Brazil

Giovani Loss

Mattos Filho, Veiga Filho, Marrey Jr e Quiroga Advogados

  1. 1.What is the legislation applicable to oil and gas activities in your country? Is it federal or state legislation, or both?

    Both. The Brazilian oil and gas sector is regulated by general provisions of the Brazilian Constitution, as well as by a number of different federal and state laws and regulations.

    Pursuant to articles 20 and 176 of the Brazilian constitution, oil and gas reserves located within the Brazilian territory (including continental shelf, territorial sea and exclusive economic areas) are considered assets of the Federal Union.

    Until 1995, Brazilian activities regarding the oil and gas sector were by monopoly of the Federal Union and were carried out basically by Petróleo Brasileiro SA (Petrobras), a state-owned company. However, Constitutional Amendment No. 09/1995 loosened this monopoly amending article 177, thereby allowing that the Brazilian government could contract with state-owned and private companies over the following activities:

    • prospection and exploitation of deposits of oil, natural gas and other hydrocarbons;

    • oil refining;

    • importation and exportation of products or basic by-products resulting from the activities of prospection and exploitation of oil, natural gas and other hydrocarbons, as well as oil refining activities; and

    • maritime transportation of crude oil or basic oil by-products produced in Brazil, as well as pipeline transportation of crude oil, oil by-products and natural gas from any source.

    In Brazil, the hiring of a state-owned or private company for the execution of these activities is regulated by Federal Laws Nos. 9,478/1997 (the Petroleum Law) and 11,909/2009 (the Gas Law).

    The Gas Law came in later to specifically regulate gas activities in Brazil, clarifying the legal background for private investors, particularly to projects related to gas transportation, gas storage and LNG facilities.

    Regarding oil and gas exploration and production, under the concession regime regulated by the Petroleum Law, companies holding concession rights are entitled to the property of their production. Since the opening of the oil market, ANP has conducted 10 bidding rounds to grant onshore and offshore blocks to concessionaries.

    In addition to the concession regime, in December 2010, the Brazilian congress approved and the president sanctioned three separate bills already in force that deal with the exploration and production of the pre-salt reservoirs. These laws promote:

    • the introduction of a “production sharing contract regime” to be applied for future licensing of the pre-salt area and certain other areas to be deemed strategic by the government and the implementation of an oil fund to support social and economic development in Brazil – Federal Law No. 12,351/2010 (the Pre-Salt Law);

    • the creation of a new 100 per cent state-owned company, named Empresa Brasileira de Administração de Petróleo e Gás Natural SA – Pré-sal Petróleo SA (the PPSA), that will represent the Federal Government in the consortium to be awarded with the right to explore and develop a block within the pre-salt area – Federal Law No. 12,304/2010; and

    • the capitalisation of Petrobras – Federal Law No. 12.276/2010.

    These laws may have diverse effects in the oil and natural gas sector, since Petrobras will be the sole operator with a minimum of 30 per cent participating interest in the consortium to be awarded with the production sharing contract and a new 100 per cent state-owned company – PPSA – also being part of said consortium.

    PPSA shall not perform upstream oil and gas activities and shall not engage in investments, but has very important roles; among them:

    • management, audit and supervision of oil and gas activities performed under the PSC regime;

    • management and control of costs arising from the production sharing contracts;

    • participation in the operating committees, electing half of its members, including its chair, having voting rights and veto power over operations; and

    • negotiation of unitisation involving unlicensed acreage.

    On the other hand, natural gas distribution is a prerogative of the states, as per article 25, section 2 of the Brazilian Constitution. Therefore, each state may enact its own set of rules applicable to the natural gas distribution and can sign its own concession agreement related to local piped natural gas services.

    Furthermore, there are specific federal and state tax and environmental laws that may apply depending on the activity to be performed.

  2. 2.Are oil and gas activities carried out by the state or a state-owned agency or national oil company (NOC)?

    Prior to 1995, the exploration and exploitation of oil and gas reserves and the transportation and distribution of natural gas were government monopolies carried out by Petrobras (the Brazilian NOC), elected by law as the representative of the federal government, and entities originally controlled by the states, such as Comgás in the state of São Paulo.

    The opening of the gas distribution sector to private investors with the enactment of Constitutional Amendment No. 05/1995, which granted to the states the right to exploit the natural gas distribution services by means of concessions to state-owned or private companies, leaded to the privatisation of the local gas distribution companies.

    In addition, the enactment of Constitutional Amendment No. 09/1995 also loosened the federal government’s monopoly over activities related to oil and gas – which were carried out basically by Petrobras – allowing the federal government to contract the performance of such activities from state-owned or private companies.

