Oil and gas regulation in Brazil: overview
A Q&A guide to oil and gas regulation in Brazil.
The Q&A gives a high level overview of the domestic oil and gas sector, rights to oil and gas, health safety and the environment, sale and trade in oil and gas, tax and enforcement of regulation. It covers transfer of rights; transportation by pipeline; environmental impact assessments; decommissioning; waste regulations and proposals for reform.
This Q&A is part of the global guide to energy and natural resources. For a full list of content visit www.practicallaw.com/energy-guide.
Brazil has about 6.4 million square kilometres of sedimentary area distributed between 29 basins and very favourable geological conditions for exploitable reserves of oil and gas, of which 2.5 million square kilometres are located in offshore areas (National Agency of Petroleum, Natural Gas and Biofuels (Agência Nacional do Petróleo, Gás Natural e Biocombustíveis) (ANP)).
Exploration and production (E&P) areas currently subject to granted concessions total 336.7 square kilometres in 724 blocks and fields. Under the concession regime the state grants rights to other entities (concessionaires) (see below, Concession regime).
Since the 1950s the Brazilian oil and gas industry has been dominated by Petroleo Brasileiro SA (Petrobras) (a mixed-capital entity incorporated in 1953). However, in 1995 Congress approved Constitutional Amendment No. 9, which allowed the federal government to contract both private and state-owned companies to explore for and produce natural resources. This amendment was followed by Federal Law No. 9,478/1997 (Petroleum Law). The Petroleum Law was the main measure taken by the government to open the Brazilian oil industry to private investment.
During the first ten years of the regulatory concession system (1997 to 2007), the following occurred:
Oil reserves increased from 7.1 billion barrels to 12.6 billion barrels.
Gas reserves increased from 228 billion cubic metres to 365 billion cubic metres.
Annual oil production increased from 316 million barrels to 669 million barrels.
Annual gas production increased from 9.8 billion cubic metres to 18.2 billion cubic metres.
The participation of many domestic and foreign oil companies was instrumental in achieving these results. From 1999 to 2008, the ANP promoted annual bid rounds to grant concessions for the E&P of oil and gas, in which dozens of oil and gas companies from all over the globe competed to have access to Brazil's reserves. As a result, 72 oil and gas companies, including 36 from 19 foreign countries were active in Brazil in 2008 in exploring and producing oil and gas. However, due to its historical dominance of E&P activities and deep knowledge of the Brazilian oil and gas reserves, Petrobras still accounts for the majority of Brazilian oil and gas production.
On 8 November 2007, the National Energy Policy Council (Conselho Nacional de Política Energética) (CNPE) announced the assessment of reservoirs of Petrobras' largest oil province (Lula, formerly Tupi), located in the offshore Santos Basin (south eastern Brazil). Studies indicated that this area holds about 6.5 billion barrels of oil equivalent (BOE), that is, the amount of energy equivalent to the energy released by burning one barrel of oil.
The CNPE's announcement initiated speculation about possible vast reserves at the pre-salt layer (reserves below a thick layer of salt, on average around 7,000 metres deep). This 800 kilometres wide pre-salt layer area is located about 170 kilometres from the Brazilian coast, between the coasts of Espírito Santo and Santa Catarina in the south and south eastern regions of Brazil. The Brazilian proven reserves of oil are currently around (Statistical Yearbook of Brazilian Oil, Natural Gas and Biofuels 2012, ANP):
15 billion BOE.
Natural gas of 459 billion cubic metres.
The pre-salt discoveries are expected to increase Brazilian oil and gas reserves from 70 to 100 billion BOE in the next few years (estimate of the Ministry of Mines and Energy (MME)).
These discoveries led the CNPE to withdraw 41 of the 311 blocks offered in the ANP's ninth Bidding Round held at the end of 2007, all of which were in the pre-salt area. The CNPE stated that extensive studies had to be made to evaluate the suitability of the existing concession regime in relation to these new oil and gas prospects.
In July 2008, an inter-ministerial committee was created to analyse the various alternatives and suggest modifications to the E&P concession regime with the goal of presenting the President with options for reform of the Petroleum Law.
In August 2009, the government presented legislative bills to Congress that:
Introduced a Production Sharing Agreement regime (PSA regime) that would apply to the pre-salt layer and other strategic areas.
Introduced the assignment by the federal government to Petrobras of rights to explore and produce five billion BOE within certain pre-salt areas (Petrobras Assignment Agreement).
Created a state-owned company to manage the PSAs, that is the Brazilian Oil and Natural Gas Management Corporation – Pre-Salt Petroleum (Empresa Brasileira de Administração de Petróleo e Gás Natural SA – Pré-Sal Petróleo SA) (PPSA).
Created a social sovereign fund (fundo soberano) to receive oil revenues due to the federal government.
Federal Law No. 12,351/2010 (PSA Law) was enacted in 2010 and introduced a new contracting system (that is, the PSA regime), which applies to E&P activities in the pre-salt areas and in areas declared as strategic by the government. Domestic and international oil and gas companies can take part in bidding rounds for pre-salt blocks that will be granted under this regime. However, the PSA regime somewhat limits the participation of these players as:
Petrobras will be the sole operator of all blocks explored under this system.
