Nineteen years after the opening of the state monopoly over oil and gas activities, the oil industry in Brazil is growing steadily and has matured. Complex deals are becoming more common as the portfolio of exploration and production companies enter into the production phase and service providers start to prepare for the upcoming challenges.
In 2014, Brazilian proven oil reserves increased 3.6 per cent in comparison with 2013, representing 16.2 billion barrels of oil. The country is ranked 15th among the world biggest proven oil reserves. National oil production reached 2.437 million barrels per day in 2015, and the production of pre-salt totalled 1.091 million of barrels of oil equivalent per day, volume 33.7 per cent higher than December 2014. The country is ranked ninth among the world’s biggest oil producers. As regards liquefied natural gas (LNG), production rose 10.19 per cent in comparison with 2014, hitting 96.2 million cubic metres per day.
Despite falling oil prices, recent month-by-month statistics show that production is still increasing and pre-salt production rates are improving considerably. Also, currently the government is preparing the 14th licensing round, scheduled to take place in 2017, and a second bid round for pre-salt areas.
II LEGAL AND REGULATORY FRAMEWORK
The Brazilian oil and gas sector is regulated by general provisions of the Brazilian Constitution, as well as by a number of different federal laws, and ordinances and resolutions enacted by the Brazilian National Oil, Natural Gas and Biofuels Agency (ANP). After the enactment of Constitutional Amendment No. 09/1995 the federal government’s monopoly over exploration and production of oil and gas reserves was loosened, allowing the federal government to contract state-owned or private companies.
i Domestic oil and gas legislation
Pursuant to Articles 20 and 176 of the Brazilian Constitution, oil and gas reserves located on Brazilian territory (including continental shelf, territorial sea and exclusive economic areas) are considered assets of the federal government, and, according to Article 177, the government can contract the exploration and production of deposits of oil, natural gas and other hydrocarbons.
Additionally, Federal Law No. 9,478/1997 (the Petroleum Law), enacted on
6 August 1997, established a new regulatory framework for these activities, especially by establishing:
- a the creation of the ANP, and the National Energy Policy Council (CNPE);
- b the concession regime, which is the main regime for exploration and production in Brazil;
- c the minimum requisites for the tender protocol and concession contracts; and
- d the government takes.
Federal Law No. 11,909/2009 (the Gas Law) was enacted to specifically regulate gas activities in Brazil, clarifying the legal background for private investors. The Gas Law gave the Ministry of Mines and Energy the power to decide which pipelines must be built or extended, and established provisions focused on projects related to gas transportation, gas storage and LNG facilities.
Federal Law No. 12,351/2010 (the Pre-Salt Law) established the basic guidelines for exploration and production within pre-salt and strategic areas, which shall be made under the production sharing regime. Additionally, it has established:
- a the use of a production sharing agreement (PSA) instead of a concession agreement in such areas;
- b Petrobras as operator of all exploration and production activities within those areas, with a minimum 30 per cent stake;2
- c a public company – the recently created Empresa Brasileira de Administração de Petróleo e Gás Natural (PPSA) – as the manager of the PSAs;
- d the need for other companies to enter into a consortium with Petrobras and PPSA;
- e minimum requirements for the unitisation, according to the ANP’s regulations; and
- f government takes for the PSA.
The Ministry of Mines and Energy (MME) is mainly responsible for planning the use of oil and natural gas. The MME proposes to the CNPE, after consulting with the ANP, the definition of the areas that will be subject to concession agreement or PSA regime, and the technical and economic parameters for the PSA. The MME also approves the drafts of the bid documents and PSA prepared by the ANP.
The CNPE has the main purpose of fostering rational use of the nation’s energy resources, ensuring proper functioning of the national fuels inventories system, reviewing energy matrixes for different regions of Brazil and establishing guidelines. It is responsible for authorising the ANP to offer blocks under the concession regime and the PSA regime.
The ANP is the national regulator of the oil, gas and biofuels industry, and is in charge of regulating, contracting and supervising economic activities related to the oil, natural gas and biofuels industry, as well as establishing technical standards for various connected activities. The ANP is also responsible for supervising compliance with safety standards and its regulations.