    After the opening process, Petrobras was subject to competition of private companies. However, Petrobras maintained a number of advantages in its domestic operations, despite the nominal entry of new competitors. Petrobras retained its most promising fields, while handing back those that had not yet been explored or developed, and also retained ownership of most of the pipeline built in Brazil, besides acquiring interest in most of the local natural gas distribution companies.

    By virtue of the fact that it had been the only operator for so many years in Brazil, Petrobras had an advantage not only in knowing where to look for reserves but in knowing how to navigate the country’s regulatory process. Though many new competitors participated in auctions for new blocks, these same competitors often approached Petrobras to partner with them in the exploration and production of those sites, especially those located at depths that made exploration and production difficult.

    Under the PSC regime, established by the Pre-Salt Law, Petrobras will be the sole operator with a 30 per cent participating interest in the consortium to be awarded with the production sharing contract. In addition, Petrobras may participate in the PSC tender to increase its participation in a certain asset. Furthermore, CNPE may propose to the president possibilities in which Petrobras shall be contracted directly by the federal government. Therefore, Petrobras will be able to act solely, if directly contracted by the federal government, if the CNPE considers it essential to the preservation of the national interest.

    A new 100 per cent state-owned company will also be part of all the consortiums to be awarded with the production sharing contract, as representative of the Federal Union and responsible for commercialising the government’s portion of the oil and with the prerogatives described in question 1 above.

    Activities regarding gas transportation, gas storage and LNG facilities are regulated by the Gas Law and can be carried out by any company incorporated under Brazilian law with head offices and management in Brazil, whether state or privately owned, and in accordance with the applicable rules. However, it is important to state that Petrobras currently holds the ownership of the major gas pipelines and LNG facilities.

  3. 3.Is oil and gas a regulated business that can only be carried out by companies that are licensed or that receive government concessions to operate?

    Yes. In 1995, the Brazilian Constitution was amended (Amendments No. 05/1995 and 09/1995 referred above) so as to allow oil and gas activities to be carried out by private companies, through government contract, either through concession agreements or production sharing contracts.

    The hiring of state-owned or private companies for the execution of these activities is regulated by:

    • the Petroleum Law which, among other things, set forth the national energy policy for oil activities;

    • the Pre-Salt Law, which set forth the regulatory framework for the pre-salt area and other areas to be deemed strategic by the government;

    • the Gas Law, which regulates projects related to gas transportation, gas storage and LNG facilities; and

    • the relevant state’s laws and regulations related to gas distribution activities.

    The Petroleum law set the concession regime, which is the universal regime in Brazil for exploration and production of oil and gas. In addition, the Pre-Salt Law established a production sharing contract regime to be applied for future licensing of the areas within its scope. Therefore, the right to explore and produce oil and natural gas can be granted by means of concession agreements or production sharing contracts. Nevertheless, it is important to note that Petrobras may be direct contracted by the government.

    According to the Gas Law, depending on the activity to be performed contemplated therein, concession or authorisation regime may apply.

    To become a concessionaire or contractor or to be authorised to perform such activities, the individual or each member of the consortium shall incorporate a company under Brazilian law, with head offices and management in Brazil, apart from all technical, legal and financial requirements established by the ANP or, in the case of natural gas distribution, the relevant state’s regulatory agencies.

    It is important to state that, besides the regulatory framework, environmental regulations are applicable and some licences are required for the performance of said activities. Government environmental agencies are responsible of issuing such licences and federal or state rules may apply depending on the activity to be carried out.

  4. 4.What are the regulatory agencies charged with regulating oil and gas activities?

    The regulatory agencies in charge of regulating oil and gas activities are the following:

    • the National Energy Policy Council (CNPE) with 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; and

    • the Brazilian National Oil, Natural Gas and Biofuels Agency (ANP) is the national regulator of the oil, gas and biofuels industry. ANP is generally in charge of regulating, contracting and supervising economical activities related to the oil, natural gas and biofuels industry, establishing technical standards for various connected activities.

    Furthermore, according to article 25, section 2 of the Brazilian Constitution, the states shall develop the local service of piped gas, directly or through its state regulatory agencies. Therefore, the state regulatory agencies shall be responsible for the regulation and distribution of piped gas as per delegation of the respective state.

  5. 5.Are all hydrocarbons in your country deemed to be originally owned by the state? If so, when does ownership transfer to the extractor or buyer of the hydrocarbon?

