Brazil: New trends in oil regulations in view of recent environmental disasters

Paulo Valois
Schmidt Valois Miranda Ferreira & Agel
Rio de Janeiro

Recently the world witnessed the oil spill in the Gulf of Mexico. The accident was a result of an explosion at the Deepwater Horizon oil rig, located approximately 80 km off the coast of the State of Louisiana. Consequences of this environmental disaster were chaotic, and it has drawn the attention of the world's environmental authorities, including the Brazilian environmental authorities. This in turn has lead Brazilian legislators to perform a deep analysis of the regulations now in force in the country for the protection and control of marine and coastal ecosystems.

A development of upstream activities in Brazil occurred after 1997, with the enactment of the Brazilian Oil law, when international and domestic oil companies were allowed to participate in bid rounds promoted by the National Oil Agency (ANP) for the acquisition of rights in offshore and onshore exploration areas in Brazilian sedimentary basins. The development of E&P activities in Brazil has required governmental agencies to issue institutional and technical measures to control environmental risks and hazards of such activities, and current legislation requires the best available practices and technologies to be employed in Brazil for such activities in order to mitigate such environmental risks.

In 2000, Brazil faced a major environmental disaster caused by an oil spill in the Guanabara Bay, in the city of Rio de Janeiro. At the time, over six thousand barrels were spilled from the pipeline connecting the Duque de Caxias Refinery to the Ilha D'Água terminal, reaching an ecological sensitive area. Since then, Brazil has increased its participation in international technical mobilisation efforts to mitigate the risks of oil spills in Brazilian jurisdictional waters.

Under the Brazilian Federal Constitution, the three levels of government (federal, state and local) have general and concurrent authority over the environment and its protection. Federal authorities can pass general laws and regulations on environmental control, while States and municipalities are authorised to supplement Federal legislation on issues of local interest or relevance.

Environmental licensing of O&G exploration and production activities is regulated by the National Environment Council (CONAMA). CONAMA considers the drilling of wells as part of exploration and production activities, regulating under CONAMA Ordinances #23/94, 237/97 and 350/04 that the Brazilian Institute of Environment and Renewable Natural Resources (IBAMA) shall be in charge of environmental licensing of the activities carried out in Brazilian jurisdictional waters (sea and marine environment).

It should be highlighted that the concession contracts which are executed with the winners at the ANP promoted Bib Rounds also provide for environmental obligations that shall be complied with by the concessionaires during the term of the concession.

CONAMA defines all the steps that an O&G company is required to take in order to secure licensing for their activities. Ordinarily, these steps are divided into the following categories: (i) Seismic Research Licence; (ii) Preliminary Licence; (iii) Installation Licence; and environmental control and mitigation measures and conditions; and (iv) Operation Licence.

A data room is now being created by a partnership between IBAMA and the ANP, who are working together to determine environmental sensitive areas with views of guiding oil companies with respect to the environmental licensing of their activities in said areas.

Among other regulatory measures, CONAMA regulation determines that O&G concessionaires submit an Environmental Control Plan or Project to the environmental agency, which lists measures taken to mitigate environmental impacts associated with the installation and operation of an oil facility. Law # 9,996/2000 establishes as a main requirement, the creation of an Individual Emergency and Contingency Plans by all oil companies, which is an additional restriction to the O&G exploration and production activities to the extent that such plans shall follow similar standards of international conventions, such as MARPOL 73/78, CLC/69 and OPRC/90.

The imposition of fines, suspension or cancellation of an environmental licence may occur in case of non observance of environmental control measures; and in some cases, depending on the extension and severity of the incident, it may result in criminal charges being filed against the companies and its respective officers. The operator of an oil platform or unity may be held liable for damages and consequently may have to compensate not only the affected parties but also the government for costs incurred in connection with the mitigation of pollution caused by an accident in the Brazilian jurisdictional waters. There is no limitation to liability for environmental damages and, in extreme cases courts may determine the piercing of the corporate veil to reach the personal assets of the companies' shareholders.

The national authority is developing a National Contingency Plan, which may impose new obligations to concessionaires. Although details are scarce, the plan is believed to involve changes to the environmental licensing process, which will likely involve risk possibilities which encompass more factors. There is some speculation with regards to the increase of the limit for environmental fines, as well as to the possibility of the creation of an indemnification fund, for cases of environmental disasters.

Given the Deepwater Horizon oil spill the Brazilian authorities may decide to impose additional rules to the upstream companies operating in Brazil, even though environmental regulations now in force have developed a culture of accident prevention in upstream activities in the country. With the pre-salt layer the Brazilian environmental authorities wish to have close control over activities developed in these areas, since the exploratory risks and the technological challenges of companies will be even greater. Considering the risks involved in these operations, it is likely that environmental authorities increase control over exploration activities in the Pre-Salt layer in the upcoming years.