The federal government may directly hire Petrobras or hold bidding rounds in which private companies can freely participate.
Petrobras will be granted a minimum 30% participating interest in areas that are auctioned, and it may also participate in the auction with the aim of increasing its interest in these areas.
The PSA Law also created the PPSA to represent the nation's interests in the PSA regime and manage the executed PSAs.
The main roles of the PPSA are to:
Represent the federal government in consortia formed by the parties to each PSA, and to be the federal government's voice on the respective operating committees.
Perform technical and economic evaluation of and monitor the execution of any plans for exploration, appraisal, development and production.
Enforce contractual provisions regarding local content obligations, as well as monitor and audit any costs and investments related to the PSA.
Represent the federal government in executing and managing oil and gas commercialisation agreements; these will most likely be entered into with Petrobras without a prior bidding procedure.
Represent the federal government in unitisation (joint development of an oil field that extends into two different areas) procedures when reservoirs extend into areas that have not been granted or that have been granted under the concession regime.
As occurs under the concession regime, the ANP may promote public bidding rounds to grant the PSAs. The winning bidders will enter into a consortium agreement with the PPSA and Petrobras, with Petrobras legally entitled to a minimum 30% interest in each consortium. In addition to this mandatory interest, Petrobras may itself participate in bidding rounds and increase its participating interest in the relevant PSA.
The first PSA bid rounds are yet to be held in Brazil (2013) as Congressional discussions continue about the distribution of PSA government takes to the federal government, states and municipalities.
The 2012/2016 business plan disclosed by Petrobras for the refining sector indicates that this sector will receive 27.7% (US$65.5 billion) of the total US$236.5 billion that will be invested by Petrobras between 2012 and 2016. US$51.7 billion will be allocated for projects currently under implementation.
Refining expansion capacity projects that will come into operation up to 2016 will receive US$24.9 billion in investments in the expansion of their refining facilities. This includes the Abreu e Lima Refinery and Comperj's first refining train, both already in the implementation phase. The main refining projects currently under Petrobras' responsibility are:
The petrochemical complex COMPERJ, which is sponsored by Petrobras and private companies with total investments of US$8.5 billion (State of Rio de Janeiro). Petrobras has already invested US$700 million into this project.
The Abreu e Lima Refinery, with total investments of US$2.5 billion (Suape, in the State of Pernambuco).
The Premium I Refinery with a two-phase refining project of 300,000 barrels per day (bpd) capacity for the first phase, scheduled to start operating in 2014 (Maranhão State). The second phase has the same capacity and is scheduled to start operating in October 2016. It is estimated that investments for the second phase will reach US$20 billion.
Premium II Refinery with a projected 300,000 bpd capacity, which is scheduled to start operating in 2017 (State of Ceará).
Two Petrobras-owned LNG regasification terminals entered commercial operation for LNG in 2009 (one in the state of Ceará and one in Rio de Janeiro). Together, the terminals have gas processing capacity of 21 million cubic metres per day.
In addition, Petrobras and its partners are now working on a new concept of a floating liquefied natural gas plant (FLNG) for developing gas reserves located in the Santos Basin. Following a bid proposal by Technip/JGC consortium to supply and develop the project, discussions about its feasibility increased.
Petrobras accepted the initial proposal of US$3.8 billion for constructing a FLNG ship with a capacity of 14 million cubic metres. The project was originally scheduled for 2015. However, following a decision to build a major pipeline to transport gas from the offshore Santos basin to the shore, it was postponed to 2016, despite Petrobras' internal disagreements on the feasibility of the project. The biggest obstacle to the FLNG project appears to be the projected production and consumption of gas within the E&P area, which may not justify the use of this system at this time.
In 2011, the domestic energy supply consisted of the following (2012 Brazilian Energy Report ( BEN), MME) (2012 BEN):
Oil and its by-products: 38.6%.
Biomass (which includes sugarcane by-products and firewood): 25.4%.
Natural gas: 10.2%.
Coal and Coke: 5.6%
Uranium - U3O8: 1.5%.
Other renewable sources: 4.1%.
The final energy consumption in 2011 was (2012 BEN):
Oil and its by-products: 43.5%.
Natural gas: 7.6%.
Coal and coke: 4.7%.
Ethyl alcohol: 4.6%.
Domestic policy on oil and gas aims to advance national energy policies to, among others things (section 1, Petroleum Law):
Preserve the national interest and ensure the supply of oil and oil products in the Brazilian territory.
Attract risk-based investments in energy production.
Promote free competition and development.
Expand the labour market.
Increase Brazil's competitiveness in the international market.
Protect the environment.
When the Petroleum Law was enacted in 1997 the government believed that Brazil had to attract national and international oil and gas companies in order to find new reserves and increase oil and gas production and the domestic supply of by-products. Therefore, from 1999 to 2008 the government, through the ANP, promoted annual bid rounds to grant concessions for E&P of oil and gas. As a result of these bid rounds there are over 70 different concessionaires in Brazil and the oil and gas supply chain is developing at unprecedented levels. The government also set a local content policy that has contributed to the development of a local supply chain.
