General

Development

Describe the areas of energy development in the country.

Brazil is an incredibly diverse country with abundant energy sources, such as oil and natural gas, hydropower, coal, nuclear, solar and wind power. The most developed sectors in the energy industry in general are: oil and natural gas, hydropower and, more recently, solar and wind power. These energy sources’ development (and the technology related thereto) may vary depending on special circumstances (such as long periods of drought) and the inducing policies issued by the Brazilian federal government, represented by the Ministry of Mines and Energy (MME).

The federal government, through the MME, is the one establishing the energy development policy to be put in place by the federal regulatory agencies for each specific industry - the National Agency of Petroleum, Natural Gas and Biofuels (ANP) for oil and natural gas, and the National Agency for Electric Energy (ANEEL) for power generation from different sources. The exploration and exploitation of coal is regulated by a third entity, the Brazilian Department of Mineral Production (DNPM), but ultimately the use or not of coal as an energy source depends on the government allowing coal-fired power plants into the system (which has become rarer) and this is regulated by ANEEL.

Regulatory agencies in Brazil have the role of promoting each industry by understanding their specific requirements and responding through proposals that achieve within their competence affirmative economic and social results.

In 2017, the federal government enacted a three-year schedule of bid rounds under the concession and production sharing regimes for exploration and production of oil and gas onshore and offshore in Brazil until 2019. All those bid rounds have taken place as per the original schedule. A new revised scheduled has been released and now there is a new schedule setting bids until 2021 in addition to the open acreage system, which is an acreage awarding system including all available onshore areas and some offshore acreage put to bid in previous bid rounds but not awarded in the past. Under the open acreage system any interested companies may come forward and make an offer. An online competitive awarding process will be initiated and the area shall be awarded within up to 90 days.

In 2018, the Brazilian government carried out two bid rounds related to the construction of new power plants triggered by hydro, gas, coal or wind sources. The most recent one took place on 31 August 2018. The 2018 A-6 auction was sponsored by ANEEL to contract electricity from new hydro, wind and thermoelectric (coal, natural gas and biomass) projects, with the supply beginning on 1 January 2024.

With a low demand of 835MW, 62 projects were awarded PPAs with a total capacity of 2.1 GW, as follows: (i) 48 wind power plants with 1,250MW of capacity; (ii) 11 hydro power plants with 457.7MW of capacity; and (iii) three thermal power plants with 391MW of capacity, including two biomass and one natural gas thermo power plant. As can be seen, renewables stand out with the largest number of new projects.

By 30 March 2019, the Brazilian government must publish a new schedule of auctions with a minimum of two new energy auctions per year, pursuant to Federal Decree No. 9,143/2017, if there is demand for contracting.

Role of government

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

The Brazilian Federal Constitution in articles 20 and 21 provides that the Brazilian federal government has exclusive ownership, and may explore through certain granting regimes, concession, authorisation or permission, all mineral resources, including those underground, and those lying over the continental platform and the exclusive economic zone.

Accordingly, the exploration or exploitation of a mineral resource in Brazil requires a grant of concession by the Brazilian federal government, represented by the MME or the DNPM depending on the nature of the resource. Certain types of resources (ie, sand, gravel or uranium) are exceptions to that general rule and have specific exploration regimes not relevant for the purpose of this material.

Coal is considered a mineral for legal purposes in Brazil. To harvest this energy source it is necessary to follow a series of procedures to finally obtain a mining concession with the DNPM. The DNPM enjoys general discretion to reject any application failing to meet the relevant geographical, geological, technical or procedural criteria, and an application may be refused should it be determined that the exploration or mining activities involved are harmful to the public good or to interests that outweigh the usefulness of exploration or exploitation of the deposit.

For the purposes of exploring oil and natural gas, there are two main systems in Brazil: the concession and production sharing regimes, and the direct contracting regime, which is exclusively celebrated between the federal government and Petróleo Brasileiro SA (Petrobras).

Under the concession regime, through an organised bidding process or assignment of rights, the concessionaires are granted with the ownership of the oil and gas (O&G) arising out of the authorised exploitation of those deposits. The ownership of the O&G is transferred by the Brazilian federal government - the owner of the O&G reserves - to the concessionaire at the production measurement point, which is a physical mark proposed by the concessionaire and agreed to by ANP.

