An extract from The Oil and Gas Law Review, 8th Edition
The first oil and gas exploration and production operations in Portugal were carried out in the early twentieth century. In the 1970s, after drill stem tests produced small quantities of crude oil, several wells were drilled. However, Portugal's petroleum potential – including its exclusive economic area – remains under-evaluated, with an average of 2.4 wells drilled per 1,000 square kilometres, and no proven reserves.
Major efforts in the 1970s and 1980s aimed to locate commercial reserves, following the 'oil shocks' of the time and the discovery of crude oil in the Grand Banks, of which the offshore areas of Portugal are considered a geological continuation. However, the results of these efforts were disappointing and the industry's interest in the country declined.
In 1994, the government adopted new legislation in the sector, simplifying procedures and providing more favourable fiscal terms aimed at reigniting the interest of international companies and attracting new investment. In line with classical western European tradition, this legislation continued to follow the concession model, but instituted more flexible terms for the basic framework of contracts, namely:
- the definition of concession areas is based on a small unit (lot) measuring 6° longitude by 5° latitude, allowing the concessionaire to apply for the area it wants to explore, grouping these lots into 'blocks' of up to 16 contiguous lots;
- it extends the exploration period to 10 years;
- production rights, following the discovery and final delineation of an oilfield, are granted for at least 25 years, which can be extended to 40 years; and
- minimum exploration commitment requirements are of one well per block from the fourth year, with the rest being left for agreement in negotiations.
Deep offshore areas will not be subject to these terms until a specific regulation is published (which is not expected anytime soon), an incentive to attract companies interested in exploring these areas, which will enjoy even greater flexibility when submitting their proposals.
Shortly after the 1994 law was enacted, and to prepare for a public tender for the award of exploration and production rights, the authorities contracted TGS-NOPEC to conduct a seismic and gravimetric study of the deep offshore areas, which only then became available to exploration thanks to technological advances. The tender was organised in 2002, leading to the award, in 2005, of one concession covering two deep offshore blocks. Later, new rights were awarded following direct negotiations with several companies that approached the authorities.
Regarding onshore, since 2001, 'strong indications' of gas in two wells in the Alcobaça region have been registered. Oil shows have also been registered, although production tests were inconclusive. In 2019, Australis Oil & Gas Portugal, Lda, current onshore operator of the Batalha and Pombal blocks, did not manage to obtain all necessary approvals to carry out a vertical pilot survey with a subsequent horizontal deviation, to test the occurrences of natural gas, and is still waiting for Directorate-General for Energy and Geology (DGEG) approval. Australis's activity during the first years of the concession consisted largely of reevaluating data and analysing 2D and 3D seismic information, as well as other existing information related to surveys carried out in the past. This allowed Australis to define a potential discovery of a significant conventional gas in the Jurassic formations and to identify the possible production mechanisms that contributed to the 3 million cubic feet per day observed in the survey in which it occurred. In addition, Australis has a drilling operations model that will allow it to reassess the 2C net contingent resource of 459 billion cubic feet as a reserve.
Based on the work carried out by Australis, an update of the contingent resource associated with the two objectives carried out in 2016 and this led to a 96 per cent increase in the estimated recoverable resource to a value of 2C of 458.5 billion cubic feet.
From 31 August 2015, exploration activities were pursued under concession agreements in nine deep offshore areas and one onshore area, which was the same as in the previous year. Direct negotiations were held regarding five onshore and four deep offshore concession areas. As a result, concession rights were granted covering deep offshore areas off the southern coast and onshore areas in the centre of the country. However, in 2017 and 2018, the government revoked most of the concessions covering onshore and offshore areas in on procedural grounds and partly motivated by environmental pressures. Presently, Australis Oil & Gas Portugal, Lda, is the only operator with two active concessions in Portugal.