    Yes. Pursuant to articles 20 and 176 of the Brazilian Constitution and article 3 of the Petroleum Law, oil, natural gas reserves and hydrocarbons located within the Brazilian territory, including continental shelf, territorial sea and exclusive economic areas, are considered assets of the Federal Union. In any event, it is important to note that gas stored by an authorised agent in natural reserves is not subject to these dispositions.

    The ownership of the oil and natural gas produced is transferred to the concessionaires at the “measurement point”; where the volumetric measurement of the oil and gas produced is made according to ANP’s regulations. For the blocks within the scope of the Pre-Salt Law, the ownership shall be transferred at the “production share point”; where the production shall be shared between the government and contractors.

  6. 6.How are oil and gas exploration rights or concessions granted? Is there more than one method for granting such rights (ie, concession and joint exploration agreements) or co-existing regimes applicable to different exploration or exploitation areas?

    Prior to the approval of the Pre-Salt Law, there was only one regime applicable for the granting of exploration and production rights in Brazil – the concession regime. However, at the end of 2010, with the enactment of the Pre-Salt Law, the PSC regime was introduced to be applied in the pre-salt area and certain 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, the concession of oil and gas blocks in Brazil is awarded by means of bidding rounds carried out by ANP, as set forth under article 8 and article 23 of the Petroleum Law. Therefore, ANP has the authority to define which oil and gas blocks shall be tendered and to release general terms and conditions comprised in the tender documents.

    Such tender documents shall establish all technical, financial and legal documents and requirements that the concessionaire may present or fulfill, 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 the company which will join the consortium, but will not be able to conduct the performance of the operations; 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.

    Bidding offers may be submitted by companies 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:

    • signature bonus;

    • minimum exploration programme; and

    • 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.

    It is important to note that, unlike the concession model, the signature bonus under the PSC regime is not a criterion for the evaluation of the bidding offers but a fixed amount to be defined by the Ministry of Mines and Energy (the MME) in each concrete case. 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 PSC regime.

    On the other hand, under the PSC regime, the oil company produces oil for the government in exchange for a proportion of the oil produced. The initial production, generally known as “cost oil”, is sold and used to reimburse the investor for exploration costs. The remaining oil, or ‘profit oil’, is allocated between the state and the investor.

    The use of a signature bonus in the PSC system has the objective of anticipating oil production revenues from the pre-salt fields and is a fixed amount established in the final tender protocol, which the contractor must pay to the government upon signature of the production sharing contract. Through this system, the government is able to obtain funds that otherwise it would only have access to upon the start-up of production of the prospect, four or five years later, paid out as royalties. Signature bonus might be defined by CNPE before the auction.

    Under the PSC regime, Petrobras will be the sole operator with a minimum of 30 per cent participating interest in the consortium to be awarded with the production sharing contract. Additionally, private parties and even Petrobras are entitled to bid for the remaining participating interest in the PSC consortium.

    The winner of the bid, pursuant to article 18 of the Pre-Salt Law, will be the company that proposes the highest percentage of interest in the remaining profit oil to the government, which will be represented in the consortium by a 100% state-owned company created for this purpose – PPSA.

    Therefore, under this bidding regime, Petrobras and the winner 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 of cost oil (oil and natural gas equivalent to exploration and production costs) reimbursement, subject to payment of a “government take” (please see question 13).

  7. 7.Is there a public bidding or similar process? If so, is it open to foreign investors?

    Yes. As described in question 6 above, there is a public bidding process conducted by the ANP, pursuant to articles 8 and 23 of the Petroleum Law and articles 11 and 18 of the Pre-Salt Law, and it is open to foreign investors, under the condition that they incorporate a company under Brazilian law with head offices and management in Brazil or acquires interest in a Brazilian company and complies with all technical, legal and financial requirements established by ANP. The direct or indirect acquisition of oil-related interest by foreign and local companies is subject to the approval of the ANP.

  8. 8.Are there any minimum local content requirements related to international bidding processes?

    For the acquisition of goods and services, the companies or consortia that hold the concession rights are subject to local content provisions.

    Companies are obliged to acquire a minimum local content percentage of goods and services in the exploration phase and in the development stage, provided that the national suppliers offer conditions of price, term and quality equivalent to the conditions offered by the international suppliers. This minimum percentage is determined in the bidding round conducted by ANP. In the tender protocol, ANP sets minimum local content percentages and the bidders, in the concession regime, may propose higher percentages of local content that are considered in the evaluation of the offers to determine the winner bid.

    In general terms, the local content is measured by the ratio between the amount of national goods and services and the total amount of good and services acquired during the execution of the exploratory or development activities.

    It is also important to state that, as it is possible to not find competitive national offers, the contract sets the possibility of the company to apply before ANP a waiver request in some local content items prior to the acquisition of the service and/or goods from an international supplier, by which the company may be exempted from the respective obligation.