The Federal Environmental Protection Agency (IBAMA) is responsible for environmental regulations regarding upstream offshore activities. For onshore activities, other state and local environmental agencies may also be competent to regulate upstream activities.
The Brazilian Maritime Transportation Agency (ANTAQ) is responsible for regulation and supervision of maritime transportation of oil as well as maritime support activities. Only Brazilian navigation companies, duly authorised by the ANTAQ and the ANP, may perform maritime transportation and support activities within the country.
The Brazilian Navy has multiple roles in offshore exploration and production. In addition to technical inspection and entry control for any vessel or platform, it has jurisdiction over any incidents that take place on Brazilian waters. It is also responsible for maintaining the registry of maritime property, such as vessels.
With a view to the avoidance of double taxation, Brazil has entered into tax treaties with the countries listed below. These treaties executed by Brazil and its partners usually follow the Model Tax Convention of the Organisation for Economic Co-operation and Development (OECD) even though Brazil is not an OECD member. Brazil has entered into treaties with Argentina, Austria, Belgium, Canada, Chile, China, the Czech Republic, Denmark, Ecuador, Finland, France, Holland, Hungary, India, Israel, Italy, Japan, Korea, Luxembourg, Mexico, Norway, Peru, the Philippines, Portugal, Slovakia, South Africa, Spain, Sweden and Ukraine.
Brazil has ratified the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the New York Convention) through Decree 4,311/2002. However, Brazil does not have significant bilateral investment agreements in force. As for tax information exchange agreements (TIEAs), Brazil has enacted Decree No. 8,003 of 15 May 2013, which put in force a TIEA entered into with the United States.
From the end of Petrobras’ monopoly in the 1990s and prior to the approval of the Pre-Salt Law, the only regime applicable for the granting of exploration and production rights in Brazil was the concession regime. At the end of 2010 the PSA regime was established to govern exploration and production on pre-salt areas and areas deemed strategic by the federal government.
Therefore, there are two different regulatory frameworks for the granting of exploration and production rights in Brazil, each of them described below. Under the concession regime (similar to a tax-royalty regime), the granting of concession contracts for exploration and production activities is preceded by a tender (known as bid rounds). The tender documents must establish all technical, financial and legal criteria and requirements that a bidder must comply with in order to be qualified for the bidding round as non-operator or operator A, B or C. In general terms, the ‘non-operator’ is a capital partner; operator A is the company qualified by the ANP to operate in any block offered in the bid; while operators B and C are eligible to operate in some restricted blocks to be defined by the agency (usually in shallow waters and onshore, respectively).
Companies may submit bidding offers individually or jointly in consortium. In case of a consortium, a qualified operator between them shall be indicated.
The criteria for the evaluation of bidding offers are:
- a signature bonus: a lump sum payable in a single instalment upon execution of the concession agreement or PSA;
- b minimum work programme; and
- c local content.
There is no restriction on foreign participation, provided that the foreign investor incorporates a company under the Brazilian law and complies with all technical, legal and financial requirements established by the ANP before the execution of the concession agreement (or the PSA). Companies from the same corporate group are prevented from making competing offers for the same block. Under the PSA regime, a portion of the production of oil and gas is paid to the oil and gas companies as reimbursement for their exploration and production costs (known as cost oil), and the federal government shares the remaining production (known as profit oil) with the relevant oil and gas companies according to the ratio set forth in the respective PSAs.
The current PSA regime provides that Petrobras will be the sole operator with a minimum 30 per cent participating interest in the consortium to be awarded with the PSA, with the remaining percentage being contracted with other companies through competitive bidding rounds. However, this system is likely to be altered, possibly even before the next bidding round for pre-salt areas.
Recently, a bill that proposes to end Petrobras’ mandatory operation and minimum stakes in the pre-salt area was approved in the Brazilian Senate and it is expected to be voted until the end of 2016 in the Congress. In case it is approved in the Congress, the bill will still be subject to presidential approval. If approved, it will alter the wording of the Pre-Salt Law, replacing the current system for one where Petrobras will have preferential rights for the operation and minimum stakes of each pre-salt area to be offered in a bid round.