The PSA Law introduced the PSA as an additional legal-regulatory regime for E&P activities. The PSA regime will apply to upstream activities performed in the pre-salt layer and in strategic areas to be defined as such by the federal government.
The PSA was introduced because, in comparison to the Brazilian concession regime, it allows for more government control over E&P activities and will enable Brazil to increase its oil revenues (two of the main suggested policies behind the Brazilian PSA).
(These directives are mentioned in the MME's Regulatory Framework of the Pre-Salt, as well as in the Online Guidebook of the Pre-Salt, both documents are available on the National Department of Mines and Energy’s website in Portuguese (www.mme.gov.br/mme/menu/pre_sal.html).)
Other regulatory bodies
The main regulatory bodies involved in oil and gas E&P operations are:
CNPE, which is the advisory entity linked to the Presidency. CNPE's function is to propose to the president's policies specific measures to promote the rational use of energy resources.
MME, which is responsible for defining guidelines, and planning and monitoring CNPE policies.
Brazilian Institute of the Environment and Renewable Natural Resources (Instituto Brasileiro do Meio Ambiente e dos Recursos Naturais Renováveis) (IBAMA), which:
implements environmental national policies;
issues environmental licences for large oil and gas projects, especially those located on the continental shelf.
National Waterway Transportation Agency (Agência Nacional de Transportes Aquaviários) (ANTAQ), which is the federal regulatory agency linked to the Transportation Ministry and the Ports Secretariat, which is responsible for waterway transportation in Brazil. ANTAQ's role includes formal authorisation for chartering foreign vessels to be used in coastal, port and maritime support navigations.
Directory of Ports and Coasts (Diretoria de Portos e Costas) (DPC), which is responsible for general control and supervision activities, for example, carrying-out technical expert examinations to verify the condition of vessels' equipment, crew qualifications and documentation required by applicable Brazilian legislation and international conventions.
The regulatory regime
The oil and gas activities in Brazil were exclusively carried out by Petrobras until 1997, when the Petroleum Law was enacted following Constitutional Amendment No. 9/95, which authorised the Federal Union to contract with private or state-owned companies for oil and gas activities.
The Petroleum Law implemented the concession regime and established the required legal framework for other companies to enter the market in all segments of oil and gas activities. The law also created the CNPE and the ANP.
Under the concession regime, companies granted with concession interests (which can be by means of the bid rounds or by assignment), are entitled to the property of their production and run all the risks of their undertaking. As in any typical concession or licence regime, the government’s compensation is based on the "tax and royalties" system. Concessionaires pay certain government takes as compensation for their activities (see Question 9). Since the opening of the market, ANP has conducted ten bidding rounds to grant onshore and offshore blocks to concessionaries and, although rounds have not been conducted since 2008, the eleventh one is expected to take place in early 2013.
After two years of discussions among the federal government and Congress to analyse the suitability and applicability of the concession regime to E&P activities within the pre-salt layer, Federal Law No. 12,351 (the PSA Law) was enacted at the end of December 2010 (see Question 1, PSA regime). The PSA Law amended the Petroleum Law and introduced the PSA as an additional legal-regulatory regime for E&P of hydrocarbons, applicable to the pre-salt layer and to strategic areas, defined as such by the Federal Union.
The Federal Union does not bear any of the risks of E&P activities, although any exploited hydrocarbons remain its original property (PSA Law). However, once a commercially feasible hydrocarbon discovery is made, the Federal Union effectively assumes some risks associated with these activities by giving over part of its production as reimbursement for the exploration, development and production costs incurred by those oil companies that are party to the agreement (cost oil). The Federal Union then shares in the rest of the production with these companies at a rate established in the agreement (profit oil).
The ANP is a federal administrative entity and the main regulator in the extraction of oil and gas. Its main purpose is to:
Implement the national oil and gas policy set out by CNPE and MME.
Regulate and inspect industry activities.
See box, The regulatory authorities.
Rights to oil and gas
Mineral resources in situ
The Federal Union is the owner of all mineral resources in situ (that is, before exploitation), whether the oil and gas is located onshore (on land) or offshore (Brazilian Federal Constitution) (Constitution). Oil and gas E&P activities are a Federal Union monopoly (Constitution). However, these activities may be delegated by the federal government to state-owned or private oil and gas companies through the concession regime or PSAs, taking account of the conditions set out by the Petroleum Law and the PSA Law.
The rights to explore for and produce oil and gas are granted through ANP bid rounds to winning companies or consortia, which must meet the technical, economic and legal requirements established by the ANP. Foreign companies can participate in the bidding. However, the winners must incorporate a Brazilian company to perform the E&P activities.
In the concession regime, the following criteria are used for evaluating bid offers:
Local content (minimum and maximum percentages of local investments for the acquisition of goods and services).
Signing bonus (a fee offered in exchange for the concession).