  9. 9.Are there any restrictions on foreign participation in such rights or concessions or in companies holding any such rights?

    There is no restriction on direct or indirect foreign participation in exploration and production rights, provided that the foreign investor incorporates a company under the Brazilian law with head office and management in Brazil and complies with all technical, legal and financial requirements established by ANP. No preference rule is established.

    However, under the PSC regime, in the consortium to be awarded with the production sharing contract, Petrobras will be the sole operator with a minimum of 30 per cent participating interest and the government, represented by a 100 per cent state-owned company created for this purpose, will be assured with a participating interest subject to a minimum percentage defined by the MME. In addition, Petrobras may participate in the PSC tender to increase its participation in a certain asset. Furthermore, CNPE may propose to the president possibilities in which Petrobras shall be contracted directly by the federal government.

  10. 10.Are there any restrictions on the participation in such rights or concessions by local national oil companies?

    There are no restrictions on the participation of local oil companies, provided that they comply with all technical, legal and financial requirements established by ANP.

    It is important to note, however, that there are in force two new forms of contracting besides the concession regime. Under the direct negotiation of the PSC regime, Petrobras will join the government – represented by a 100 per cent state-owned company created for this purpose – in a PSC consortium. Petrobras 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 cost oil reimbursement, subject to payment of government take.

    In the bidding PSC regime, Petrobras will be the sole operator and will be assured a minimum 30 per cent participating interest in the consortium ultimately awarded with the PSC contract. The government will be assured a minimum participating interest in the PSC consortium to be defined by the CNPE. Private parties, local or international oil companies, are entitled to bid for the remaining participating interest in the PSC consortium.

  11. 11.Are companies or consortia that are awarded exploration rights given priority to operate and exploit the fields? How is priority structured and documented?

    Yes. Once the companies or consortia are awarded with exploration and production rights to operate and explore certain areas, the results of the bidding award are published on the ANP website and in the Official Gazette. ANP invites such companies or consortia to sign the concession agreement or the production sharing contract. If the first company is not able to sign the agreement, the following company – the one that made the second-best offer – will be invited.

    It is important to note that the agreements are basically divided into two phases: exploration and production. In case of declaration of a commercial discovery in the exploration phase, the company or consortium automatically enters into the production phase, which also encompasses the development stage. In general terms, the same company or consortium that performs the exploration activities is entitled to produce the hydrocarbons.

    Accordingly, the concession agreement and production sharing contract have a bidding effect between the concessionaire or contractor and the granting authority and the concession or PSC cannot be arbitrarily terminated by the government, comprising not only the exploration phase, but also the development and production phases.

  12. 12.Who has title to assets imported to develop and produce petroleum hydrocarbons?

    In general, Brazilian companies acquire assets to be used in petroleum activities (equipment and spare parts) through a special system of temporary admission of goods – REPETRO regime.

    Under the REPETRO regime, taxes generally incurred on imported equipment are suspended upon the equipment’s entry into Brazilian territory. The regime operates basically through:

    • a special type of temporary admission regime; and

    • a symbolic exportation system, by which Brazilian companies are allowed to acquire equipment and spare parts to be used internally, as if such assets had been exported and subsequently imported in the special regime for the temporary admission described above.

    Accordingly, the Executive Order No. 844, as of 2008, defines which type of equipment and spare parts may benefit from the REPETRO system.

    In order to enjoy the full benefits of REPETRO, a Brazilian company must fulfill certain requirements such as:

    • the imported equipment being contractually bound to leave Brazil after a definite period of time; and

    • the property remaining with the foreign supplier during its stay in Brazil.

    In any event, it is important to note that on the termination of the concession or production sharing agreement, some goods may be transferred to the federal government’s property according to the rules set by ANP. In general, these are goods that are deductible for purposes of calculating the special participation due to the government and that, at ANP’s sole discretion, are necessary to allow the continuity of the operations; or good that are susceptible to utilisation of public interest.

  13. 13.How are federal, state and local governments recompensed for granting companies rights or concessions to conduct oil and gas exploration and production?

    Federal, state and local governments are recompensed through “government takes”, which are defined as all payments to be made by a concessionaire as a result of the activities of exploration and production of oil and natural gas. Government takes are the following:

    • Signature Bonus: a lump-sum payable in a single installment upon execution of the concession agreement;

    • Royalties: financial compensation to be paid monthly by the concessionaries per each field;

    • Special Participation: extraordinary financial compensation payable in the event that high volumes of oil or natural gas are produced or otherwise a certain field enjoys high profitability; and

    • Payment for area occupation or retention: consists of a yearly sum to be paid for the occupation or retention of oil prospecting areas. ANP sets the amounts to be paid in the bidding documents and concession agreements; nonetheless, article 28 of Decree No. 2,705/98 provides minimum and maximum standards for charging such amounts.