PPSA is a 100 per cent state-owned company created to represent the federal government in the consortium, and is responsible for the management of the PSAs. PPSA cannot perform upstream oil and gas activities and will not make investments, but has very important responsibilities, including managing and supervising PSAs and representing the government in the operating committees. PPSA is entitled to appoint half of the members of the operating committee, including the chairperson.
The only criterion used to determine the winning bidders is the percentage of profit oil to be given to the government. Signature bonus under the PSA regime has a fixed value, as well as the minimum work programme and the local content. The special participation and payment for area occupation or retention, both part of the government take in the concession regime, are not applicable under the PSA regime.
Petrobras (as the operator) and the winners (individually or in a consortium) of the bid will bear 100 per cent of the exploration and production costs, but will receive as payment a share of the profit oil and will have the right to reimbursement of the cost oil (oil and natural gas equivalent to exploration and production costs), subject to payment of the applicable government take.
In both regimes companies are required to comply with local content commitments as well as mandatory investment in research and development (R&D).
IV PRODUCTION RESTRICTIONS
Although the concessionaires or contractors under the PSA are entitled to explore and produce oil and natural gas, Brazilian reserves, including reserves in the continental shelf, territorial sea and exclusive economic areas, are property of the government.
Concessionaires have ownership over the entire volume of the oil and natural gas produced under the concession regime, where the volumetric measurement of the oil and natural gas produced is made according to the ANP’s regulations. For blocks within the scope of the Pre-Salt Law, the ownership is transferred to the oil company at the production sharing point, where the production is shared between the government and contractors.
Oil and gas are freely exportable in Brazil and there are no limits or quotas applicable to oil and gas production. Nevertheless, the export company must be authorised by the ANP to perform such activities. The exporting and importing companies must present reports and information to the ANP on each sale.
Furthermore, the exportation of any goods, including oil and its by-products, must necessarily be recorded in the national integrated system for international commerce, SISCOMEX, which is an online platform that enables the government to control international trade by establishing a one-way flow of information. Requirements of the maritime authorities (ANTAQ and the Navy), the tax authorities (the Secretariat of the Federal Revenue and the state tax secretariats) and the Brazilian Central Bank (currency exchange regulation) will also apply.
Notwithstanding this, in emergency cases in which the domestic supply of oil and natural gas is impaired or threatened (which must be declared by the Brazilian president), the ANP may limit the export of hydrocarbons, as well as of its by-products, after giving 30 days’ prior notice to the companies. The portion of production on which restriction applies will be determined on a monthly basis considering the participation of the company in the national production of oil and natural gas in the month immediately preceding. So far, Brazil has not faced this situation.
There is no specific requirement applicable to the sale of oil into local markets, but only to its by-products. The overall taxation regime applies for oil and natural gas sales in the local market. Some quality requirements must be observed by companies selling natural gas.
Prices for oil and gas are freely stipulated between the parties according to the market price. However, the ANP establishes the minimum price for the oil to be considered by the ANP for the calculation of government takes or eventual cost oil.
Anti-competitive practices in connection with the exploration, production, transportation, refining or marketing of crude oil or crude oil products are subject to the scrutiny of the Brazilian Antitrust Authority (CADE), and may subject companies to penalties.
V ASSIGNMENTS OF INTERESTS
Generally, the ANP’s prior authorisation will be required for any assignment of interests. The rationale only applies to direct transfers, as the ANP recently changed its understanding and no longer evaluates indirect transfers (such as mergers).
Only Brazilian companies duly qualified as per the ANP’s requirements for technical, legal and financial qualifications are entitled to receive the title to the participating interest in both the concession regime and the PSA regime.
No fees are required and no preferential purchase rights upon transfer are reserved for the government, neither in the concession regime nor in the PSA regime. The ANP takes on average from four to six months to approve an assignment request.
In addition to the ANP’s approval, CADE’s clearance may also be required if the groups involved in the transaction meet the following revenues threshold as set forth in the Brazilian antitrust laws: (1) at least one of the groups involved (seller or buyer) registered gross revenues in Brazil in excess of 750 million reais, during the fiscal year immediately before the transaction; and (2) at least one of the other groups involved registered gross revenues in Brazil in excess of 75 million reais, during the fiscal year immediately prior to the transaction.