Minimum exploration programme (PEM) (work units, which must be fulfilled by the concessionaire in the concession area during the exploratory phases).
The winning companies (concessionaires):
Enter into concession agreements with ANP.
Are the rightful owners of all oil and gas exploited from the reservoirs.
Are responsible for the full risk and cost of E&P activities.
In PSAs the sole criteria to evaluate a bid is the government's share of the production at a rate set in the agreement (profit oil).
The winning companies enter into both:
A PSA with the MME.
A consortium agreement with the PPSA and Petrobras.
The federal government does not bear any of the risks of the E&P activities and all exploited oil and gas are the original property of the federal government (sections 5 and 6, PSA Law). However, once a commercially feasible oil and gas discovery is made, the federal government gives part of its production as reimbursement for the exploration, development and production costs incurred by the oil companies that are party to the agreement (cost oil). The federal government then receives its profit oil (see Question 9, PSA).
The first PSA bid round is yet to be held by the government.
Owners of private lands from which oil and gas are extracted have the right to remuneration equivalent to 1% of the annual oil and gas production.
See above, Mineral resources in situ.
See above, Mineral resources in situ.
Nature of oil and gas rights
The concession agreement provides that:
The concessionaire is the owner of the hydrocarbon as soon as it is exploited and is entitled to factor in the hydrocarbon reserves within the concession area.
The government, by means of the ANP and the other bodies, acts as regulator and inspecting agent.
The concession contracts executed with the ANP include a local content requirement, which applies for all phases of the contract.
In addition, the concession contract has two contractual phases, the exploration phase and the production phase (Petroleum Law). In the exploration phase, seismic data is collected and exploratory wells are drilled to evaluate the commercial viability of an eventual oil or gas discovery. The production phase starts when activities for construction, acquisition and installation of equipment are developed, and services are contracted to execute the infrastructure necessary for production of hydrocarbons in a determined field.
The exploration phase starts when the contract is effected and may last between four and eight years, and be divided in up to three distinct periods. The production phase of each field, which also includes the development activities, starts when a declaration of commercial viability is delivered to the ANP. The length of the production phase is established in the contract, which may be decreased or extended under the terms of the applicable contractual provisions. The concession contract for the tenth bidding round provided for 27 years counted from the date the declaration of commercial viability was delivered.
As the rights regarding the ownership of the mineral resources in situ belongs exclusively to the Federal Union (and transferred to the concessionaire after extraction), they cannot be leased as can occur in other regulatory regimes where the property of the land determines the ownership of the hydrocarbons and this ownership may be transferred through a lease. However, the transfer of rights and obligations that arise from the Brazilian concession regime may be performed through a concession agreement by means of a farmout agreement (where one company transfers its participating interest rights to another company), the operational procedure of which is set out by the Petroleum Law (see Question 10).
Concessions are awarded through bidding rounds held by the ANP. The first bid round was promoted by the ANP in 1999, and since then ten bid rounds (the last one took place in December 2008) have contributed significantly to the rapid growth of the oil and gas industry in Brazil.
Requirements must be met by the potential concessionaires for acquisition of concession interests in Brazil, whether by participation in the bid rounds or by means of assignment through farmout agreements. The tender protocols for the bid rounds have always defined the qualification requirements that the bidders must comply with in order to be able to participate. The procedure involves a set of documents that must be presented to ANP, which are listed and described in the tender protocols.
The ANP requires that companies must qualify in the following areas:
Legal, which requires concessionaires:
to be incorporated under Brazilian law;
present information regarding their corporate chain and other relevant legal and corporate information to the ANP.
Financial, which has the purpose of providing the ANP with the necessary information about the concessionaires’ financial standing and minimum net worth. Financial statements must be presented to the ANP in addition to bank references and other information.
Technical, which is the most relevant. Concessionaires may choose to qualify themselves as operators (or non-operators). There are three types of operators:
A, which are qualified to operate in any block;
B, which are qualified to operate in blocks located in shallow waters and onshore;
C, which are qualified to operate in blocks located onshore.
Companies that request qualification as an operator must submit a technical summary with all required information of their technical capability, as well as information on areas where current exploration and/or production activities are carried out globally by these companies. The criteria for bids normally used by the ANP are the:
local content percentage.
Under the concession regime, the federal government, certain states and certain municipalities are remunerated through government takes, which are:
Royalties. Royalties are financial compensation due mainly to the states and municipalities by the concessionaires. Each concessionaire must pay production royalties to the National Treasury, in reais (BRL), by the last business day of the month immediately following the month of production of the relevant oil and gas. Production royalties are due in percentages calculated on the actual monthly production volumes from both onshore and offshore blocks, which may vary from a minimum of 5% to a maximum 10%, according to the applicable concession agreement. The obligation to pay and distribute amounts of production royalties equal to 5% of production volumes is set out in Federal Law No. 7,990, enacted on 28 December 1989, and is further regulated by Federal Decree No. 1, enacted on 11 January 1991. The obligation to pay and distribute amounts of production royalties exceeding 5% of production volumes is set out in the Petroleum Law, and is further regulated by Federal Decree No. 2,705/98.