    It is important to note that, unlike the concession model, the signature bonus under the PSC regime is not a criterion for the evaluation of the bidding offers but a fixed amount to be defined by the MME in each concrete case. 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 PSC regime.

    Under the PSC regime, the oil company produces oil for the government in exchange for a proportion of the oil produced. The initial production, generally known as “cost oil”, is sold and used to reimburse the investor for exploration costs. The remaining oil, the “profit oil”, is allocated between the state and the contractor.

    The percentage of royalties under the PSC regime has generated great discussion. The authorities considered raising the amount to 15 per cent as opposed to the current 10 per cent imposed on grantees. After much deliberation, however, the preceding 10 per cent prevailed and shall continue to be used under the PSC regime.

  14. 14.May companies or consortia that hold oil and gas exploration rights compulsorily acquire property or rights of way to carry out exploration or production activities? Are these compulsory acquisitions governed by special judicial or administrative proceedings?

    The companies or consortia that hold oil and gas exploration rights may negotiate the acquisition of the property or the right of way directly with the landowners, following the principles of private law.

    In any event, according to Brazilian Federal Constitution, properties are subject to the public interest. In light of article 8, VIII, of the Petroleum Law, ANP has competence to declare the public use or institution of utility easements in an area to be used in E&P activities. Therefore, in case of a non-successful friendly negotiation between the companies and the landowners, for instance, the companies or consortia that hold oil and gas exploration rights may submit to ANP a request for declaration of the public use of the area or institution of utility easements, such as rights of way, in accordance to ANP’s regulations.

    With the instructions from the proceeding lead by ANP, the President may issue a Decree declaring the public use of the area or instituting an utility easement and authorising the company or consortium to promote with its own resources, friendly or judicially, the total or partial expropriation or the institution of utility easements.

    It is important to state that the landowners are entitled to a percentage of the production in their lands, which may vary from 0.5 per cent to 1 per cent, to be defined by ANP, according to article 52 of the Petroleum Law.

  15. 15.Are natural gas exploration and production activities regulated separately or subject to the same regulation applicable to oil exploration and production? Are there different royalties or other government charges payable by companies that conduct natural gas production activities?

    The natural gas exploration and production are subject to the same rules of the Petroleum Law and Pre-Salt Law that applies to oil activities. No different compensations are due.

    Furthermore, in 2009, Brazil has adopted the Gas Law, which regulates the natural gas activities in Brazil and creates incentives for private investment, particularly in gas pipelines, gas storage and liquefied natural gas (LNG) facilities.

  16. 16.Do foreign ownership restrictions apply to the oil and gas sector in your country?

    No. Foreign ownership restrictions do not apply in Brazil, provided that the companies or each of the members of the consortium, authorised to perform oil and natural gas activities, incorporate a company under Brazilian law, with head offices and management in Brazil, apart from all technical, legal and financial requirements imposed by the ANP or, in the case of natural gas distribution, the state regulatory agencies. Please note that the direct or indirect acquisition of oil-and-gas-related interest by foreign and local companies is subject to the approval of the ANP or the competent state agency.

  17. 17.Are there any minimum domestic participation rules or any labour law rules relating to domestic and foreign workers (eg, permits for foreign workers)?

    All foreign or Brazilian companies are required to hire local personnel as employees, observing the proportion of two-thirds of Brazilian employees and one-third of foreign employees in each branch, main branch or agency. Thus, the proportion shall be also observed regarding the payroll, which means that the remuneration received by the foreign employees shall observe the same proportionality related to the quantity of employees.

    In order to work in Brazil, a foreign employee shall have a working visa and fulfill all the requirements established by the Brazilian National Immigration Council, and the employment agreement shall be duly approved by the Ministry of Labour and Employment.

    Therefore, there are different types of visas that allow foreign employees to work in Brazil:

    • Permanent Visa: granted to a foreign citizen who will take a position of manager in a Brazilian company (officer), and usually is granted for the maximum duration of five years;

    • Temporary Visa: granted to foreigners coming to Brazil for short periods of time with an employment relationship with a Brazilian company.

  18. 18.Does local law mandate a particular entity with authority over the sector?

