A thumbnail guide to oil exploration and production in Brazil

Natural resources

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?

The Federal Constitution grants to the federal government title to mineral resources located in Brazil that are deemed to be distinct property from the land itself. The federal government may, upon compensation, allow companies to explore and produce such mineral resources.

Accordingly, any company organised under Brazilian law whose headquarters and management are located in Brazil can obtain an authorisation or concession for the exploration and production of mineral resources, subject to certain technical, financial, and legal conditions.

There is a legal distinction between surface rights and subsurface rights. The ownership of mineral resources is distinct from the ownership of the land on which they are located. The Federal Constitution grants the federal government title to mineral resources located in Brazil. The federal government can then authorise companies to explore and produce such resources. Regarding landowners, both the Federal Constitution and the Petroleum Law guarantee their right to receive a monthly share fee of the oil and gas production as compensation that ranges from 0.5 per cent to 1 per cent of the total volume of oil and gas produced in the area.

The oil and gas exploration and production activities in Brazil are separated in two different phases. Once the concession or contract is granted, the company will enter the exploration phase (unless the field in which the company has acquired or farmed-in has already finalised the exploration phase) and start the exploration procedures. Once the company has completed the minimum exploratory programme stipulated and the Discovery Evaluation Plan, it will then decide if the field is commercially viable and will present to the Petroleum, Natural Gas and Biofuels Agency (ANP) the Discovery Assessment Final Report. Upon ANP’s approval of the Report, the company may then present the Declaration of Commerciality and move into the production phase, which will have a duration of 27 years. The company will then provide the ANP with a Development Plan in which it will detail the operations’ following steps, including the production. The fields’ production may not be anticipated without the authorisation of the ANP and must start within five years of the Discovery Assessment Final Report. 

What is the general character of oil exploration and production activity conducted in your country? Are areas off-limits to exploration and production?

Brazil has both offshore and onshore operation opportunities.

By the end of 2019, 729 areas were licensed, 272 blocks were in the exploration phase, 77 blocks were being developed and 380 were in the production phase; to which 141 of the exploratory blocks were located offshore and 130 were located onshore. Of the 272 exploratory blocks, the state oil company, Petrobras, had a participating interest in 113, in which 39 were wholly owned by the company.

Regarding the production fields, also by the end of 2019, out of the 380, 101 were offshore, while 279 were onshore. Petrobras, in 2019, held an exclusive participating interest in 250 of the onshore production fields. 

Pre-salt production jumped from 521.5 million barrels in 2018 to 634 million barrels in 2019, with an average daily production of 1.7 million barrels, representing 62.3 per cent of the total national production, and continues to go up. The offshore productions corresponded to 96.3 per cent of the total production, and Rio de Janeiro was responsible for 75.3 per cent of production, placing Brazil as the 10th biggest producer in the world.

As to the areas off-limits, the environmental authority will be responsible for the granting (or not) of the operational licences. All areas pass through a thorough environmental study by the regulatory agency, which is regulated by the Intra-Ministerial Normative: 198/2012 (MME/MMA 198/12). Initially, the environment procedure will indicate if the areas can be offered as exploratory blocks. A positive indication, however, does not mean the automatic granting of an operation licence by the environmental authorities. 

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?

The Brazilian legal framework establishes different regimes for the exploration and production of oil and natural gas – namely, the concession regime and the production-sharing regime. However, all the regimes are granted through public bid procedures organised by the ANP, and open to Brazilian and foreign companies. Under the Petroleum Law, only companies that comply with certain technical, economical and legal requisites established by the ANP can obtain authorisation for exploration and production of oil and gas. Therefore, if a foreign company wins the bid proceeding, it must set up a company organised under Brazilian law, with headquarters and management located in Brazil.

The concession regime was established by the Petroleum Law and has been successfully used in Brazil since the oil and gas market was opened to private companies. Under the concession agreements entered into by the ANP and the oil companies that win bid proceedings, the exploration and production activities are undertaken at the sole risk of the oil companies, which will have ownership of the oil and gas produced.

The production-sharing regime was established by the Pre-Salt Law and is applicable to the pre-salt polygon and strategic areas. According to the Pre-Salt Law, Petrobras – the Brazilian national oil company – will always be granted a ‘right of first refusal’ to hold a minimum 30 per cent stake or to be the operator in the pre-salt and strategic areas’ developments in any consortium formed with oil companies for the relevant pre-salt public bid proceedings.