In order to obtain CADE’s approval, the payment of a 45,000 reais fee is required. The transfer of licence rights for exploration and production of oil and gas to third parties is generally analysed by CADE under the fast-track procedure. Thus, CADE usually takes between 30 and 45 days to approve such transaction.
CADE’s approval is required by the ANP as a condition for the ANP’s approval.
The oil and gas industry is usually taxed at the same rates for indirect (IPI, ICMS, ISS, customs duties, CIDE) and direct taxes (IRPJ, CSLL, PIS and COFINS) applicable to most Brazilian companies.
REPETRO is a special customs regime for the industry that allows the suspension of federal import taxes (i.e., customs duties, excise tax and PIS/COFINS on imports), or Brazilian federal import taxes, on the importation of goods intended for the exploration and production of oil and gas by certain eligible entities.
REPETRO only applies to those goods listed by the Brazilian tax authorities. The entities that may be eligible to use REPETRO for the importation of eligible goods are: (1) the beneficiary of a concession or permit to carry out the activities of research, or exploration and production of oil and gas in Brazil; and (2) those entities hired by the concessionaire under charter agreements or to render services related to the performance of the activities involved in the concession or permit, as well as their subcontracted entities.
The following special customs treatments are available under REPETRO:
- a symbolic exportation regime: full suspension of Brazilian federal import taxes on symbolic exportation of the benefited good without actual removal of the goods from the Brazilian customs territory (goods manufactured by a Brazilian industry and sold to a foreign entity that does not physically remove the good from the country) and subsequent importation under the temporary admission regime in (c) below;
- b special drawback regime: full suspension of Brazilian federal import taxes levied on the raw materials, semi-industrialised or finished products, parts and pieces to be used in manufacturing an asset that will be imported under the symbolic exportation regime; and
- c temporary admission regime: full suspension of Brazilian federal import taxes levied on certain goods of foreign origin that were actually imported on a temporary basis, for a fixed period of time. After the period of temporary admission, the goods must, among other options, be re-exported, destroyed, transferred to another special customs regime, or dispatched for consumption in Brazil (in the case of dispatch for consumption, the full payment of Brazilian federal import taxes will be required).
At the state level, VAT (value added tax) benefits may also be available depending on the legislation of each state. Agreement No. 130/07 has authorised Brazilian states to establish a tax reduction on the import of certain REPETRO-eligible goods related to the oil production phase, such that the total tax burden applicable to such transactions corresponds to 3 per cent or to 7.5 per cent, depending on whether the importer intends to register VAT credits or not. The Agreement has also authorised Brazilian states to exempt or grant a tax reduction so that the total tax burden corresponds to 1.5 per cent on the import of equipment related to the oil exploration phase. There may be other specific benefits available related to goods utilised concomitantly during both the exploration and production phase, related to the drawback regime, among others.
In 2005, Law 11,196 was issued establishing tax benefits for the oil and gas industry, among others. The benefits include exemption of corporate taxes (IRPJ, CSLL) and IPI. However, Law 11,196 also requires that the company meets certain requirements to be eligible for the benefits, especially with regard to mandatory investment in R&D.
VII ENVIRONMENTAL IMPACT AND DECOMMISSIONING
Article 225 of the Brazilian Constitution classifies the environment as a common usage asset and imposes on public authorities and on the community the duty to protect and defend it for present and future generations. These guidelines are generally established by the National Environmental Policy, outlined in Federal Law No. 6,938/1981, which is considered one of Brazil’s main legal statutes on the environment.
The National Environmental Policy regulates civil liability for damages caused to the environment, which has a strict liability nature (i.e., irrespective of fault). The sole demonstration of the cause-effect relationship between damage caused and action or inaction suffices to trigger the obligation to redress environmental damages.
The fact that the wrongdoer’s operations are permitted by environmental licences does not exclude such liability. The National Environmental Policy further expanded the list of parties that may be liable for environmental damages, and set joint and several liabilities among polluting entities. Accordingly, all legal entities or individuals directly or indirectly involved in the damaging or polluting activities shall be jointly and severally liable for its recovery.