Special participations. Financial compensation in the form of special participations was established by Section 50 of the Petroleum Law, as regulated by Federal Decree No. 2,705/98, and is considered to be a form of extraordinary financial compensation payable to municipalities, states and the federal government by the concessionaires when a particular concession area has high production volume or is highly profitable. Special participations have progressive rates ranging between 10% and 40% of the concessionaire’s net revenue depending on the location of the production, the number of years of production and the volume of audited production.
Signing bonuses. Signing bonuses are the bid amount offered by the winning bidder during the applicable ANP auction in order to acquire the right to perform E&P activities in the applicable onshore or offshore block and to execute the respective concession agreement. The tender document sets out the minimum amount of the signing fee for the auction of each block that is payable to the federal government, which then allocates a portion to the ANP. The signing fee is payable on execution of the concession agreement (Petroleum Law).
The federal government must collect and manage the government revenue and distribute a part of them to certain states and municipalities in accordance with the Petroleum Law (section 45(2)) and specific regulations, such as the Federal Decree No. 2,705/98.
Under the PSA regime, the federal government is remunerated through its portion of the profit oil (see Question 6, PSA), in addition to its share of royalties and signature bonuses.
Royalties due must correspond to 15% of the production volume (Article 42(1), PSA Law). Signing bonuses (Article 42( 2), PSA Law) are determined by the Federal Union according to the PSA that is executed with the concessionaires.
In addition, the recent enacted Federal Law No. 12,734, as of 30th November 2012, sets out new rules for the distribution of government take among the Federal Union, States and Municipalities which will apply to the concession and PSA regimes. However, the constitutionality of said law was challenged by the certain States affected by the new distribution, and the Federal Supreme Court granted an injunction suspending the effects of Federal Law No. 12,734 until its ultimate decision.
Transfer of rights
The procedure for assignment of rights and obligations under a concession agreement is based on Section 29 of the Petroleum Law. Direct or indirect transfer rights and obligations under concession agreements are permitted, provided that (section 29, Petroleum Law):
ANP's prior and express authorisation is obtained.
The contract's purpose and conditions are preserved.
The new concessionaire complies with the technical, financial and legal requirements established by ANP.
The requirements of the PSA Law are similar to those of the Petroleum Law (see above, Concession regime). However, under the PSA Law:
Consortium members have the right of first refusal in proportion to their interest in the consortium (section 31( III), PSA Law).
Petrobras is prohibited from assigning its mandatory 30% operatorship interest in the PSAs and can only assign participating interest above this threshold (section 10( c), PSA Law).
Assignment of rights and obligations under a PSA must have prior and express authority from the MME (section 31, PSA Law).
Transportation by pipeline
ANP's Technical Regulation of Pipelines for the Transport of Petroleum, its by-products and Natural Gas (Regulamento Técnico ANP n° 2/2011 - Regulamento Técnico de Dutos Terrestres para Movimentação de Petróleo, Derivados e Gás Natural) (RTDT) establishes the mandatory requirements and minimum operational security standards for pipelines in order to protect the general public, the facilities and the environment.
The concessionaire or the company authorised by ANP is responsible for the operational security of the pipeline.
Any interested party can use oil transportation pipelines and offshore terminals after paying the appropriate remuneration to their owners (section 58, Petroleum Law). Third party access is regulated by ANP Ordinance No. 35/2012, which establishes that the transporter will provide access to any interested third parties to its available capacity, operational capacity and idle capacity. However, natural gas pipelines and pipelines of less than 15 kilometres length are not subject to this ordinance, the latter is governed by ANP Ordinance No. 255/2000.
Third party access to natural gas pipelines is covered under Federal Law No. 11,909/2009 (Gas Law) and the Federal Decree No. 7,382/2010. Third parties may have open access to gas transportation pipelines that are under the concession system, but do not have open access to transfer or gas production flow pipelines (section 45, Gas Law). Currently, this issue is regulated by ANP’s Ordinance 27/2005, which was enacted before the Gas Law. ANP has not yet enacted new rules on the regulation of open access to gas transportation pipelines that are established in the Gas Law.
Health, safety and the environment
Health and safety
Companies operating oil-related facilities operate under the basic principles for employees' health and safety procedures of the Labour Code (Consolidação das Leis do Trabalho) (CLT) and various health and safety statutes (for example, Ministry of Labour Regulatory Rule No. 5, which establishes the Internal Commission for Accident Prevention (Comissão Interna de Prevenção de Acidentes)). The Regional Office of the Labour Department closely audits workers' health and safety protection and employers must create protection programmes. Protection programmes aim to create standard practices that must be followed by employees to preserve their integrity and health. The programmes anticipate, evaluate and control environmental and other risks at different workplaces, while simultaneously contributing to the preservation of the environment and natural resources.