Overall, the authorities' attitude has been passive, responding solely to the initiative of interested companies rather that embarking on promotion, and reluctant to raise local unrest because of the population's environmental concerns on exploration projects. This, coupled with the wrong perception that the country presents a high exploration risk, has resulted in an extremely low level of activity over the past few years. Nevertheless, a task force has been appointed to prepare guidelines and recommended practices regarding shale oil and shale gas exploration (fracking), which seems to indicate that some interest has been shown in assessing the potential of the country's unconventional reserves.
The applicable tax system is relatively simple. A royalty is levied on production in excess of 10,000 barrels of crude oil per year, set at 9 per cent in the case of onshore areas and 10 per cent in the case of shallow offshore areas (water less than 200 metres deep). Deep offshore and natural gas production, as well as annual onshore production below 6,000 barrels of crude oil and annual offshore production below 10,000 barrels of crude oil are not subject to royalties. Oil companies are also subject to corporate income tax (plus a municipal and state surcharge), which is levied on their profits. Imports and exports must comply with EU law.
Conflicting interests with other activities that are seen as having a greater short-term social and economic impact affected most of the exploration operations in Portugal: in at least one case, the formal start of prospecting activities has been postponed several times, delayed mostly because of concerns raised in the press that tourism could be negatively affected by these oil exploration operations. This situation led to the resolution by the operators of three development and production contracts for the offshore concessions named Santola, Lavagante and Gamba, held by the ENI/GALP consortium. According to the President of the Portuguese Oil & Gas Company, 'legal constraints that made it objectively impossible to carry out drilling work off the coast of Aljezur', regretting the loss of opportunity for the country to find out, once again the true potential for oil resources.
A fresh look at the country's petroleum potential could be justified because of the combination of technological advances enabling exploration and production operations at ever greater depths, the development of geological knowledge (and further discoveries made in the Grand Banks area) and a flexible and overall favourable legal and tax regime. At this moment, we believe there is no political interest in developing Portugal's potential in this area. The Minister of Environment has already made it clear that his priority is to combat climate change and reduce dependence on fossil fuels, ambitions difficult to reconcile with further oil and gas prospection.
Under Decree-Law No. 130/2014, the former EGREP (Managing Authority of Petroleum Products Strategic Reserves) changed its name to the National Authority for the Fuel Market (ENMC), and more recently to the ENSE (National Entity for the Energy Sector) keeping its specific role as the entity responsible for constituting and maintaining the strategic portion of the national emergency stocks of crude oil and petroleum products.
As mentioned above, the DGEG's responsibilities with regard to exploration, development and exploitation of oil resources were also transferred to the ENMC. In spite of this, there is a duty of cooperation and articulation with the DGEG regarding the preparation of laws and regulations, and on drafting relevant statistical information.
However, the legislative tendency of transferring responsibilities to the ENMC has been reversed by State Budget Law of 2017 that determined the future extinction of the Energy Services Regulatory Agency (ERSE). This trend has been developed by recent legislative and governmental measures proceeding to the restructuring of the administrative agencies in charge of the energy areas.
The first of the above-mentioned measures is Decree-Law No. 57-A/2018, of 13 July (already in force), which amends the by-laws of the ERSE, an important regulator empowered with regulatory powers in the electricity and natural gas areas). This amendment broadens the ERSE's powers, which now encompass the LPG, oil derivatives and biofuels sectors, which were transferred from the ENMC. Under the Decree-Law and as part of the competent bodies of ERSE, the Council for Fuels is created to serve as a consulting body for the execution of ERSE's powers in the LPG, oil derivatives and biofuels sectors.
The second measure relates to the enactment of Decree-Law No. 69/2018, of 27 August that provides for the restructuring of the ENMC, the DGEG and the Energy and Geology National Laboratory (LNEG). It also proceeds to the redenomination of the ENMC, which is now named the Energy Sector National Entity (ENSE). Said institutional restructuring was aimed to aggregate the supervision powers over the whole the energy sector in ENSE. Also, it transferred ENSE's powers to DGEG, concerning the development, prospection and production of oil resources and licensing in the fuel and LPG sectors.