On a similar bidding process, the sharing production regime determines that the federal government keeps the ownership of the O&G produced even after the physical mark point and, in case of commercial discovery, it repays the companies for the costs incurred with exploration and production activities (known as the ‘oil cost’) and shares the remaining oil (profit oil), as determined in the Production Sharing Agreement. As mentioned above, the MME and the ANP have launched a schedule of bid rounds to take place between 2017 and 2019. Between the months of September and October of 2017 ANP held three different bid rounds, being the first of them the 14th concession bid round and the other two the third and fourth pre-salt or production-sharing bid rounds. In positive return, these bid rounds have accrued approximately 10 billion reais in signature bonuses.

All in all, Brazil is currently a self-sufficient country for power and oil, although it still depends upon imports from Bolivia to attend to its internal natural gas demand. Offshore oil and gas exploration and production increased substantially over the years and some offshore gas discoveries may reduce the dependence on Bolivian gas if Brazil is capable of putting together the infrastructure to flow the gas inland to the interested consumers.

Further, there has been a substantial increase of renewables sources into the already very green Brazil’s power generation energy matrix. In the past five years the wind share in the Brazilian power generation energy matrix increased from less than 1 per cent up to 7.8 per cent and the solar share up from nil up to 0.7 per cent. And this in a energy matrix that is already almost 45 per cent renewable.

Commercial/civil law – substantive

Rules and industry standards

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

Generally speaking, except for the model concession contracts and production sharing contracts for oil and gas exploratory areas, there are no industry-standard form contracts in Brazil. In their private dealings local industry players typically use certain model contracts prepared by the Association of International Petroleum Negotiators (AIPN) adjusted to civil law principles. The standard form contracts for concession and production sharing agreements are updated and improved in every new bid round by the regulator (ANP) to adjust the draft to the current policies in place by the Brazilian federal government, for instance to adapt it to local content requirements. The ANP supplies English versions of these contracts online at www.brasil-rounds.gov.br/ingles/contratos_e_editais.asp.

Under the model concession contracts for exploratory oil and gas areas, concessionaires have to pay a signing bonus and submit financial and performance guarantees as per the ANP’s requirements.

The concessionaire undertakes all costs and risks in connection with the operations and its consequences, as well as several obligations to be complied with to keep the concession over the area. The concession is divided into two different phases - the exploration phase and the production phase.

The exploration phase commences on the execution of the concession contract and usually lasts from two to eight years, commonly divided into two different periods, each of them with specific obligations under the concession contract. During the exploration phase, the concessionaire has to, among other obligations:

  • attend the minimum exploration programme (PEM) agreed for both periods, as the case may be;
  • drill the well or wells agreed under the PEM at least to the depth agreed;
  • submit the annual work programme and budget plans;
  • pay the occupation fee; and
  • submit reports quarterly regarding local investments and expenditures.

In case there is a discovery in the area, the concessionaire has to notify ANP about the discovery, submit an evaluation plan for the prospect and if it is commercially feasible and submit a development plan for such prospect to be approved by ANP.

If the prospect is not economically interesting for the concessionaire, it can return the area.

Production phase starts with the declaration of commerciality of the prospect and in general lasts for 27 years. The concessionaire must carry out all operations in accordance with the development plan approved by the ANP for the area, which may be amended from time to time with the ANP’s acknowledgment. The concessionaire is obliged to notify the ANP prior to the beginning of the production of oil and gas as per the annual production plan submitted by the concessionaire to the ANP. During the production phase the concessionaire has to, among other obligations:

  • conduct the operations in accordance with the Development Plan and Annual Production Plan;
  • annually submit the Annual Production Plan for the following year;
  • submit monthly production reports and annual reserve report;
  • submit well status and completion reports; and
  • pay the occupation fee, royalties and special participation (if applicable).