ANP also sets out rules regarding safety procedures that concessionaires must follow, such as ANP’s Ordinance No. 43/2007, which establishes Operational Safety of the Management System of Marine Facilities of Drilling and Production of Petroleum and Natural Gas (Sistema de Gerenciamento da Segurança Operacional das Instalações Marítimas de Perfuração e de Produção de Petróleo e Gás Natural) (SGSO) (see Extraction).
On offshore platforms, it is mandatory to comply with ANP's SGSO, which was created by ANP's Resolution No. 43/2007 and its Technical Regulation of Operational Safety for Marine E&P Facilities.
Submit the required safety procedure documentation to ANP and are responsible for what is contained in that documentation (SGSO).
Determine that the facility operator has a management system that complies with the SGSO (ANP Resolution No. 43/2007).
The criteria and procedures for operational safety on onshore facilities in order to protect people and the environment are set out by ANP (through Resolution No. 02/2010) in Technical Regulation of the Management System of Structural Integrity of the Onshore Facilities of Petroleum and Natural Gas Production (Regulamento Técnico do Sistema de Gerenciamento da Integridade Estrutural das Instalações Terrestres de Produção de Petróleo e Gás Natural) (RTSGI).
ANP’s RTDT, which was created by ANP’s Ordinance No. 6/2011, sets out the procedures for operational safety on onshore pipelines.
The facilities’ operator must have a management system in accordance with the RTDT and submit documents related to the pipeline’s project to ANP. ANP is responsible for analysing those documents and auditing the facilities. Offshore pipelines are considered marine facilities and, therefore, must comply with the SGSO, which is also the management system for the offshore platforms (see above).
Flares and vents
Flares and vents are regulated by the Technical Regulation for Flaring and Losses of Petroleum and Natural Gas (Regulamento Técnico para Queimas e Perdas de Petróleo e Gás Natural) (Technical Regulation), approved by ANP Ordinance No. 249/2000.
Prior notice of the amount of flares and losses must be included by the concessionaire in the Annual Production Plan that must be submitted to and approved by ANP (item 2.3, Technical Regulation).
Annual production plans must set out the:
Procedures and motives for flaring and losses of gas.
Limits for authorised flares and flares liable to payment of royalties.
Conditions and parameters for control of flares.
Environmental impact assessments (EIAs)
EIAs are required by law and regulated by the National Environment Council (Conselho Nacional do Meio Ambiente) (CONAMA).
Projects that may be considered effectively or potentially pollutant must obtain environmental licences for the following activities, in compliance with the concessionaire’s previous environmental impact assessment (EIA), duly approved (section 2, CONAMA Resolution No. 237/97, section 3, CONAMA Resolution No. 1/1986 and section 225, Constitution):
As a rule, state environmental agencies grant environmental licences. However, the IBAMA grants licences for activities that have a national or regional impact, including offshore E&P projects.
EIAs must be performed by accredited technicians following the minimum requirements established by CONAMA in accordance with section 5 of Resolution No. 1/1986. The state environmental authority, IBAMA or the municipal authority may make additional requirements, which must also be complied with.
EIAs must include the following (section 6, CONAMA Resolution No. 1/1986):
Environmental diagnosis of the project area including a complete description and analysis of the natural resources in the area.
Analysis of the environmental impacts of the project and its alternatives, identifying the magnitude of the impacts and its negative and positive aspects.
Details of the mitigation measures related to negative impacts.
A supervision and monitoring programme for positive and negative impacts, indicating the parameters and factors to be considered.
Depending on the particular project, the state environmental authority, IBAMA or the municipal authority, as relevant, may require additional activities to be performed.
As the EIA depends on the specific characteristics of each project, the time for completion of each assessment varies.
The environmental licensing process varies according to the specific characteristics of the activity. Environmental licensing generally includes three licences (CONAMA Resolution No. 237/1997):
A preliminary licence (licença prévia) (LP).
An installation licence (licença de instalação) (LI).
An operating licence (licença de funcionamento) (LO).
Oil and gas exploitation is subject to a specific licensing process that involves four successive steps:
A preliminary drilling licence (LPper).
A preliminary production licence for research (LPpro).
An LO granted by the respective state environmental authority or by IBAMA (CONAMA Resolution No. 23/1994) (see below).
Federal environmental licensing
Federal environmental licences are issued by IBAMA. They are applicable to the following:
Projects that have a national and regional impact.
Activities in indigenous lands, in territorial waters, on the continental shelf and in the exclusive economic zones. Drilling activities in territorial waters can only be initiated after an LO is obtained from IBAMA (Ministry of Environment (MMA) Ordinance No. 422/2011).
For onshore blocks, as a general rule, the environmental agency of the state where that block is located issues the required permits. Federal licences are not required unless the project is located in specific areas (see bullet point two above).
Individual emergency plan
An Individual Emergency Plan for Oil pollution incidents originated in pipelines, platforms and their support facilities (plan) (section 1, CONAMA Resolution No. 398/2008) must be prepared by concessionaires. The plan:
Sets out the actions to be taken in incidents of pollution.
Describes the type of equipment to be used for mitigating the environmental impact of the pollution.