Legal and regulatory frameworki Domestic oil and gas legislation
The oil and gas system is governed by Decree-Law 31/2006, of 15 February, which sets the General Framework for the Organization and Functioning of the National Oil System, as amended by Decree-Law 244/2015, of 19 October that specifically governs refining, storage, transport and distribution, and more recently amended by Decree-Law 5/2018, of 2 February, and Decree Law 69/2018, of 27 August, updating the general principles relating to the organisation and operation of the National Petroleum System, storage activities, transport, distribution, refining and marketing of oil product activities, and setting the organisation of crude oil and oil derivatives products markets.
These activities are not subject to prior licensing, save regarding environmental licensing when applicable, industrial facilities licencing when applicable and transport facilities licensing that takes into account the technical capacity of the performer. The public interest oil facilities are ruled by Regulation No. 1094/2016 of 14 October that establishes some obligations and rules for the operator, namely regarding capacity management. Import and export is not subject to licensing, but selling is subject to a licence. There is a specific regime for jet fuel, LPG and oil derivatives licensing. The main principles of the oil market are freedom of access to activities, non-discrimination, equality of opportunities and freedom to choose the oil selling company.
Exploration and production activities are specifically regulated by Decree-Law No. 109/94, published on 26 April 1994 (the Decree-Law), which was recently amended by Law No. 82/2017 of 18 August. The following documents were published to complement its provisions:
- Notice dated 21 July 1994, identifying the areas where oil exploration, development and production operations are permitted, amended by the notice dated 12 March 2002;
- Dispatch No. 82/94, establishing the fees chargeable by the competent authorities for the issuance of preliminary evaluation licences and for the signature of concession agreements and assignment agreements;
- Joint Dispatch No. A-87/94-XII, establishing surface rental charges; and
- Ministerial Order No. 79/94, published on 26 July 1994, establishing the basis of the concession agreements referred to in Article 83 of the Decree-Law.
These legal documents aim to clarify and simplify the rules and procedures governing oil and gas exploration and production, including the award of rights, and thus attract new investment to these activities.
The relevant contents of some major provisions of these legal documents are summarised below.Property of mineral resources
Any underground mineral resources in the areas subject to the sovereignty or dominance of Portugal are an integral part of the state's public domain. Oil and gas exploration and production activities can only be performed under concessions granting exclusive rights without prejudice to any third parties, to other activities or resources, or to national interests in national defence, the environment, navigation and scientific investigation, and management and preservation of maritime resources. Conflicts must be resolved jointly by the overseeing ministers according to national interests and in compliance with applicable international law rules and principles. Studies merely aimed at providing better technical support to any requests for concessions can be conducted with a preliminary evaluation licence.
Recent Law No. 82/2017 of 18 August, which entered immediately into force, establishes that any administrative procedure relating to prospection, research, experimental exploration and exploitation of hydrocarbons shall be preceded by compulsory consultation with the municipalities, in the respective areas of territorial jurisdiction. If the administrative procedure relates to exploration in the National Exclusive Economic Zone (offshore), the consultation shall be addressed to the municipalities of the relevant coastal line.
The municipalities shall issue their opinion on the conditions for prospection and research activities, experimental exploration and exploitation of hydrocarbons, to provide the consulting entity with all the information available on the area required.Public tender procedure for award of concessions
In line with EU directives on public contracting and to increase transparency in award procedures, the preferred method for the award of oil and gas exploration and production rights is a public tender organised by the DGEG through its Unit for Research and Exploration of Oil Resources, which publishes the announcements in the Official Gazette and in the Official Journal of the European Union, specifying the terms of reference of the tender and the basis of the concession agreements.
