and may vary according to internal and external factors, including, but not limited to, the international economic environment.

However, besides the marketing of oil and gas, the ANP shall set a minimum price for the oil to be considered by the ANP for the specific purpose of calculating government takes or eventual cost oil; namely, this price shall be the average of the price of four types of similar oils according to the international market.

COMPETITION

Competition enforcers

What government bodies have the authority to prevent or punish anticompetitive practices in connection with the extraction, transportation, refining or marketing of crude oil or crude oil products?

Law No. 12,529/2011 is the new antitrust law that entered into force in Brazil on 29 May 2012.

Under this new regime, CADE became the sole administrative agency in charge of both merger control and antitrust investigations in Brazil. CADE is comprised of three divisions:

  • the General Superintendence (the Superintendence);
  • the Administrative Tribunal; and
  • the Department of Economic Studies, which provides the authority with economic analysis support.

The Superintendence is responsible for launching and leading investigations into alleged antitrust violations. Upon concluding the investigations, the Superintendence shall present the case to the Administrative Tribunal, which is composed of seven commissioners and takes the final decision regarding the case. The final decision of the Administrative Tribunal will be final and binding, but subject to judicial review.

According to article 10 of the Petroleum Law, the ANP shall give notice to the Brazilian antitrust authorities of any potential anticompetitive conduct of which it may become aware.

Obtaining clearance

What is the process for procuring a government determination that a proposed action does not violate any competition laws? How long does the process generally take? What are the penalties?

The most important change brought about by Law No. 12,529/2011 is that, effective from 29 May 2012, Brazil became a suspensory jurisdiction, under which transactions cannot be closed and the parties must remain independent from each other until final antitrust clearance is given in Brazil. Filing with the Brazilian antitrust authority shall be mandatory if at least one of the groups involved in the transaction had gross revenues in Brazil of at least 750 million reais in the preceding fiscal year and at least one of the other groups involved in the transaction had gross revenues in Brazil of at least 75 million reais in the preceding fiscal year.

CADE is divided into three divisions (see question 33). The Superintendence is responsible for the initial review of merger cases and can issue final clearance in those cases that do not raise competition concerns. In the event the Superintendence concludes that a given transaction should be either blocked or approved, subject to restrictions, it must oppose the case in the Administrative Tribunal.

Compared to other suspensory regimes around the world, the Brazilian pre-merger control regime does not allow the parties to close or implement the notified transaction immediately after the publication of the clearance decision. Under Brazilian law, within 15 days commencing from the publication of the clearance decision issued by the Superintendence, third parties and regulatory agencies are allowed to challenge the Superintendence’s decision in the Administrative Tribunal. In addition, any members of the Tribunal can request that the case be subject to a complementary review by the Tribunal. For this reason, the parties are only allowed to close or implement the notified transaction once the 15-day period has elapsed.

There are two review procedures under the new regime: regular and fast track. The fast-track procedure applies to simple transactions, including, inter alia, transactions resulting in only minor horizontal or vertical overlaps and involving market shares below 20 per cent. The formal review period may take up to 240 days, and can be extended only once, for either an additional 60 or 90 days. During the first year of the new regime, cases filed under the fast-track procedure have generally been cleared by CADE in around 30 calendar days. Cases filed under the ordinary review process will take longer.

DATA

Seismic data

Who holds title to seismic data collected during the term of and on termination of a licence, PSC or service contract? Can the regulator require the data owner to report or release the data?

According to the Brazilian Constitution, all data and information on Brazilian sedimentary basins integrate the national petroleum resources and are therefore public and federal assets. Therefore, any company that performs data collection in Brazil must provide a copy of the data to the ANP in the form of pre-established standards.

The Exploration and Production Databank (BDEP) brings together all the data already collected by the oil and gas industry in Brazil and is managed by the ANP. ANP Resolution No. 1 /2015 regulates the access to this data. The data and technical information acquired in the E&P activities are subject to a period of confidentiality. Confidential data stored in the BDEP is not made available unless the requester is the E&P company itself or the acquiring company. Public data can be accessed by any interested individual or legal entity.

INTERNATIONAL

Treaties

To what extent is regulatory policy or activity affected by international treaties or other multinational agreements?

The regulatory policy for oil activities is not affected by treaties or multinational agreements. The core directives of the oil sector in Brazil are established under the Brazilian Constitution. Multinational agreements or treaties entered into by Brazil must not conflict with the provisions of the Brazilian Constitution.

However, with a view to the avoidance of double taxation, Brazil has entered into tax treaties with the countries listed below. These treaties executed by Brazil and its partners usually follow the Model Tax Convention of the Organisation for Economic Co-operation and Development (OECD) even though Brazil is not an OECD member. Brazil has entered into treaties with Argentina, Austria, Belgium, Canada, Chile, China, the Czech Republic, Denmark, Ecuador, Finland, France, Holland, Hungary, India, Israel, Italy, Japan, South Korea, Luxembourg, Mexico, Norway, Peru, the Philippines, Portugal, Slovakia, South Africa, Spain, Sweden and Ukraine.

Nevertheless, Brazil does not have significant bilateral investment agreements in force. As for tax information exchange agreements (TIEAs), Brazil has recently enacted Federal Decree No. 8,003/2013 putting into force a TIEA entered into with the United States.