The plan must be submitted to the competent environmental authority for approval together with the application for the environmental licence and is approved when the LO, LPper and the LPpro as relevant are issued (section 3, CONAMA Resolution No. 398/2008).
The decommissioning obligations and liabilities are set out in contractual provisions included in the concession agreement (clauses 13, 18 and 21), in addition to the technical requirements for abandonment procedures (ANP’s Ordinance No. 25/2002) and surrender of acreage (ANP Resolution No. 13/2011).
When a concessionaire relinquishes or abandons blocks within a concession, clauses 13, 18 and 21 impose certain requirements, for example that the concessionaires:
Pay all costs.
Issue a guarantee regarding abandonment operations (garantia de desativação e abandono), which covers activities that constitute definitive well abandonment.
The concession agreement also provides that the concessionaire’s obligation to perform all of the operations necessary to inactivate and abandon a given field, at its own cost and risk, are not waived when the inactivation and abandonment guarantee is presented.
In addition, concessionaires must comply with applicable law (for example, environmental law) and international best practices (international best practices will be inferred as those provided by international regulation, such as the United Nations Convention for the Continental Shelf (Geneva, 1958) and the United Nations Convention on the Law of the Sea 1982 (UNCLOS)). Accordingly, the relinquishment set out in the concession agreement will not exempt concessionaires from fulfilling all outstanding obligations, or from any liabilities, irregularities or infractions verified later.
When the block is excluded from the concession area or when the concession agreement is terminated, the assets required for operations to continue or that are deemed of public interest are reverted to the Federal Union, and to the administration of the ANP, provided that the concession area comprises of only one block. The non-reverted assets will be removed and disposed of by the concessionaires, at their own cost and risk.
Sale and trade
There is no restriction on the sale and trade of oil. However, as Petrobras holds control over the refineries, either directly or indirectly, it is almost the sole acquirer in the domestic market. Consequently, most producers import their production.
Purchase and sale
Purchase and sale of gas occurs through agreements negotiated between the parties. These agreements must be registered with ANP. Any company or consortium of companies incorporated in Brazil can request an authorisation for trade in gas from ANP (section 4, ANP Ordinance No. 52/2011). After receiving the authorisation, the company is registered as a seller agent and can execute gas purchase and sale agreements, which must be registered with ANP.
Import and export
Any company or consortium of companies incorporated in Brazil can apply for an authorisation from the MME to import or export gas (section 36, Federal Law No. 11,909/2009 (Gas Law)). The exercise of these activities must comply with guidelines established by the CNPE.
The rules for import and export of oil are similar. Companies or consortiums must be incorporated in Brazil and request an authorisation for their incorporation from the ANP. The conditions to receive authorisation to import and export oil are contained in ANP Ordinances Nos. 147/1998 and 7/1999 respectively, such as the requirement to register with the ANP and submit all information related to the export of oil and gas (section 3, Ordinance No. 147/1998 and section 3, Ordinance No. 7/1999).
For export of oil, companies or consortiums must also:
Comply with the rules for foreign trade.
Take into account the priorities of the national energy policy.
Not compromise national energy requirements.
Distribution and commercialisation of gas to residential, commercial and industrial consumers is limited to the local distributor company (LDC) of each state (section 177, Constitution).
However, there are two exceptions for the distribution of gas to industrial consumers (section 2, Gas Law):
Self-producer, which is the gas E&P concessionaire that intends to use its production as raw material or fuel in its own facilities.
Self-importer, which is the authorised agent for the import of gas that also uses the imported gas as a raw material or fuel in its facilities.
Complex tax system
The tax system is highly regulated and complex, the main issues that arise include:
The quantity of taxes at federal, state and municipal level. For transactions involving more than one state, for example, different rules apply, therefore increasing the complexity.
Customs clearance requires extensive paperwork, which can delay the importation or exportation process.
In addition, Brazil is not an OECD member country, which means that tax treatment on cross-border transactions may differ from international standards.
The main issue for E&P activities are the difficulties faced by industry players when trying to benefit from the Repetro regime (Repetro) in their projects.
Repetro is available for a number of special customs treatments or regimes that aim to reduce the tax burden on investments for research and exploration of oil and gas fields offshore. Repetro allows for the total suspension of federal taxes on the importation of equipment and materials for temporary use in oil and gas research and exploration activities.
In the past, the competent authority (Brazilian Federal Revenue Service) used to take from two to three weeks to analyse a company's Repetro eligibility application. Recently, it has taken about six months to analyse some applications and many applications have been denied. The current delays are mainly due to a series of formal requirements and new measures recently implemented by the tax authorities.
Indirect tax system
Brazil has a very complex indirect tax system, which directly impacts capital and operating expenditure required to put these capital intensive projects into operation. Recovery of indirect tax credits is always an issue when concessionaires are involved, especially those focused on exports.
There are no clear rules for depreciation and depletion mechanisms in relation to oil and gas assets in tax legislation. Consequently, depreciation and depletion procedures vary across the industry depending on each player's interpretation of the tax legislation.