The production sharing contract model provides for two phases: exploration phase, which includes the discovery and evaluation of commercial feasibility; and production phase, which includes the development phase; and will set forth, among other provisions:

  • the financial guarantees required to contractors;
  • limitations, terms, criteria of payment of cost oil and profit oil;
  • accounting rules and procedures for the ANP to follow and control the activities of exploration, evaluation, development and production;
  • minimum exploration programme (PEM);
  • criteria for the preparation of exploration and development plans, as well as work programme;
  • information, reports and data that have to be submitted to the ANP;
  • term of the agreement, which will not be longer than 35 years; and
  • health, safety, security and environment policies and contingency plans.

As in the concession regime, under the production sharing regime the contractor will undertake all costs and risks in connection with the operations and their consequences.

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

Contractual interpretation is not thoroughly ruled under the Brazilian Civil Code, which basically sets forth that:

  • the statements of the contracting parties should be interpreted in accordance with their real intention and not solely based on the literal wording;
  • waiver of rights should be interpreted restrictively;
  • contract provisions should be interpreted in light of the principle of good faith and in accordance with the practice and customs of the place where the contract is entered into; and
  • contradictory or ambiguous provisions should be interpreted in favour of the party who has not participated in the drafting of the contract, but has solely adhered to the conditions put forward by the other party.

As Brazilian legislation is not detailed in what regards contract interpretation, the doctrine has room to contribute on the matter. The majority of scholars in Brazil agree that contract interpretation needs to take into account the intention of the parties, but also understand that this should not be transformed into a way to allow the parties to change the original provisions under the argument that they do not accurately reflect the contracting parties’ intention. In other words, where the provision is clear and there is no room for doubt, the statement should be taken literally, with no innovations whatsoever.

Such rules generally apply to energy contracts.

Describe any commonly recognised industry standards for establishing liability.

Liability towards third parties is subject to the applicable law and therefore the operator shall be strictly liable for any damages to which it gives cause. Under agreements dealing with energy operations, however, the parties should be free to make their own arrangements, provided that they do not violate public order or any statutory legal provisions.

In such context, operations agreements in Brazil usually adopt the same standards as established in the AIPN model contracts and provide for the liability of the operators in case of wilful misconduct or gross negligence. It should be noted that this may change on a case-by-case basis as there are no specific rules preventing the parties from agreeing otherwise.

Performance mitigation

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

Brazilian legislation does recognise some concepts that may release the contracting party from the obligation to perform under the contract in certain specific situations, such as in case of force majeure, which is defined under the Brazilian Civil Code as a necessary fact whose effects the party could not avoid nor prevent from taking place. It is worth noting that the party shall in principle not be discharged from its original obligations even in case this becomes an impossible obligation to comply with due to a force majeure event where such event takes place when the party is already in breach under a contract.

Brazilian legislation also provides for the right of the contracting party to the rebalancing of the rights and obligations under the contract in the event it becomes excessively onerous to one of them due to an unpredictable and unavoidable supervening event that triggers demonstrably substantial unbalance to one of the parties. According to the Brazilian Civil Code, this would grant the impacted party with the right to terminate the agreement, which is similar to commercial impracticability as defined under English law, but Brazilian doctrine and jurisprudence has evolved to understand that the contract should ideally be maintained, as an expression of the principle that determines that contracts should ideally be conserved in force.

As for the concept of frustration (as defined under English law), despite some controversy, Brazilian scholars tend to affirm that this is similar to our unpredictability theory, which is treated under the Brazilian Civil Code, as mentioned above. However, the theory should only apply in cases where the party can demonstrate the occurrence of extraordinary and unpredictable facts (albeit it is admitted also that facts with unpredictable consequences trigger the consequences set out in the Brazilian Civil Code).

Finally, it is worth noting that the loss of the contractual object also allows the termination of an agreement under Brazilian legislation and thus releases the parties from complying with the original contractual provisions.

Nuisance

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

Nuisance is not a concept found under Brazilian law. However, under the Brazilian Civil Code, any party that causes damages to another party shall be liable to indemnify that party for the damages caused. In that sense, operators may be liable for negligence claims as long as the affected parties are capable of proving the existence of damages and negligence by the operator.

Liability and limitations

How may parties limit remedies by agreement?