    The Petroleum Law has created the ANP and the CNPE as regulatory entities in charge of regulating petroleum activities in Brazil, as described in question 4. In addition, it is important to emphasise that such entities are subordinate to the executive branch of the state. Finally, the laws enacted in virtue of the pre-salt areas established a new 100 per cent state-owned company, named Empresa Brasileira de Administração de Petróleo e Gás Natural S.A. – Pré-sal Petróleo SA, which will partner with other companies in the PSC regime.

    Despite those specific entities, other bodies such as environmental and revenue service entities may also have authority over certain subjects.

  19. 19.Are there any limitations on vertical integration in the oil and gas industry?

    No. In general, there are no limitations on vertical integration in the oil and gas industry, however this industry is subject to the Brazilian competition rules.

    From 29 May 2012 onwards, the antitrust rules applicable in Brazil will be those set forth in Law No. 12,529/2011, enacted in December 2011(the new Brazilian Competition Law). CADE will be the sole administrative agency in charge of both merger control and antitrust investigations. CADE will be composed of three divisions: the General Superintendence (Superintendence); the Administrative Tribunal; and the Department of Economic Studies, which will provide economic analysis support. The Superintendence will be responsible for launching and leading the relevant investigations. Upon concluding the investigations, the Superintendence will present the case to the Tribunal, which will be composed of seven commissioners and will take the final decision on the case. This decision will be final and binding, but subject to judicial review.

    According to article 10 of the Petroleum Law, ANP may give notice to

    the Brazilian antitrust authorities of any potential anti-competitive conduct that it may become aware of, as well as ANP may be involved in matters related to the oil and gas industry in particular.

    The most relevant change brought by the new Brazilian Competition Law is that, from 29 May 2012, Brazil will become a suspensory jurisdiction under which transactions cannot be closed and the parties must remain independent from each other until final antitrust clearance. The new Brazilian Competition Law also lays out new filing thresholds, creating a sole two-prong turnover threshold:

    • at least one of the groups involved in the transaction must have had gross revenues in Brazil of at least R$400 million in the preceding fiscal year;
    • at least one of the other groups involved in the transaction must have had gross revenues in Brazil of at least R$30 million in the preceding fiscal year; and
    • the market share threshold set forth in the Law No. 8,884/1994, the former Brazilian Competition Law, no longer exists under the new Brazilian Competition Law.

    Under the new Brazilian Competition Law, CADE shall have up to 240 days to issue its final decision on the notified transaction. This review period may be extended for an additional period of 60 days, if requested by the parties, or for an additional period of 90 days, by means of a justified order issued by the Tribunal. CADE is expected to enact regulations that will provide for a shorter review period for uncontroversial transactions.

  20. 20.Are oil and gas activities carried out through incorporated entities with limited liability or by consortia or other types of unincorporated joint ventures? Are joint venture partners jointly and severally liable for the obligations undertaking?

    Companies are allowed to bid as individuals or as consortia. The company shall carry out the operations individdually, with no formal requirements of incorporating a new entity. In case of consortium, the companies must enter into a consortium agreement that must provide the joint and several liability for the obligations undertaken under the concession agreement. In case of a foreign entity, it is important to emphasise that it must incorporate a company under Brazilian law, with head offices and management in Brazil.

    Additionally, the parties may enter into a joint operating agreement (JOA), which may regulate the rights and obligations of the operator and its co-ventures, and usually provides that the parties are jointly and severally liable for the obligations of the venture with possible right of recourse. Other than the consortium agreement, the JOA is a private instrument between the parties and there is no obligation to submit it to ANP.

    Nevertheless, it is important to state that under the PSC regime, consortia may be formed in two different ways, such as through direct negotiation or from the results of bidding rounds. In the direct negotiation regime, Petrobras will join PPSA in a PSC consortium. Petrobras 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 cost oil reimbursement, subject to payment of government take.

    In the bidding regime, Petrobras will be the sole operator and will be assured a minimum 30 per cent participating interest in the consortium ultimately awarded with the PSC contract. PPSA will be assured a minimum participating interest in the PSC consortium to be defined by the CNPE. In this context, notwithstanding the fact that there were no bidding rounds on pre-salt areas and no drafts were disclosed yet, it is also important to note the prerogatives of PPSA set forth by the law, as stated in question 1 above.

    Private parties and even Petrobras are entitled to bid for the remaining participating interest in the PSC consortium. Petrobras and the winner 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 of cost oil (oil and natural gas equivalent to exploration and production costs) reimbursement, subject to payment of government take.

  21. 21.May oil and gas be pledged or encumbered to secure the repayment of debt? How?

    Yes. Oil and gas which belong to the concessionaire, given the production of the area and the payment of government take, can be pledged or encumbered to secure the repayment of debt through the lien of oil. However, according to the Brazilian code of civil procedure, the execution against the debtor shall always be implemented trough the less harmfully way.

