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The Brazilian Regulatory Framework for Exploration and Production of Oil & Gas

I. Brief Introduction to Energy Sources in Brazil

During the last few years Brazil has increased its dependency on non-renewable energy, being oil (together with its by-products) and natural gas the most significant sources used in the country, playing, therefore, an important role in the country's energy matrix.

With specific regard to exploration and production of oil, Brazil ranks amongst the top oil producers in the world, with proven reserves of 12.6 billion barrels of oil equivalent (BOE) and nearly 800 areas under concession. In 2016, the country produced an average of 2,730 million BOE per day. The recent discovery of large oil reserves in the so-called pre-salt layers, covering an area of around 800km across the Brazilian continental shelf, has brought about enthusiasm for economic development. The federal government estimates that the country's reserves could amount to nearly 100 billion BOE which would, indeed, place Brazil amongst the most important oil producers in the world.

The feasibility of profitable exploration and production (E&P) projects in the post-salt and pre-salt layers offshore of Brazilian territorial waters has led to investments from major companies worldwide. With this in mind, the oil industry in Brazil will continue to grow as an interesting opportunity for investment, mainly related to the provision of services and the supply of vessels and equipment.

Recent studies estimated that in 2022 the daily production of oil in Brazil will range around 5.5 million BOE. Accordingly, it is expected that Brazil may have a major role in the world's oil market in the years ahead, acting not only as an exporter of crude oil, but also as an exporter of its by-products, in view of the recent oil discoveries and of the expected enlargement of the countries' refining capacity – currently 18 refineries.

II. Overview of the Oil & Gas Industry and Regulations in Brazil

After analysing the energy resources available in Brazil and how they are currently being explored, it shall be provided an overview of the country's oil & gas industry and its applicable legal framework.

The 1988 Federal Constitution grants the Federal Union title to mineral resources located in Brazil which are deemed to be distinct property from the land itself.

In 1995 Constitutional Amendment (EC) 09/1995 was enacted and modified Article 177 of the Federal Constitution, authorizing the Federal Union to hire both state-owned or private companies to perform activities relating to oil & gas exploration and production. Until then, only Petróleo Brasileiro S.A. (Petrobras) – the Brazilian national oil company – had been entitled to conduct these activities.

EC 09/1995 was followed by the enactment of Law 9.478/1997 (the Petroleum Law), which transformed the Brazilian oil & gas sector's legal regime. Accordingly, the Petroleum Law introduced the concession regime for the exploration and production of oil & gas in Brazil. Under this new approach, the government authorised different economic agents to explore and produce oil & gas under particular concession agreements, following bid proceedings conducted by the National Agency of Oil, Natural Gas and Biofuels – ANP (the ANP).

In this sense, after some alterations, the Brazilian legal framework currently establishes different regimes for the exploration and production of oil & natural gas in the country – namely: the concession regime and the production sharing regime.

(i) Concession regime:

The concession regime was established by the Petroleum Law and has been successfully used in Brazil since the oil & gas market was opened for private companies.

Under the concession agreements entered into by the ANP and the oil companies (which win bid/ auction proceedings), the exploration and production activities are undertaken at the sole risk of the concessionaires/ oil companies, which will have ownership of the oil & gas produced.

(ii) Production sharing regime:

The production sharing regime was established by Law No. 13,365/2016 (the Pre-salt Law) and is applicable to pre-salt and strategic areas.

According to the Pre-salt Law, Petrobras will always be granted a "right of first refusal" to hold a minimum 30% stake and/or to be the operator in the pre-salt and strategic areas' developments in any consortium formed with other 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 & 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 (i.e., the cost oil) and will be entitled to a percentage of the remainder of the production (i.e., the profit oil), in accordance with the provisions of the production sharing agreement (PSA) so executed with the government.

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 S.A., a state-owned company which 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 other oil companies (whenever applicable).

Although the execution of a PSA is usually preceded by an auction/ bid proceeding, Petrobras can also be directly hired if this is deemed relevant for preserving national interests and attaining the energy policy's goals.

Both the concession and production sharing regimes will be preceded by a public auction/ bid proceeding, which is open to Brazilian and foreign companies. Under the Petroleum Law, only companies that comply with certain technical, economic and legal requisites established by the ANP can obtain authorisation for oil & gas exploration and production. If a foreign company wins such bid proceeding, it must set up a company organised under Brazilian law, whose headquarters and management are located in Brazil.

However, on certain exceptional circumstances, the National Council for Energy Policy can propose that Petrobras be directly contracted for the exploration and production of oil & natural gas under the production sharing regime, in order to secure national interests and fulfil Brazil's energy policy.

Pursuant to the Petroleum Law, companies can carry out oil & gas exploration and production individually or through a consortium with other companies. Under a consortium agreement, a leader company will be appointed as responsible for the operations, while the other members will be joint and severally liable for the obligations undertaken under the agreement.

Each consortium member must submit to the ANP: documentary evidence of its economic and technical capacity; and the registered version of the instrument that set up the consortium. Further, parties under a consortium normally enter into a joint operating agreement (JOA), which regulates their commercial relationship and allocates control, risk and reward among them. As a private instrument, the JOA is not subject to the ANP's analysis and approval.

When it comes to activities related to natural gas, Law No. 11.909/2009 (the Gas Law) regulates the transportation, treatment, processing, storage, liquefaction, regasification and commercialization of natural gas, as well as the import and export thereof.

The Brazilian natural gas market is also regulated by the ANP from exploration and production sites to city-gates. From there on, regulatory agencies in each state member are responsible for the regulation of the distribution of such products to final consumers. Both State and private companies, either national or international, are free to participate in all stages of the gas value chain.

As to the supply of piped gas, the Brazilian Federal Constitution authorizes the states to exploit either directly or through concessions the services related thereto. Therefore, such activity is regulated by the states and their respective agencies.

In Brazil, natural gas is mainly used in the domestic market by the industry and transport sectors, since the country's climatic and geographical features make LPG of major use in the residential sector.

III. Conclusions:

As described above, considering the existing national reserves, the stage of development of the Brazilian oil & gas industry, and also the present well-developed and stable regulatory framework, one may conclude that Brazil and its oil & gas industry are in the right path for development, having an important role to play as a promising oil & gas producer.