Although widely adopted in several contracts governed by Brazilian law, contractual provisions that limit the liabilities of the parties are still the object of certain discussions among the Brazilian doctrine. However, the majority of Brazilian scholars understand that our legislation does not prevent parties from agreeing on such limitations provided that they do not offend public order or morals standards.

Brazilian legislation contains several provisions that confirm that limitations on liability are valid and available to the parties when negotiating a contract and this often serves as support to defend the validity and effectiveness of such provisions. It is also crucial to assess the nature of the contract, as such limitations shall probably be disregarded in courts if the parties are not negotiating in equal conditions.

This type of clause is particularly common for energy contracts, and is accepted as valid and enforceable as it deals with disposable interests and has a strong economic nature. Therefore, any provision for the limitation of remedies should always be considered and interpreted in line with the economic rationality of the contract and the rules contained in the Brazilian Civil Code.

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

According to article 927 of the Brazilian Civil Code, one shall be liable for the damages resulting from a risky activity even if there is no fault attributable to such person (ie, strict liability). There is no legal definition of risky activities and therefore this shall ultimately be decided by courts. However, considering its peculiarities, activities in the energy industry should be deemed as risky.

In a scenario where article 927 applies (ie, environmental damages), strict liability would be there in the case of damage caused to third parties but this would not change the liability regime defined in an energy contract. This means that the parties to a contract may agree that the contractual liability shall be fault-based even in the case of risky activities such as the activities inherent to the energy industry. Liability towards third parties shall, however, be strict.

Commercial/civil law – procedural

Enforcement

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

Courts typically tend to try to identify elements of connection among the contracts, particularly economic function nexus, and then indicate which is to be considered the main contract, the one containing the nuclear provisions of the deal. Identification of the main contracts follows the principles set in the Brazilian Civil Code and essentially calls for the intention of the parties when entering into those contracts. The provisions contained in the identified main contract do prevail over the others.

Regarding choice of forum, it is important to mention that article 25 of the Brazilian Civil Procedural Code states that courts in Brazil do not have jurisdiction to preside over and try actions when, in an international agreement, the parties agree on an exclusive foreign jurisdiction.

 

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

Stepped and split dispute clauses are more common in highly complex contracts, including certain types of contracts (ie, concession of services) entered with public entities (ie, federal and state governments).

Brazilian courts recognise the validity of stepped and split dispute clauses as long as the deal originating the dispute is entered into between two parties with the same level of sophistication and autonomy to decide which matters shall be decided by courts and which shall be decided in an arbitration and whether certain matters shall, prior to their submission to courts or arbitrators, be subject to another dispute resolution mechanism such as mediation or dispute boards.

As a matter of fact, stepped and split dispute clauses are particularly relevant for contracts entered with public entities (ie, federal and state governments) as in Brazil there are limitations as to the kind of matters public entities (ie, federal and state governments) can submit to arbitration and exclude from the appreciation of local courts.

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

A court judge may authorise or request the provision of expert evidence by the parties if the judge feels it is necessary for a technical or scientific opinion to be included to make a decision in any lawsuit. The judge is not obliged to decide in accordance with the expert evidence as it can use other elements of proof (ie, documentary, depositions). When a judge appoints an expert, each of the parties is allowed to appoint a technical assistant, an expert that is allowed to provide their vision of the matter once the judge-appointed expert issues their opinion.

If the judge is convinced by any technical opinions or other documents presented by the parties in the course of the process, the judge is not obliged to request expert evidence. The judge may also deny any requests for expert evidence if the judge feels that the expert evidence is not necessary for the due conclusion of the process.

The appointment of an expert is typically made by the judge. However, the Brazilian Code of Civil Procedure provides that the parties may jointly appoint the expert if all parties freely agree about it. In addition to expert individuals, the Brazilian Code of Civil Procedure allows legal entities to act as experts as well. The costs associated with the expert evidence shall be borne by the parties of the lawsuit. The judge may require a new expert opinion if the matter is not clarified by the first expert evidence.

The expert opinion may contain:

  • a definition of the scope of the expert determination;
  • the technical or scientific review carried out by the expert;
  • indication of the method used by the expert clarifying it and demonstrating it is widely accepted by the experts in the field; and
  • conclusive answer to all questions made by the judge, the parties and any public attorney as the case may require.