Under the production-sharing regime, oil companies will bear all activity’s risks – even though the oil and gas produced will be considered federal government’s property. In the case of a commercial discovery, oil companies will recover the costs and investment made (ie, the cost oil) and will be entitled to a percentage of the remainder of the production (ie, the profit oil), in accordance with the provisions of the production-sharing contract (PSC).

The parties to the PSC are the federal government (represented by the Ministry of Mines and Energy (MME)); the ANP (as the regulatory and supervisory agency); Pré-Sal Petróleo SA (a state-owned company that is part of the MME and was established to manage the PSCs); Petrobras (if it uses its right to hold the minimum stake of the relevant area); and possibly other oil companies.

Although the execution of a PSC is usually preceded by a bid proceeding, Petrobras can also be directly hired if this is deemed relevant for preserving national interests and attaining the energy policy’s goals.

The government, through the ANP, organises the bid procedures and sets up the dates and schedules for each company to participate. Together with the MME, the government can propose pluriannual bid proceedings agendas, which are indicative dates for the bidding proceedings to take place in the following years. The pluriannual agenda is subject to changes, nonetheless, it assists companies in preparing and organising themselves for upcoming bids. The time frame from the publishing of the tender protocol and contract drafts until the deadline for enrolment and presentation of the documents to participate in the bid proceedings can range from six to eight months, being such terms subject to change.

An interested company has six to eight months to submit all the documents and pay the enrolment fees, which may vary considerably depending on the sector involved. For the 17th Bidding Round, for instance, the fees vary from 120,000 to 190,000 Brazilian reais. 

During the aforementioned periods, the ANP holds public hearings to discuss and improve the contracts (concession and production sharing) and the tender protocol. Once the public hearing is finalised and the final drafts of the contract and tender protocol are published, all bidding companies will be subject to those terms and conditions for the purposes of submitting the relevant qualification documents and its offer. 

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?

The government participates, as managing party, in all contracts under the production-sharing regime through its state-owned company – the Pré-Sal Petróleo SA (PPSA). The PPSA is not joint and severally liable for any damages incurred and does not assume any risk related to the operations before the ANP. However, it is a party to the consortium agreement, where its main functions are to guarantee the government’s interest and to approve the ‘cost oil’ reports. 

In addition to the government participation under the PSC, Petrobras, a state-owned oil company, has the right of first refusal to hold a minimum 30 per cent stake or to be the operator in the pre-salt and strategic areas’ developments in any consortium formed with oil companies for the relevant pre-salt public bid proceedings. Petrobras, differently from the PPSA, is an active party and, therefore, participates in all decisions, risks and liabilities related thereto. 

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?

In the upstream activities, there are specific government takes to be paid by the stakeholders. These government takes apply to both onshore and offshore activities. However, some will vary depending on the area and production volumes. The following are the main government takes currently in place: 

• royalties: these are paid on a monthly basis and can vary from 5 per cent to 10 per cent of oil and gas production (for concession regime), depending on such aspects as the geological risks and production expectations, and 15 per cent (for production-sharing regime); 
• special participation: this is paid in cases of large production volumes, taking into account the conditions established in the relevant contract and bid invitation, varying from 0 per cent to 40 per cent of the net revenue of the production of the field, as stated in the Federal Decree No. 2705/98; 
• annual surface rentals: companies must pay to occupy or retain a site annually, the amount of which is established in the bid invitation and corresponding agreement, and 
• subscription bonus: paid for the acquisition of the rights to explore the oil and gas area. 

Additionally, in PSCs, the government shall have a participation in the production of the field, varying according to the proposal made during the relevant bidding procedure.

Finally, Resolution ANP No. 749/2018 authorises the reduction of royalties for mature fields, based on new investments to be made, capable to extend its life. In any event, the ANP is editing a new resolution aiming to reduce the rate applicable to the royalties owed by small and medium-sized oil companies, as a measure to promote more equitable conditions in the oil industry for these players.

What is the customary duration of oil leases, concessions or licences?

The duration for the concession contracts is separated into two phases: the exploratory phase and the production phase. The exploratory phase can vary in accordance with the minimum exploratory programme presented by each company, but once the company has completed the first phase and declared commerciality of the field, it will have 27 years for the production phase. The PSCs have a term period of 35 years, divided in two. The exploration phase has a maximum seven-year term that can be finalised at any moment by notifying the regulatory agency, after which the production phase will commence. If, after the term period of each contract the companies understand that the fields are still commercially viable and present an operational opportunity, they may submit a request for the extension of the licence.