    In addition, under a reserve-based lending structure a security package may include pledge over the exploration and production rights or over the shares of a SPV that owns exploration and production rights.

  22. 22.Can oil and gas rights that are subject to a lien be sold or transferred freely by the secured creditor?

    Yes. Oil and gas rights can be subject to a fiduciary alienation by the secured creditor. However, in order for such alienation to become effective and for the transference of such rights, the previous consent of the ANP is required.

  23. 23.Is oil and gas output freely exportable in your country? Are there any limits or quotas applicable to oil and gas production? Is there access to export pipelines? What licences are required for oil and gas exports? Are duties applicable?

    Yes, oil and gas are freely exportable in Brazil and there are no limits or quotas applicable to oil and gas production. The export company must be registered before ANP, in accordance with ANP’s Ordinance Rule No. 7/1999. Such registration must be requested by the operator on behalf of the consortia or by each of the consortium members individually. For each oil and gas cargo to be exported, the company shall send to ANP a letter comprising that all the legal requirements established in ANP’s Ordinance Rule No. 7/1999 have been fulfilled and informing the quantities and specifications of the hydrocarbons.

    Furthermore, the exportation of any goods, including oil and gas, must necessarily be recorded in the National Integrated System for International Commerce (SISCOMEX), an online instrument, which enforces the governmental control of the external business by establishing a one way flow of information, eliminating parallel control in the operations.

    Besides, there are requirements of the maritime authorities, the tax authorities, and Central Bank (foreign exchange agreement registration) that may apply.

  24. 24.Are prices for oil and gas set or fixed by the government?

    No. Prices for oil and gas are freely stipulated between the parties according to the market price and may vary according to internal and external factors, such as the international economic scenario.

    However, besides the marketing of the oil and gas, ANP shall set a minimum price for the oil to be considered by ANP for the specific purpose of calculating government takes or eventual cost oil, ie, this price shall be the average of the price of four types of similar oils according to the international market.

  25. 25.Are oil and gas exports taxed under the general income tax regime or is there specific petroleum tax legislation?

    All income generated by the exportation of oil and gas shall be taxed, by the federal income tax, as any other income generated with the exportation of any other type of goods, being subject to general income tax legislation.

  26. 26.Do special environmental rules apply to oil and gas exploration and production?

    Yes. Article 225 of the Federal 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. The Brazilian Federal Constitution has followed the guidelines established by the National Environmental Policy, outlined in Federal Law No. 6,938/81, which is considered one of Brazil’s main legal statutes on environment.

    The National Environmental Policy regulates civil liability for damages caused to environment, which has a strict liability nature, ie, irrespective of fault. Demonstration of the cause-effect relationship between damage caused and action or inaction suffices to trigger the obligation to redress environmental damage.

    In the criminal sphere, the Environmental Crimes Act (Federal Law No. 9,605/98) 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 proxy will also be subject to criminal penalties. In the administrative sphere, the non-compliance with environmental obligations may subject the violator to sanctions, such as the imposition of fines up to 50 million reais, interdiction of activities, cancellation of tax incentives and credit lines with governmental financial entities.

    Recently, the congress passed a law creating the National Climate Changes Fund (Law No. 12,114/2009), to support initiatives toward a low carbon economy and also for coverage of impacts, adaptation and vulnerability related to global warming. Such fund is already receiving money from oil and gas undertakings that, in accordance with the Petroleum Law, shall already be reserving a percentage of its profits in order to cover general negative impacts arising out its business.

    ANP and IBAMA or a competent state environmental agency are responsible for the safety and environmental regulations regarding upstream activities. ANP, as the oil and natural gas regulatory body, supervises the compliance with environmental standards.

    All activities related to the sector, such as exploration and production, are subject to environmental licensing in light of specific rules enacted by the competent bodies. The applicable licences are Preliminary License (LP), Installation License (LI), Operating License (LO) and other specific environmental licences for the oil and gas sector as described in question 28 below.

    Further still, ANP Ordinance Rule No. 3 of 2007 regulates the process for environmental licensing related to rigs.

    The performance of upstream activities without the necessary environmental licensing may subject the company to administrative and criminal sanctions.

    Due to recent oil spills and accidents involving the industry, some working groups were created in the National Congress in order to investigate and study the situations and alternatives of stricter rules on environmental issues. It is likely that new stricter regulations are going to be enacted in view of these facts.

  27. 27.Are environmental regulations in your country consistent with any international standards?