During the expert-related proceedings (ie, expert appointment until the homologation of the expert opinion) due process must be observed and the parties must be heard (ie, presentation of the opinions prepared by the technical assistants, hearing of the expert for purposes of clarifications).

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

There are two types of interim and emergency relief available in Brazilian courts for energy and disputes of other nature: provisional remedies based on urgency or evidence.

Courts may grant emergency relief in every case where a party can argue that there are elements evidencing the probability of the right, the peril of damage or the risk to the useful result of the process; and evidence relief where there is no need of a party arguing the existence of peril of damage or the risk to the useful result of the process in the main following hypothesis provided in the law:

  • upon characterisation of abuse to defence rights;
  • court decision; and
  • when a claim can be verified only based on documentary evidence and there are case law-based decisions taken by the High Courts in Brazil.

Emergency relief in Brazil can be granted by courts as independent measures in anticipation or not of a main claim (ie, preparatory measures to a lawsuit or arbitration process) or incidental measures claimed upon filing or in the course of a main lawsuit.

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

The Brazilian Civil Procedure Code in article 961 provides that any foreign ruling made final and unappealing or arbitral award shall only be effective in Brazil after its admission and statement of enforceability by the Brazilian Superior Court of Justice (STJ), or through the concession of an exequatur to a rogatory letter.

These rulings and arbitral awards are considered judicial enforcement instruments and, in this sense, the Brazilian Superior Court is the competent court to review any requests to recognise and enforce foreign rulings and arbitral awards, as provided in article 105, item I, ‘i’ of the Brazilian Federal Constitution.

Articles 216-A to 216-N of the Brazilian Superior Court’s procedural rules, therefore, appoint the minimum requirements to be met by a foreign ruling and arbitral award for these to be enforceable in Brazil.

Article 216-D of STJ’s procedural rules list the requirements, which are:

  • the ruling or award must be rendered by a competent authority;
  • the parties in the procedure have received service of process;
  • the ruling or award needs to be final and unappealable;
  • the ruling or award needs to be notarised and consularised by the Brazilian consul and accompanied by a sworn translation made by a sworn translator in Brazil; and
  • the ruling or award must not be contrary to the principle of law and order, sovereignty and good moral conduct.

Article 963 of the Brazilian Civil Procedure Code also includes two other requisites to the list: the ruling or award needs to be effective in the country where it was issued, and it cannot go against res judicata.

Upon presentation of the ruling or award, accompanied by the enforcement request to the Superior Court of Justice, and any other document necessary in connection with the above, the STJ shall be able to analyse the request and complete the regular proceeding to issue the writ of execution allowing or not the execution of the ruling or award in Brazil.

The STJ does not make any material analysis of the content of the ruling or award, considering that Brazilian law recognises foreign judicial rulings and arbitral awards as judicial enforcement instruments, as described above. The STJ shall solely be responsible for confirming that all procedural matters were duly completed, including that the parties were given the opportunity to confront each other (thus the need of service of process).

Once the writ of execution is granted by the STJ, the parties are allowed to take the ruling or award to the competent federal courts for enforcement purposes.

 

Alternative dispute resolution

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

No, there is not. However, progressively, Brazilian dispute resolution centres are panelling energy experts as arbitrators.

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

For matters involving high technical complexity and relevant amounts such as those related to the energy sector, there is a general preference in Brazil for arbitration over litigation. This is because court judges, particularly first level judges, have very little specialisation and exposure dealing with highly technical and complex material disputes such as those involving the energy sector.

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

Law No. 1.340/2015 that establishes and regulates mediation in Brazil expressly provides that the entire mediation process including documents and discussions integrating the procedure are confidential. The same confidentiality feature applies to arbitral proceedings and any settlement discussions arising from those proceedings.

Privacy and privilege

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

No, there is not. There is nothing similar to discovery as it is understood under common law in court processes in Brazil, only in arbitrations.

Generally speaking, all court proceedings in Brazil are public, except for the following:

  • where confidentiality is necessary to protect the social or public interest;
  • family matters such as divorces;
  • where data is protected by intimacy and privacy principles under the Brazilian Federal Constitution; and
  • arbitrations, including the execution of arbitral awards.