In the criminal sphere, the Environmental Crimes Act (Federal Law No. 9,605/1998) applies to every person, whether an individual or legal entity, which concurs with certain behaviours deemed damaging to the environment. As a result, upon occurrence of an environmental violation, a legal entity’s officer, administrator, director, manager, agent or attorney who concurs with certain behaviours deemed to be damaging to the environment will also be subject to criminal penalties. In the administrative sphere, the non-compliance with environmental obligations may subject the company to sanctions, such as the imposition of fines of up to 50 million reais (according to federal legislation, fines imposed by state environmental authorities might have a different range), interdiction of activities, cancellation of tax incentives and credit lines with governmental financial entities.
IBAMA or the competent state environmental agency, in addition to supervising compliance with environmental matters, issues the necessary environmental licences. As a general rule, the state environmental agency has jurisdiction for the environmental licensing proceeding of onshore activities and IBAMA for offshore activities.
The environmental licensing procedure requires the presentation of environmental assessments, such as the environmental impact assessment and an environmental impact assessment report by the company, which is mandatory for facilities that perform activities of significant environmental impact.
The research of seismic data in marine and transition land-sea areas requires a seismic research licence. The exploration and production of oil and gas and extended well tests also requires the following licences issued by IBAMA and the presentation of the correspondent environmental assessment:
- a preliminary licence: granted during the preliminary stage of planning the operations and activities and approves its location and conception, it attests to the environmental feasibility and sets forth the basic and conditioning requirements to be met during the subsequent stages of its implementation;
- b installation licence: authorises the setting up of the operations or the activity according to specifications in the approved plans, programmes and designs, including measures of environmental control and conditions, of which they are determining factors; and
- c operating licence: authorises the operation, after effective compliance with the previous licences and with the environmental control measures and conditions determined for the operation have been checked.
With respect to decommissioning, the operator of a concession area or a PSA area must, upon termination of the agreement, procure the decommissioning and removal of the goods and assets in order to transfer them to the federal government according to the rules set by the ANP. The ANP may require financial guarantees to be presented during the term of the agreement to cover such obligations.
VIII FOREIGN INVESTMENT CONSIDERATIONS
Foreign investors must incorporate a company under Brazilian law, with headquarters and administration in Brazil, or acquire interest in a Brazilian company in order to perform operations in Brazil. Operations cannot be conducted by a branch of the foreign corporation.
The entire process of incorporating a local entity usually takes from 30 to 45 days to be completed, as of the date the corporate documents are registered with the commercial registry until the day the company is able to fully operate with all other required government licences and registrations.
All documents related to foreign entities must be notarised by a public notary, stamped by the Brazilian consulate and duly translated into Portuguese, by a sworn translator enrolled in any commercial registry. The company must also be registered with the Brazilian Central Bank.
ii Capital, labour and content restrictions
Companies must comply with the local content commitment undertaken in the applicable bid round. If the commitment is not accomplished, the ANP may impose a penalty of 60 per cent over the amount not complied with, in case the percentage of local content not complied with is less than 65 per cent. If the amount not complied with is more than 65 per cent, the penalty may vary between 60 and 100 per cent of the amount not complied with. In 2013, the ANP published rules and criteria for the procedure of local content certification.
All companies established in Brazil, foreign or Brazilian, are required by law to hire Brazilian employees, observing the minimum proportion of two-thirds of Brazilian employees for one-third of foreign employees in the company (which includes the headquarters and each branch with more than three employees). Such proportion must also be observed in relation to the payroll, meaning that the remuneration received by the foreign employees must be limited to one-third of the overall payroll.
In order to work in Brazil, a foreign employee must have a working visa and fulfil all of the requirements established by the Brazilian National Immigration Council. In this sense, there are two types of visa that allow foreign employees to work in Brazil: (1) a permanent visa: granted to a foreign citizen who will take a position of manager in a Brazilian company (officer), and is usually granted for the maximum duration of five years; and (2) a temporary visa: granted to foreign nationals coming to Brazil for short periods of time with an employment relationship with a Brazilian company.