For offshore production, how far seaward does the regulatory regime extend?

The Brazilian government, through the ANP, is responsible for regulating all exploratory and production activities related to the extraction of petroleum and gas to the extent of the exclusive economic zone. As so, as a rule, the ANP Normative Ruling No. 2/2020 (IN ANP No. 2/2020) states that all blocks to be indicated and delimitated for the bidding procedures shall be located within the limits of the exclusive economic zone.

Nonetheless, the recently published Resolution CNPE No. 11/2021, allowed the inclusion of areas to be offered during the ANP 17th Bidding Round, which may have oil or gas deposit located outside the exclusive economic zone. Such allowance was based on the conclusion of a working group established by the MME, which did not see any impediment for the inclusion of such exploratory block located in the continental platform beyond the 200 nautical miles. The exploration and production of hydrocarbons in such areas shall follow the rules established by the Brazilian authorities, but shall be also subject to the payment of a fee to the International Seabed Authority fund.  As stated in article 82 of the UN Convention on the Law of the Sea, an annual fee of 1 per cent of the global production amounts must be paid for the first five years of production. After that, the annual fee will increase 1 per cent each year until the 12th year, after which the fee will be maintained at 7 per cent.  

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?

The regimes in place in Brazil apply similarly to the different types of hydrocarbons. But, except for the pre-salt polygon where the applicable regime is the production sharing, all other oil and gas exploration and production activities, both onshore and offshore, will be regulated under the concession regime.

What will differ in a case-based situation is the qualification requirements (technical and financial) for the operation of each field. For a company to operate an onshore field (except if located at the Amazon Basin), the qualification requirements are the ones related to an ‘operator C’, but for a company to operate in shallow or deep-water, the qualifications requirements range from ‘operator A’ to ‘operator B’. There is also the possibility for a company to participate in a consortium as non-operator, to which financial and legal requirements must be met.

When it comes to hydraulic fracking, after several discussions with the industry, the ANP has issued Resolution 21/2014 on 10 April 2014, which aims to regulate fracking operations in non-conventional gas fields. The Resolution’s enactment was mainly motivated by the fact that the 12th Bidding Round, which was held in 2013, encompassed potential non-conventional gas areas. Among other provisions, under Resolution 21/2014, operators must adopt an environmental management system and conduct technical studies to obtain approval for fracking operations. Accordingly, environmental licences are required before the ANP can authorise fracking. 

Despite the above, certain recent court decisions have temporarily forbidden such fracking operations to take place. Additionally, there is a bill of law (BL 1935/19) in congress that aims to permanently prohibit such activities in Brazil. 

Which entities may perform exploration and production activities? Describe any registration requirements. What criteria and procedures apply in selecting such entities?

Any company organised under Brazilian law whose headquarters and management is located in Brazil can obtain an authorisation or concession for the exploration and production of mineral resources, subject to certain technical, financial and legal conditions.

The criteria, both financial and technical, to grant an authorisation for the exploration and production of hydrocarbons in Brazil ranges widely and depends on the field and basin; hence, the criteria used are the type of fields and its technical and financial specifications. The technical and financial requirements will be indicated in the tender protocol of each bidding procedure. The company, when enrolling to participate in a bidding procedure, will have to provide proof of technical and financial qualification. It is important to note that companies may form consortiums, in which the operator will fulfil all technical qualifications while the other companies will be held to lower technical qualifications criteria. 

If a foreign company wishes to obtain a concession or authorisation in Brazil, it may create a limited liability Brazilian branch constituted under Brazilian laws. It is a simple procedure where the company is incorporated and registered with public bodies, such as the national bank, trade register and the federal reserve. With that, an entity taxpayer number and a trade registry number is issued, and the company is created under Brazilian law. It is a fairly simple, fast, and low-cost procedure; the main restriction imposed by Brazilian law is that administration of the company be held by someone who has a fiscal residence and domicile in Brazil.

What controls does the regulatory body have over operators? Can operatorship be revoked?

The operatorship can be revoked by the ANP in the event the operator does not comply with its obligations under the contract for a period greater than 90 days after being notified by the regulatory body. If an operatorship is revoked, the operator shall assign to the new operator custody of all assets used in operations, such as: 

• accounting records; 
• files; and 
• other documents related to the concession area and the operations in question. 