In arbitration proceedings, where e-disclosure or e-discovery may take place, data and privacy protection relies on the confidentially obligations agreed between the parties. The applicable statutory laws do not deal with those issues at this point in time.

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

Advocacy in Brazil has its own federal law regulating the rights, duties and privileges of everyone registered as a lawyer with the states’ bar councils. Law No. 8.906/94 expressly provides in its article 7 that lawyers are guaranteed the inviolability of their offices or workspace as well as their work tools, their written correspondence, including electronic, telephonic or telematic exchanges as long as those are related to the practice of law. The only exception to that principle is when lawyers are themselves the target of some law enforcement investigation.

Thus, all communications between lawyers and their clients, as well as the work product, are protected and should be confidential as per Law No. 8.906/94.

Jurisdiction

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

No. The Brazilian Federal Constitution and the Brazilian Civil Procedure Code provide for the general principle that jurisdiction cannot be put away and that any potential or actual damage or threat to a right can be taken directly to local courts. The general exceptions are matters where the parties agree that arbitration shall prevail and no recourse to courts is admitted.

Regulatory

Relevant agencies

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

The Brazilian Constitution determines in article 22 that the federal government (as opposed to the states and municipalities) holds the right to rule over matters such as energy, water and mineral resources (where oil, natural gas and coal are included). In the second half of the 1990s, the Brazilian federal government enacted laws that created federal regulatory agencies, which are independent and autonomous regarding action but must follow the energy policy principles formulated by the Brazilian federal government through the MME and the National Energy Council.

In 1996, ANEEL was created through Law No. 9.427/1996 with the purpose of promoting and regulating the power sector in Brazil in accordance with the guidelines provided by the MME. ANEEL is primarily responsible for regulating the sector and reviewing compliance by private players of the terms of the authorisations and concessions granted by the Brazilian federal government and local regulation.

Similarly, in 1997, through the enactment of Law No. 9.478/1997, the ANP was constituted with the purpose of regulating the petroleum industry. The agency (the ANP) is also responsible for sponsoring bids for acreage to be conceded to private players and ruling on third-party access to existing infrastructure, among other things.

Law No. 9.478/1997 also instituted the National Council of Energy Policies in Brazil, with the purpose of ensuring compliance with the principles of rational exploitation of the energy resources of Brazil, among other things.

Both regulators (ANEEL and the ANP) have jurisdiction over all Brazilian territory.

Access to infrastructure

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

Both new entrants and those players already doing business in Brazil may have access to existing infrastructure.

Third-party access to oil and gas pipelines is regulated by Law No. 11.909/2009, Decree 7.382/2012, and certain ordinances issued by the regulator (the ANP). The regulation is divided into ‘gas pipelines’ regulations and ‘oil pipelines’ regulations with certain particularities to each of them, but in general terms both assure third-party access to available capacity or unused hired capacity subject to certain conditions.

For gas pipelines, access to such available or unused hired capacity is made through transportation contracts executed with the owner of the pipeline, being certain that the unused hired capacity may only be negotiated after the available capacity is fully contracted. The transportation may be firm or extraordinary for available capacity or interruptive for unused capacity. ‘Available capacity’ is the share of gas transportation capacity not hired under a firm contract and ‘unused hired’ capacity is the share of gas transportation capacity already hired but temporarily unused. The ANP is responsible for setting the main rules, conditions and regulations regarding the access to gas pipelines. Access to firm transportation is made through public auctions organised by ANP in accordance with the MME’s indications and access to interruptive and extraordinary transportations of gas is to be regulated by the ANP.

Regarding oil pipelines, third parties may be granted access to available capacity, unused hired capacity or available operational capacity. ‘Available operational’ capacity is the share of oil transportation capacity not hired considering the current operation facilities; ‘unused hired’ capacity is the difference between the hired capacity and the actual volume transported or scheduled; and ‘available capacity’ is the share of oil transportation capacity not hired considering the current operation facilities and possible expansions or developments on the facilities. Oil transportation services are hired through contracts entered into between transporter and owner of the oil transported, which will contain transportation fees as well as any additional services.