Brazilian law requires that foreign investments be registered with the Brazilian Central Bank to entitle the foreign investor to overseas dividends, interest on equity and funds related to repatriations of capital. The law establishes broad rules governing the reinvestment of profits and the payment of royalties and technical assistance fees.
Foreign investment must be registered with the Brazilian Central Bank’s computer system by means of the declaratory electronic registration. After the foreign currency funds are exchanged into local currency, the Brazilian beneficiary company must register the investment electronically with the Central Bank, in the currency in which the funds have been actually remitted to Brazil. This registration is necessary for the remittance of dividends to the investor, for obtaining additional registration upon the reinvestment of profits and for the repatriation of the capital in foreign currency.
Federal Law No. 12,846/2013 was recently enacted and it regulates civil and administrative liability of companies for the performance of corrupt acts against the government. Such law establishes a straightforward criterion to input responsibility on legal entities, whether national or foreign, for any act of corruption harmful to the government. Parent companies, subsidiaries, affiliates and consortia will be jointly and severally liable for the performance of corrupt acts.
The sanctions include the publication of the conviction and a fine that can reach 20 per cent of gross sales of the financial year preceding the initiation of administrative proceedings. If it is impossible to apply such criterion, the fine shall vary between 6 million and 60 million reais. Such actions may also result in the suspension or partial banning of activities, and, in severe cases, the compulsory dissolution of the corporation.
IX CURRENT DEVELOPMENTS
Important regulatory and legislative developments are taking place in Brazil, given the current difficulties faced both by the O&G industry, and by several Brazilian states and cities.
At the request of state governments wishing to increase revenues in the crisis period, ANP called public consultations to revise the criteria for calculation of payments of Royalties (government’s mandatory participation in production results). A new resolution modifying the minimum price to be considered for calculation of Royalties was about to be published when the CNPE intervened, publishing a resolution prohibiting ANP from changing the existing criteria, mainly because of claims from members of the industry that it would further destabilise their financial situation in the context of the sector crisis by raising production costs. The dispute went to the courts, with the states’ governments demanding that the Supreme Court declare the CNPE’s resolution unconstitutional and prevent any further interference on the matter by the Council. The Court partially granted the request, deciding that in fact the resolution was unconstitutional, but scheduled a conciliation hearing for all parties to discuss and decide together on the criteria. The final chapters on whether the royalties policy will be altered or not are yet to happen, so changes can be expected.
As to the local content policy, it is important to mention that, although originally created to foster the national industry, the local content obligations are no longer being an incentive in this regard. For this reason, the federal government recently created the PEDEFOR (Programme to Stimulate Competitiveness of Supply Chain, Development and Supplier Enhancement of Oil and Natural Gas Sector),3 that seeks enhancement of local content policies of the exploration and production of oil and natural sector gas through the legal recognition and appreciation of initiatives and investments that contribute to raising the competitiveness of suppliers in Brazil. As players are not achieving the minimum percentages and penalties are becoming more and more common,4 the PEDEFOR intends to consider alternative initiatives and investments taken by operators that develop the internal suppliers market for compliance with the local content percentages through a special committee formed by members of the Ministry of Mines and Energy, CNPE and ANP, that will assess the presented initiatives and investments and their value as local content percentages. The PEDEFOR is yet to start functioning effectively, as it depends on the formation of a special committee. Accordingly, it is expected that the ANP will soon revise the local content rules not only making changes to the applicability of penalties but also considering a bonus scheme for those players complying with the local content commitments.
Also, the ANP enacted a new resolution reviewing the ANP Ordinance No. 170/1998. The ANP Resolution 52/2015 now sets the rules for the construction, expansion and operation of handling facilities of oil, oil products and natural gas, including LNG. Among the changes made by the new resolution, we highlight the regulation of the construction, expansion and operation of facilities or production flow and transfer pipelines associated with the exploration and production of oil and natural gas that are not part of granted E&P areas. The facilities covered by the resolution include all systems essential to their operation, such as pumping stations, storage tanks, compressor stations, delivery or receiving points of natural gas, and measuring stations for operational purposes or transfer of custody, among others.