Import of oil and gas is subject to the following duties:
Import duty (Imposto de Importação) (II) . II rates vary according to the tariff classification code of the goods (Common External Tariff for non- Mercosur members (External Tariff Code ( TEC) )). For oil (NCM 2709.00.10) and gas (NCM 2711.11.00) current applicable rates are 0%.
Federal excise tax (Imposto sobre Produtos Industrializados) (IPI) . IPI rates vary according to the product to be imported and its tax classification number. Currently, oil and gas are non-taxable items.
PIS-Import and COFINS-Import. Rates vary according to the product to be imported. Generally, oil and gas are subject to the regular applicable PIS (1.65%) and COFINS (7.6%).
State value-added tax (Imposto sobre a Circulação de Mercadorias e Prestação de Serviços de Transporte Interestadual e Intermunicipal e de Comunicação ) (ICMS). Rates vary depending on the state to where goods are destined.
Importers of oil may benefit from the Repex regime. Repex allows for oil importation with total suspension of federal import duties provided that certain conditions are met.
Export of oil and gas is generally tax exempt, except for Brazilian corporate taxes.
Enforcement of regulation
Penalties that apply to activities related to concession agreements for exploration, development and production of oil and gas are regulated by ANP Ordinance No. 234/2003, which includes a procedure for administrative penalties, without prejudice to the applicable civil and criminal liabilities.
Violations of legal and contractual provisions for activities under these concession agreements are subject to the following:
Total or partial temporary suspension of activities.
Temporary suspension of the right to participate in future biddings to obtain new concessions and to enter into agreements with ANP.
A court order prohibiting the activity.
Termination of the concession agreement.
All regulators' decisions are subject to appeal to higher-level administrative entities. Appeals must be made within ten days from the date the decision was issued (section 18(1) , Federal Decree No. 2, 953/99). The decision may then be affirmed, amended or reversed by the relevant administrative entity. In addition, a judicial court can review any administrative decisions at any time, in which case the judicial decision will always prevail.
The government is currently drafting the PSA model (see Question 1).
The regulatory authorities
National Energy Policy Council (Conselho Nacional de Política Energética) (CNPE)
Address. Esplanada dos Ministérios, Block U 5th floor, Room 539, Zip Code: 70.065-900, Brasília, DF, Brazil
T +61 2032 5555
W www.mme.gov.br/mme/menu/conselhos_comite/cnpe.html (Portuguese language)
Main responsibilities. CNPE is an advisory entity to the Presidency. Its main duties include:
- Implementing energy policies and guidelines designed to promote Brazil's energy resources.
- Environmental protection.
- Security of supply of oil products throughout the national territory.
- Expansion of Brazil's competitiveness in the international market.
In addition, CNPE must:
- Ensure supply of energy to all areas in Brazil.
- Periodically review the energy matrix applied to the various regions, taking into account conventional and alternative sources and technologies available.
- Establish guidelines for special programmes for the import and export of domestic consumption of oil, its derivatives and gas.
Ministry of Mines and Energy (Ministério de Minas e Energia) (MME)
Main responsibilities. MME is responsible for defining guidelines, and planning and monitoring policies issued by CNPE.
National Petroleum Agency (Agência Nacional de Petróleo, Gás Natural e Biocombustíveis) ANP
Address. Av Rio Branco 65/22nd floor, Zip Code: 20.090-004, Rio de Janeiro, RJ, Brazil
T +55 0800 970 0267/+55 21 2112 8100
F +55 21 2112 8129/8139/8149
W www.anp.gov.br (Portuguese language)
Main responsibilities. ANP is a regulatory agency and a federal administration entity. Its main purpose is to:
- Implement the national oil and gas policy set out by CNPE and MME.
- Regulate and inspect the oil and gas industry's activities.
Brazilian Institute of the Environment and Renewable Natural Resources (Instituto Brasileiro do Meio Ambiente e dos Recursos Naturais) (IBAMA)
Address. Setor de Clubes Esportivos Norte (SCEN), Trecho 02 Ed. Sede, PO Box No 09566, Zip Code: 70818-900, Brasília, DF, Brazil
T +55 61 3316 1212
W www.ibama.gov.br (Portuguese language)
Main responsibilities. IBAMA implements environmental national policies and issues environmental licences for large oil and gas projects, especially those located on the continental shelf.
National Waterway Transportation Agency (Agência Nacional de Transportes Aquaviários) (ANTAQ)
Main responsibilities. ANTAQ is the federal regulatory agency linked to the Transportation Ministry and the Ports Secretariat, which is responsible for waterway transportation in Brazil. ANTAQ's role includes formal authorisation for chartering foreign vessels to be used in coastal, port and maritime support navigations.
Directory of Ports and Coasts (Diretoria de Portos e Costas) (DPC)
Main responsibilities. DPC is responsible for general control and supervision activities, for example, carrying-out technical expert examinations to verify the condition of vessels' equipment, crew qualifications and documentation required by applicable Brazilian legislation and international conventions.
Description. This is the federal executive’s website. It provides official information related to the president’s activities and other things of national interest, for example compilation of the federal legislation in the Portuguese language.