Finally, Brazil has ratified the New York Convention through Decree No. 4,311/2002 (see question 5). Note that, for foreign awards to be enforceable in Brazil, they must pass through a validation process before the Brazilian Superior Court of Justice (which may take a couple of years).

Foreign ownership

Are there special requirements or limitations on the acquisition of oil-related interests by foreign companies or individuals? Must foreign investors have a local presence?

There is no restriction on foreign participation in concessions, provided that the foreign investor incorporates a company under Brazilian law or acquires interest in a Brazilian company, and complies with all technical, legal and financial requirements established by the ANP. The direct or indirect acquisition of oil-related interest by foreign and local companies is subject to the approval of the ANP as described in the answer to question 27.

Further, all foreign or Brazilian companies are required to hire local personnel as employees, observing the required proportion of two-thirds of Brazilian employees to one-third of foreign employees in each branch. This proportion shall also be observed with respect to the payroll whereby the remuneration received by foreign employees shall observe the same proportionality relative to the number of employees.

Cross-border sales

Do special rules apply to cross-border sales or deliveries of crude oil or crude oil products? Are there any volumetric supply obligations for the local market that prevail over the export rights of the oil producer?

Crude oil and oil products are freely exportable in Brazil by companies duly incorporated under Brazilian law, in accordance with article 60 of the Petroleum Law. Nevertheless, the export company must be registered before the ANP in accordance with ANP Resolution No. 7/1999.

Such a registration must be requested by the operator on behalf of the consortia or by each party individually. For each oil cargo to be exported, the company shall send a letter to the ANP outlining that all the legal requirements established in ANP Resolution No. 7/1999 have been fulfilled and the quantities and specifications of the hydrocarbons.

Further, the export of any goods, including oil and its by-products, must necessarily be recorded in the national integrated system for international commerce, SISCOMEX, which is an online instrument that enforces the federal government’s control of external business by establishing a one-way flow of information, thereby eliminating parallel control in the operations.

In addition, requirements of the maritime authorities (ANTAQ and Capitania dos Portos), the tax authorities (the Secretariat of the Federal Revenue and the state tax secretariats) and the Central Bank (foreign exchange agreement registration) may also apply.

Update and trends

Current trends

What are the current trends in your jurisdiction? What can we expect in the near future? Are there current proposals to change the regulatory or statutory frameworks? What areas may be of particular interest to foreign investors?

The challenge of making Brazil more attractive for foreign companies and improving competitiveness while preserving the tax payments for states and cities is a balance that made Brazil adopt a new regulatory stance, which has resulted in considerable success in the later bid rounds and promises even greater results for future rounds. With this in mind, the ANP plans to hold three major bidding rounds during 2019, as follows:

  • the sixth and seventh pre-salt round under the PSC regime, allowing interested parties to bid areas on pre-salt; and
  • the Onerous Assignment Bid Round, in which the government plans to offer rights for exploration and production in five key pre-salt areas (in Atapu, Buzios and Itapu e Sépia).

From these events, the federal government plans to accrue over 100 billion reais in signature bonuses and expand earnings over time through job creation, tax collection and strengthening of the national supply industry. Additionally, possible future discovery of commercial petroleum resources will increase federal government participation and Brazil’s energy security. The success of the last bid rounds gave an encouraging boost to the industry as a whole, giving reasonable expectation that the country will soon enter into its strongest phase for the E&P sector to date.

Corroborating this trend, the ANP recently launched a public consultation envisaging the enactment of new regulations to facilitate upstream financing and to finally allow the implementation of widely used international funding methods such as reserve-based lending, which market players expect to see materialise soon.

In addition, Petrobras’ divestment programme, which is intended to reduce the indebtedness of the company and generate value for its shareholders, has received important accreditation from public authorities and the initial resistance presented to the programme by several aspects of federal government regulation is now significantly reduced. A recent important development to this end was a decision by the Brazilian Federal Accounts Board (TCU) that favoured Petrobras’ strategic partnerships with private companies to facilitate the sale of assets. This may provide some major opportunities for players looking to invest in Brazil but is more significant for the market as a whole, since mitigating Petrobras’ de facto monopoly over various segments of the industry is fundamental for improving competitiveness. The goal of partnerships and divestments within such a strategic plan is to end 2019 by raising more US$21 billion.

The TCU also recently brought to the table a discussion on pre-salt unitisations by ordering the removal of two blocks from the 15th concession round and possibly from one of the areas to be offered in the fourth PSC bid round. These discussions focus primarily on the effectiveness of the dual-granting regime currently in force in Brazil for E&P activities, and although embryonic, may lead to greater legislative discussions on this issue.

The trend for revising legislation to facilitate the contracting of E&P companies in Brazil is especially noteworthy considering the change already made by the National Congress in the PSC regime to remove Petrobras’ exclusive operatorship and, now, with the undergoing discussions to open up the onerous assignment regime to investments from other companies. This trend has been increasingly fashionable since the election of Jair Bolsonaro in 2018. Although it is too early to determine what direction E&P policies will follow during his administration, Bolsonaro has publicly expressed support for proposals to end the PSC Regime and terminate the PPSA. Furthermore, other policies that could be beneficial to Brazil’s industrial growth include the liberation of shale gas field exploitation, which has been publicly defended by the newly elected president.