The DGEG assesses the bids, which must conform to the terms and conditions published with the announcement, and then submits a recommendation to the overseeing minister. The minister may decide to award the concession, depending on whether the received bids are satisfactory and comply with the terms of reference. The minister's decision is appealable to the administrative courts under general legal terms.Direct negotiations
Any company interested in a concession must apply directly to the DGEG. If no public bidding is announced, the DGEG will negotiate the terms and conditions of the concession, which must conform to the applicable legal provisions, and, within 90 days (extendable for a further 60 days), submit a proposal to the minister.Preliminary evaluation licence
A preliminary evaluation licence is limited to the analysis of existing data and documents, surface and wellbore samples, and other studies that contribute to a better understanding of the area's petroleum potential. The licence lasts for a single non-extendable period of six months unless it is compulsorily terminated by the state if the licensee fails to comply with its obligations.Standards in petroleum activities
Within the limits of the law and the concession agreement, the concessionaire is free to decide on the best way to carry out its activities. However, it must perform the petroleum activities in a regular, continuous way and follow the best practices of the international petroleum industry, as it will be liable for losses and damages caused to the state or any third parties as a result of these activities.Termination and revocation
The rights granted will terminate at:
- the end of the initial period if the concessionaire has not demarcated an oilfield, or at the end of the production period;
- the concessionaire's request, effective on the whole or part of the concession area, with 30 days' advance notice before the end of the third year or of any subsequent year of the initial period, or with one year's advance notice at any time during the production period;
- any time, by mutual agreement of the state and the concessionaire;
- any time, by unilateral decision of the state as a penalty, if the concessionaire fails to complete any operations included in approved work plans and budgets, assigns any full or partial rights or without due authorisation, abandons an oilfield without due authorisation, or breaches any of its contractual obligations; or
- any moment at the state's initiative, for reasons related to the public interest and with payment of fair compensation.
On terminating the concession, any works, information, equipment, instruments, facilities and other assets permanently linked to the concession will revert to the state, free of any charge, cost or compensation to the concessionaire.Confidentiality
The concessionaire and its contractors must keep confidential all data and information pertaining to the concession for the duration of the concession, and must not disclose any such information without the DGEG's prior authorisation.
Directive 2013/30/EU of the European Parliament and of the Council of 12 June 2013, on safety of offshore oil and gas operations and amending Directive 2004/35/EC, was transposed into the Portuguese law by Decree-Law No. 13/2016 of 9 March 2016.ii Regulation
The DGEG has direct regulatory competence over oil and gas exploration and production activities and develops its activities under the supervision of the overseeing minister. Therefore, interested entities should address the DGEG to resolve any issues concerning a concession agreement or a preliminary evaluation licence.
The DGEG acts as a facilitator in relations with other administrative entities, which may have interfering powers regarding the performance of operations, such as the environmental authorities. Fieldwork requires a formal environmental impact assessment and the adoption of adequate safeguards. Usual EU standards in these matters apply.
Works relating to onshore operations, namely seismic assessments, drilling and construction require prior licensing from the competent municipal licensing entities. The maritime authorities grant licences for offshore operations and construction activities in areas subject to their jurisdiction (such as shoreline and harbours).
Support and ancillary activities, usually carried out by contractors (such as land, air or sea transport, construction and radiotelegraphy) may require specific licensing as per general rules and regulations. This licensing requirement may also apply to contractors, as it is the concessionaire's responsibility to ensure that all its contractors have the required licences in good order.iii Treaties
Portugal is a signatory of the New York Convention, and has a long-established practice of agreeing to arbitration as the preferred method for settling disputes, even when the state is a party.
The Decree-Law states that a concession agreement (and its preliminary evaluation licence) has the nature of an administrative contract and that any disputes with the concessionaire arising from the concession agreement must be settled by arbitration, to be held in Portugal under Portuguese procedural laws. According to the Decree-Law, concession agreements must contain an arbitral clause.
Portugal has concluded bilateral investment protection treaties with 53 countries, and has signed treaties to avoid double taxation with 79 countries based on the OECD model.