In summary, in having existing available capacity, an oil and gas producer could force a pipeline carrier to accept and transport its commodities following the existing regulation in Brazil.

Judicial review

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

Any decisions taken by regulators that involve administrative agencies are subject to appeal to local courts or arbitration and the regulator must be considered a party like all others.

An appeal to the MME against certain decisions taken by the regulators or administrative agencies is allowed. Such an appeal is known as hierarchical recourse and allows the party recourse to the MME trying to revise the decisions taken by the executive board of any agency.

There is a great deal of controversy around what kind of matter one can appeal, and no consensus about it has emerged. Notwithstanding the controversy, this is the only non-judicial procedure available to challenge decisions of the energy regulator prior to advancing the discussion into local courts.

Fracking

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

There are no federal laws prohibiting the use of fracking in Brazil. In 2014, the local agency (the ANP) issued Resolution No. 21 regulating the use of hydraulic fracturing in Brazil and establishing the applicable requisites and reporting mechanisms. However, since 2013 there have been court decisions prohibiting the use of hydraulic fracturing in several Brazilian states (ie, Bahia, Acre, Alagoas, Sergipe, Paraná, Amazonas), some of those states with potential for use of that technique. Also, late in 2016, the state of Pará passed a law banning the use of hydraulic fracturing in its territory until December 2026. New reserves have been identified in the state of Maranhão. So far, those reserves have been accessed through conventional exploration methods and fracturing is not an issue so far. A federal ruling on the use of hydraulic fracturing is expected to be discussed under the newly elected Brazilian government.

Other regulatory issues

Describe any statutory or regulatory protection for indigenous groups.

The Brazilian Constitution provides that indigenous peoples’ lands are destined permanently for their possession, and they have the right to its exclusive usufruct, including in relation to soil, rivers and lakes therein. The recovery of water resources, including any potential energy resources, the exploration for oil, gas or coal can only occur with authorisation from the Brazilian National Congress and, in cases such as in mining activities (ie, coal exploration), the indigenous communities shall have the right to receive royalties from the exploitation of any mineral deposits located in those regions. To date, none of those activities has ever been submitted for approval before the Brazilian National Congress. Although there have been discussions at the Brazilian National Congress to amend the approval regime for mining activities in indigenous lands, including through the suggestion of legislative bills, said discussions have never really evolved into something concrete.

Thus, indigenous lands are delimited by the Brazilian federal government and then submitted for approval of the Brazilian National Congress through a wide public process, which also has to include consultation with the indigenous community in relation to the development of said mining projects on their lands. In other words, it is relatively easy to identify if a piece of land is or is not located within indigenous land.

Additionally, there are also traditional communities called quilombolas in Brazil, comprising descendants of slaves who escaped from slave owners before the abolition of slavery in Brazil in 1888. According to the Brazilian Federal Constitution, quilombolas are essentially entitled to obtain title deeds and ultimate ownership of the land they historically occupied, which may generate disputes over royalties and compensations in connection with projects developed in those areas. Verifying the existence of those communities in an area to develop a project is essential for purposes of identifying and calculating the potential disputes and cost increases that such reality may bring to a project.

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

The Petroleum and Pre-Salt Laws establish that only companies incorporated under Brazilian law, with management and head offices in Brazil, can perform exploration and production activities in Brazil and be granted with oil and gas rights.

Although, from a formalistic standpoint, only domestic companies may perform exploration and production activities, there is no limitation or requirement for ownership or control by local residents. In that sense, foreign parties may hold 100 per cent of a company participating in a bid round, as long as such company is duly incorporated and headquartered in Brazil and has Brazilian resident management. In fact, the regulator (the ANP) even allows foreign companies to participate directly in the bid rounds as long as they assume the obligation to, in the case of winning the bid, incorporate a Brazilian company with headquarters and management in Brazil.

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

The Brazilian Environmental Policy provides that operation of potentially pollutant activities and operation of activities that use natural resources are subject to environmental licensing. Environmental licensing is an administrative procedure that aims to assess and prevent potential environmental risks caused by those activities.

