Regulation of natural gas productionOwnership and organisation
What is the ownership and organisational structure for production of natural gas (other than LNG)? How does the government derive value from natural gas production?
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.
The concession regime was established by Law No. 9,478/1997 (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 Agency of Petroleum, Natural Gas and Biofuels (ANP) and the oil companies that win bid proceedings, 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 pre-salt 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 of the activity’s risks, even though the oil and gas produced will be the federal government’s property. In the case of a commercial discovery, oil companies will recover the costs and investment made (ie, the cost of 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 agreement (PSA).
The parties to the PSA will be:
- the federal union, 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 PSAs; and
- 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 PSA 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.Regulatory framework
Describe the statutory and regulatory framework and any relevant authorisations applicable to natural gas exploration and production.
The 1988 Brazilian Constitution sets out the basic provisions regarding the oil and gas sector. Accordingly, it grants the federal union ownership of mineral resources in Brazilian territory that are deemed to be assets independent from the soil itself.
Upon the enactment of Constitutional Amendment (EC) No. 09/1995, which modified article 177 of the Brazilian Constitution, the federal union was authorised to hire state-owned or private companies to perform activities relating to oil and gas exploration and production. Until then, only Petrobras – the Brazilian national oil company – had been entitled to conduct these activities.
In 2007, the discovery of large oil and gas reserves concentrated in the pre-salt layer encouraged the government to enact the Pre-salt Law, which created a new regime for pre-salt and strategic areas by imposing the production sharing agreement in lieu of the concession agreement that is still legally applicable to other areas.
As regards natural gas, Law No. 14,134/2021 (the New Gas Law) regulates its transportation, treatment, processing, storage, liquefaction, regasification, commercialisation, import and export.
As regards the supply of piped gas, the Brazilian constitution authorises federal states to exploit the services related thereto directly or through concessions. Therefore, such activity is regulated by the federal states and their respective agencies.
The New Gas Law partially regulates this service by providing the free consumer, self-producer and self-importer regimes. These are situations in which the consumer has the right to purchase natural gas from any supplier and not only from the local distribution companies (LDCs), although the consumer remains obligated to procure the LDC to move the natural gas through the LDC gas pipeline to its facility.Unconventional gas production
Are there different rules for, or any restrictions on, unconventional natural gas production (including fracking)?
Currently, there are no specific government policies to encourage the exploration and production of unconventional hydrocarbons. In addition, fracking is still a controversial activity in Brazil. ANP Resolution No. 21/14 regulates the use of fracking in unconventional reservoirs, but the Public Prosecutor’s Office obtained a provisional court ruling to stop this activity in the country.
In late December 2021, President Bolsonaro approved a programme aimed at promoting unconventional natural gas production, which aims to facilitate the environmental licensing of projects. In addition, the programme reduced the royalties applicable to unconventional reservoirs to 5 per cent, while the royalties for conventional exploration and production projects are fixed at 10 per cent.Required security and guarantees
Are participants required to provide security or any guarantees to be issued with a licence to explore for or to store gas?
The companies or consortia that explore and produce gas in Brazil must provide financial guarantees for compliance with the Minimum Exploration Programme (MEP) and payment of the costs related to the abandonment of the production fields.
When the concessionaire does not have the satisfactory technical and financial capacity, the ANP may also require a parent company guarantee issued by the controlling shareholder, whereby it will be jointly liable for the obligations arising out of the concession or PSA (also known as a performance guarantee).
The ANP accepts the following financial guarantees for compliance with the MEP:
- a letter of credit;
- an insurance bond; or
- an oil and gas pledge agreement.
For the abandonment of fields, as provided for in ANP Resolution No. 854/2021, there are requirements for each of the types of decommissioning guarantee established by the ANP. For this purpose, the concessionaire may present:
- an accrual fund;
- a letter of credit;
- a completion bond;
- oil and gas pledges; or
- an insurance bond.