The ANP has also enacted Resolution No. 11/2016, which regulates the open access to natural gas transportation pipelines, swap of natural gas, rules for assignment of rights and obligations under a gas transportation service for firm transportation; procedure for registration of such transportation contracts with ANP and new public call procedure for contracting natural gas transportation capacity with transporters (as open access is applicable to transportation and transfer pipelines). Moreover, this new resolution comes in light of ANP Resolution No. 51/2013, which promoted the deverticalisation of the gas transportation sector by imposing a restriction on cross-ownership: companies or consortia that are concessionaires of natural gas transportation pipelines (transporters), or that have a participating interest in those companies are prevented from requesting authorisation for performing natural gas shipping activities.
Although not directly related to the regulation of the oil sector, it is important to highlight Petrobras’ current situation. As a result of an investigation being carried by the Brazilian Federal Police, known as Operation Car Wash (a reference to money laundering), many directors of Petrobras and its contractors were arrested. Pursuant to the investigations, the individuals involved have supposedly embezzled millions from contracts entered into by Petrobras and contractors. As a consequence, Petrobras has suspended several contracts, impacting the Brazilian oil and gas industry negatively. The investigation affected various companies in the oil and gas chain, and may even present good opportunities for investors to acquire the assets or even the companies themselves as certain players are selling some of their projects and participating interests to retain the cash needed for their investments and for reorganisation.
In addition to Operation Car Wash, Petrobras’ financial problems, caused by falling oil prices, its high indebtedness, and the cut in its ratings, has led Petrobras to promote its divestment plan. One of the main divestment items is the sale of multiple downstream and midstream companies it owns. Despite some initial resistance in courts, the sale of Gaspetro and Liquigás, both subsidiaries from Petrobras, are near completion. Not only may this represent some great opportunities for players looking to invest in Brazil, but its importance is even greater for the Brazilian oil and gas market, as currently Petrobras has a de facto monopoly over these sectors. The divestment of its participation in the gas transportation pipelines forced both Petrobras and the federal government to seek out solutions for this issue – as Petrobras is currently the sole owner of the gas transportation network. In response to that, the Ministry of Mines and Energy has disclosed a new plan that may be freely translated as ‘Gas for Everyone’, which aims to increase the share of the natural gas in the Brazilian energy mix. This plan includes the participation of private agents and associations in the discussion on how to improve the market conditions for the natural gas, including the possible creation of a central authority to control the movement of gas through the network (similar to other authorities in Europe). The overall expectation is that these divestments, together with the new rules to be enacted by the ANP, will open these sectors to new players, leading to a competitive market and promoting new investments.
The divestment plan also includes plays in areas on production and exploration phases. Recently Petrobras sold to Statoil the BM-S-8 block, including the Carcara discovery, for
US$2.5 billion. By the end of the year, Petrobras forecasted divestments that total US$15.1 billion for the biennium 2015–2016. As a result, for new sales and negotiations planned for the following months, E&P companies are looking into the opportunities of the exploratory blocks offered in the next bidding rounds, and in Petrobras’ assets.
Finally, the federal government is expected to carry at least three more bidding rounds until the end of the next year. These bidding rounds will include opportunities for all players in the market, as there will be onshore, offshore and even pre-salt areas being offered. The overall expectation of the market is that there will be some changes to the contract’s framework to attract more investments into such round, avoiding another ‘fiasco’ such as the 13th bid round carried in 2015. However, no further information on these changes have been disclosed so far.
1 Giovani Loss is a partner, and Felipe Rodrigues Caldas Feres and Nilton Mattos are senior associates, at Mattos Filho, Veiga Filho, Marrey Jr e Quiroga Advogados.
2 Recently a bill was approved in the Brazilian Senate to alter the wording of the Pre-Salt Law, ending Petrobras’ mandatory minimum stake as well as its mandatory operatorship in the Pre-Salt area. The bill is still pending approval by the Brazilian Congress and the President (as further addressed in detail).
3 Decree No. 8637 of 15 January 2016 established the PEDEFOR.
4 In 2015, the ANP applied nearly 1 billion reais in fines for non-compliance with local content requirements.