The licensing procedure of offshore and onshore O&G activities is conducted by the federal and state environmental protection agencies (EPAs). Each and every phase requires specific licensing: seismic, drilling and production or offloading.

The environmental liabilities that may arise in connection with the operation of those activities are from three different natures: civil, administrative and criminal.

In the civil sphere of liability, the purpose is to remediate or compensate the environment if the licensee or its related parties cause any damages. Environmental civil liability is joint, several and strict. In other words, regardless of fault, negligence or wilful misconduct, those who cause or contribute to environmental damage are jointly liable.

Complexity is added by the fact that the legal definition of polluter encompasses individuals or entities directly or indirectly responsible for the activity that is harmful to the environment.

In the administrative sphere of liability, the legal framework is composed of Law No. 6.514/2008, which sets forth the environmental administrative infractions, Law No. 9.966/2000 and Decree No. 4.136/2002, which set forth and regulate the oil pollution prevention, control and inspection rules. State laws concerning the same matter also exist and must be in line with the federal laws.

Those laws set forth the conducts deemed as administrative violations and establish the correspondent penalties, which may be warnings, fines, vessel seizure, staying of tax benefits, restrictions of rights and suspension of operations. The fines may range from 1,000 reais to 50 million reais.

In the criminal sphere of liability, the Brazilian Environmental Crimes Act provides that actions or omissions expressly described therein and committed with negligence or wilful misconduct are environmental crimes.

Individuals involved directly or indirectly in crimes carried out against the environment, to the extent of their culpability, are liable for criminal purposes. Officers, board members, auditors, managers, agents and legal representatives of an entity, who were aware of the potential environmental crime, but, when possible, failed to prevent it, are also liable for criminal purposes.

Under Brazilian law, legal entities may commit environmental crimes. Penalties to individuals may be monetary and equivalent to the damages caused, the rendering of services, and imprisonment. Penalties to legal entities may be monetary penalties, restrictions of rights and rendering of services.

The ANP is also responsible for health, safety and security regulations regarding exploration and production activities in Brazil. The ANP Resolutions 43/07, 44/09, 2/10, 41/15 and 46/16 set forth the main obligations and parameters to be followed by companies for the implementation of a health, safety and security environment to offshore and onshore facilities.

Other

Sovereign boundary disputes

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

Brazil has not been involved in any boundary disputes since 1907, when the Brazilian borders were finally established.

However, based on the UNCLOS (the United Nations Convention on the Law of the Sea) from 1982, Brazil presented a claim, which is still been processed and discussed, to a United Nations commission for the limits of the continental shelf, currently claiming for the extension of the Brazilian continental shelf from the current 200 to 350 nautical miles.

Energy treaties

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

Brazil is not a signatory or participant of the Energy Charter Treaty. As a matter of fact, Brazil is not a signatory of relevant energy treaties, except for the bilateral Itaipu Treaty of 1973 along with the Republic of Paraguay, in relation to the hydroelectric economic recovery of the water resources of the Paraná River and certain treaties entered with other South American countries for energy supplementation and assistance in case of electricity needs.

Investment protection

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

The general protections for investors contained in the Brazilian Federal Constitution and infra-constitutional normative system (ie, due process, autonomy of contracts, access to state jurisdiction) apply indistinctly to investments in the energy or other industries, and investors regardless of being domestic or foreign. In other words, there are no specific measures applicable exclusively to energy investors.

Cybersecurity

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

Brazil has no cybersecurity law and cybersecurity is not on the top of the corporate agenda in Brazil. Each company follows their own standards and multinational companies typically import the standards and best practices they use abroad to their Brazilian operations.

Update and trends

Update and trends

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

Brazilians elected a new president (Jair Bolsonaro) late in 2018 to take office on 1 January 2019. From the government plan presented by Jair Bolsonaro it is possible to expect a more pro-energy industry approach by the Brazilian federal government when comparing with the past. The extent of new government policies is at this point unknown but it is possible to say, for instance, that taxation of energy projects is out of question as there is a general understanding in the new administration that Brazil needs to boost the attraction to foreign investors of both the oil and gas, and the power sectors. Any changes in policy should seek to improve the existing regulatory framework providing further assurances to attract new investment.