The transfer of operatorship does not exclude the operator’s liability for all acts and events that occurred during its operatorship term.

What is the legal regime for joint ventures?

Pursuant to the Petroleum Law, companies can carry out oil and gas exploration and production individually or through a consortium with other companies. Under a consortium agreement, a leader company will be appointed as the operator and will be responsible for the operations, while the other members will be joint and severally liable for the obligations undertaken under the agreement. Under Brazilian jurisdiction, the operator must, at all times, hold a minimum participating interest of 30 per cent in the consortium.

To participate in a joint bid as a consortium all members must submit to the ANP the documentary evidence of its economic and technical capacity; and the registered version of the instrument that set up the consortium. The non-operating consortium must respect the minimum participating interest of 5 per cent in the consortium.

Further, parties under a consortium normally enter into a joint operating agreement (JOA), which regulates their commercial relationship and allocates control, risk and reward among them. As a private instrument, the JOA is not subject to the ANP’s analysis and approval.

How does reservoir unitisation apply to domestic and cross-border reservoirs?

Eventually, the reservoirs may extend beyond an exploratory block whereas the exploration rights may be detained by more than one company or consortium, or even extend to a non-contracted area. When that occurs, the ANP will require that the exploratory activity be developed in a joint effort, to guarantee that the extraction is rational and sustainable. The solution proposed by the regulatory body is the Production Individualisation Agreement that establishes the participating interest of each party in the activity, as well as appoints an operator for the joint production of the fields. The ANP will be responsible for the harmonisation of the Production Individualisation Agreement, as well as assist in the mediation of the individualisation of the production. A Production Individualisation Agreement may also be required by the ANP for areas that have not been licensed yet, but that have overlapping reservoirs.

In addition to the Production Individualisation Agreement, there are also other specific agreements that regulate the unitisation, such as the Production Individualisation Compromise Agreement and the Annexation of Areas. The Production Individualisation Compromise Agreement applies when the exploratory block in the same reservoir is being explored by the same company or consortium in the same participating interest – hence, there is no need for negotiation. The Production Individualisation Compromise Agreement in this case will solely establish, with the ANP, the compromise regarding exploration and production activities and local content requisites to be upheld in each field. The Production Individualisation Compromise Agreement will also be used to conciliate the contractual dispositions when the exploratory blocks are under different regimes.

The annexation of areas can be requested by the licensee when both exploratory blocks belong to the same company or consortium and the contractual parameters regulating each block is the same. In this case, the licensee, at its sole discretion, may request the annexation of the areas, which will then become one, as the result of the incorporation of one area to the other. The incorporated area contract ceases to exist, and an amendment to the incorporating area indicating the incorporation is executed. 

Is there any limit on a party’s liability under a licence, contract or concession?

The parties under a contract are jointly and severally responsible for all environmental risk resulting from the exploration, production and related activities. In Brazil, all liability involving the environment is considered a strict liability, guided by the integral risk theory, to which whoever carries out the activity must bear the risks of losses caused, regardless of fault.

Furthermore, the parties under the concession and production-sharing agreement will be jointly and severally liable for all damages caused, including force majeure and fortuitous events. The parties will be fully liable for the recovered hydrocarbon until its physical and individualised disposal. 

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?

During the exploration phase, the concessionaire shall guarantee the Minimum Exploration Programme by means of a letter of credit; performance bond; oil and gas pledge agreement; and escrow deposit (in this case, exclusively for blocks onshore). During the production phase, the decommissioning costs shall be guaranteed before the ANP by means of a letter of credit, insurance guarantee, pledge of the oil and gas production, parent company guarantee, or provisioning fund. The amount of the parent company guarantee is limited to 25 per cent of the guarantor’s net equity, and the amounts given as guarantee under other concession agreements shall be considered in the calculation of the net equity. The financial guarantees may be combined to total the amount guaranteed. 

Additionally, a parent company guarantee is always required as a performance bond, when a subsidiary obtain its technical qualification as operator during a bidding round or assignment process by means of its corporate group’s experience. In this case, its parent company (directly or indirectly) secures in full the contractual obligations undertaken by its subsidiary (in this case, the operator). 

Finally, during a bidding bound, the bidding offer shall be guaranteed by means of: 

• a letter of credit, issued in Brazil or abroad; 
• a performance bond; or 
• an escrow account for the blocks of its interest pursuant to the sectors where the object of the bid is located.

Law stated date

Give the date on which the information above is accurate.

13 April 2020