On 10 November, the Brazilian Superior Court of Justice (“STJ”) published its decision in a long awaited kompetenz-kompetenz (or competence-competence), jurisdictional case brought by Petrobras against the Brazilian oil and gas regulatory agency, the National Agency of Petroleum, Natural Gas and Biofuels (“ANP”). According to a majority of the STJ judges deciding the case, the arbitral tribunal should decide upon its own competence, including on the validity and application of the arbitration clause included in the concession agreement between the ANP and Petrobras.

The issues

The dispute started in 2014, when the ANP required the unification of seven different producing oil fields (Baleia Anã, Baleia Azul, Baleia Franca, Cachalote, Caxaréu, Jubarte e Pirambu), part of the Parque das Baleias area, located in Block BM-C-60 offshore from the state of Espirito Santo. The concession for the exploration and production from Block BM-C-60 was awarded to Petrobras in 1998.

By unifying the different fields into one, ANP increased the amount of the so-called Special Participation due from Petrobras, which is a governmental levy, calculated based on the volume of oil produced from oil and gas fields with higher production volumes. The amount of the Special Participation depends on the net production volume, the location of the fields and duration of production. The higher the volume of oil or gas produced, the higher the percentage of Special Participation that is due from the concessionaire. Thus, before the unification, only some of the fields in the Parque das Baleias area were obliged to pay the Special Participation, based on their individual oil production. After the unification, the combined production from the fields was used to calculate a higher rate of Special Participation for all of the fields. On that basis, Petrobras claimed that, if the fields were to be jointly considered, the government take under the concession agreement would move from 49.8% (for separate fields) to 58.5% (one field), which would have a multi-billion dollar impact on net revenues.

In 2014, after unsuccessfully requesting that the ANP reverse its decision, Petrobras commenced an arbitration against ANP under the concession agreement to obtain a declaration that the ANP’s decision regarding unification of the fields was invalid. Under Brazilian Petroleum Law, arbitration clauses are mandatorily included in all concession agreements for exploration and production of oil and gas.

Following Petrobras’ request to institute the arbitral tribunal, the ANP took certain judicial measures to seek to block the arbitration, arguing the lack of competence of the arbitral tribunal to decide on the merits of the case. According to the ANP, its right to charge Special Participation is not derived directly from the concession agreement, but is a power created by the law in its capacity as regulator, and should not be considered a “disposable right”. According to Article 1 of the Brazilian Arbitration Act (Law 9.307/1996), only disputes concerning disposable rights can be submitted to arbitration. The ANP also claimed that, if the case were decided by arbitration, the state of Espirito Santo would not be able to participate, despite its direct interest in the dispute. Part of the proceeds of the Special Participation are received by the state of Espirito Santo because the production takes place offshore of its territory.

Petrobras, in turn, requested interim measures to stop the ANP from demanding payment of the Special Participation at the higher rate while the arbitration was pending.

Petrobras and the ANP obtained contradictory decisions from the lower courts and from the arbitral tribunal with respect to the competence of the arbitral tribunal to decide the dispute. This led Petrobras to request a final decision on the competence issue from the STJ. In 2015, Petrobras obtained a preliminary injunction from the STJ to stay all proceedings involving the dispute until the STJ decided on the conflict of competence.

The decision

The majority decision of the STJ confirmed the competence of the arbitral tribunal to decide on its competence, based on the principle “competence-competence”, which was incorporated into the Brazilian Arbitration Act in 2015. According to the court, the Brazilian legal system determines that alternative dispute resolution mechanisms, including arbitration, shall have precedence over the court jurisdiction, including when one of the parties to the dispute is a public entity.

The court made a distinction between public interest objectives, which may not be submitted to arbitration, and the patrimonial rights of public entities, which are arbitrable, and concluded that the discussions arising out of a contract entered into by a public entity relate to disposable rights and therefore can be decided by arbitration. However, the court did not determine whether the specific right in question (i.e. to determine the interpretation of “oil field” to maximise Special Participation revenues) was disposable or not. They said that this is a question for the arbitral tribunal to determine.

The STJ also found that allowing the arbitration would not prevent the state of Espirito Santo from participating in the dispute to protect its interests. Although it was not a party to the concession contract, based on arbitral convention, the arbitral tribunal could allow the state to participate in the dispute as an interested third party.

Developments

While this dispute has been ongoing, the ANP has tried to narrow the applicability of the arbitration clause in new concessions, by including definitions of what it considers disposable rights in concession agreements for the 13th and 14th bidding rounds that took place in 2015 and 2017 respectively.

For the 13th bidding round, for example, the ANP expressly provided that the interpretation of legal definitions and legal obligations cannot be submitted to arbitration. However, legal interpretation and obligations derived are not, per se, undisposable rights, as they do not necessarily involve a public interest. If this definition were to be applied literally, the arbitration clause could be rendered ineffective, violating the mandatory nature of the arbitration agreement, as determined by the Petroleum Law.

Following the decision from the STJ, on 19 October 2017, the ANP initiated a public consultation on the latest version of the arbitration clause, which is intended to take account of best international practices with respect to arbitration involving public entities. It seems then that the arbitration clause will be further reviewed for future bid rounds, and it is to be hoped that this will bring additional clarity and certainty to this important issue.