    Yes. An example of Brazilian alignment with international standards is the environmental licensing process, which is subject to the submission of an individual emergency plan that must contain the measures for addressing water pollution derived from eventual oil leakage, as established by Resolution No. 306/2002, issued by the National Environmental Council (CONAMA). This resolution also imposes the execution of biennial independent environmental audits.

  28. 28.Must companies in the oil and gas industry obtain special environmental or other government permits (other than licences or concessions to carry out oil and gas exploration and production) in to operate in your country?

    Yes. CONAMA Resolutions No. 23/1994 and No. 237/1997 determine that the drilling of wells and the exploitation of oil and natural gas are potentially pollutant activities and, thus, subject to a special environmental licensing process.

    Accordingly, from an environmental perspective, the permits that shall be obtained for the undertaking of such activities embrace License for Seismic (LPS); a Preliminary License to Drill (LPer); a Preliminary Production License (LPpro) for temporary production for evaluating economical feasibility; an Installation License (LI) for the implementation of facilities and systems required for the oil exploitation; and an Operation License (LO) for the functioning of all facilities and activities related to the oil exploitation.

    The environmental licensing procedure in Brazil embraces the analysis of documents, projects and environmental studies submitted by the entrepreneur.

    In order to obtain environmental licenses for oil and gas activity, Brazilian regulation impose the presentation of an Environmental Impact Assessment and an Environmental Impact Assessment Report (EIA/RIMA) by the entrepreneur, which is mandatory for facilities that perform activities of significant environmental impact. Presently, the environmental licensing of such activities is also subject to the payment of an environmental compensation in the maximum amount of 0.5 per cent of the total implementation costs of the relevant undertaking.

    Besides environmental licenses, registration before the competent tax authorities is also required.

  29. 29.Does the government (including any development banks or agency) provide financing, subsidy or other support to companies undertaking oil and gas exploration or production?

    Yes. The Brazilian Development Bank (BNDES) provides a financing line for the oil and natural gas industry, in order to promote the development of the entire industry productive chain – development, production, refining, transportation and distribution.

    Besides, the National Programme for the Mobilisation of the Oil and Gas Sector (PROMINP), coordinated by the Ministry of Mines and Energy, supports the Investment in Credit Rights (FIDC), which anticipates the contract value for Petrobras’ suppliers, prior to its execution. Accordingly, such financing resources offer great competitive advantages and are available to suppliers after signing the contract with Petrobras.

    Furthermore, there are some other institutions such as the Brazilian Service of Entrepreneurs (SEBRAE) who provide financing and subsidy to companies undertaking oil and gas activities.

  30. 30.Are there any tax stability or similar regimes available to foreign investors undertaking investment in the oil and gas industry in your country?

    No, at this time Brazil offers no tax stability or similar regime for foreign investors investing in the local oil and gas industry.

    The Brazilian tax code allows for any taxpayer to propose “special regimes” for the assessment and payment of taxes considering the particularities of its operations, however, by law, the tax authorities may only agree with such regime if it does not disrupt or decrease the regular payment of due taxes.

  31. 31.Are oil and gas activities generally protected under bilateral investment treaties entered into by your country?

    No. Neither the regulatory policy for oil and gas activities nor the oil and gas activities themselves are affected by any treaties or multinational agreements. The oil sector in Brazil has its core directives established under the Federal Constitution. Multinational agreements or treaties entered by Brazil must not conflict with the provisions of the Federal Constitution.

  32. 32.Are there any dispute resolution systems specific to the oil and gas industry? Does state immunity apply in disputes?

    There is no specific dispute resolution system applicable to the oil and gas industry. However, the concession agreement elects the ad hoc arbitration, using as a parameter the rules established by the Regulations of the International Chamber of Commerce Arbitration (ICC), in accordance with the principles provided in article 31 of the concession agreement. On the other hand, no specific provision to the PSC regime was enacted yet and no drafts were disclosed, but it is likely to adopt the same dispute resolution system.

    The Brazilian Supreme Court jurisprudence demonstrates that sovereign immunity only applies to acts of state (imperium), which are acts performed by public authorities with all the prerogatives and privileges of coercive impositions on individuals.

  33. 33.Do anti-corruption rules apply to the oil and gas industry?

    Yes, anti-corruption rules apply to the oil and gas industry, in view of the Inter-American Convention against Corruption (Decree No. 4,410/2003) and the United Nations Convention against Corruption (Decree No. 5,687/2006), internally ratified by Brazil.

    Such conventions generally prevent the practice of corruption by public officials and define the applicable penalties.

    Notwithstanding, the US Foreign Corrupt Practices Act of 1977 (FCPA) which prohibits payment, directly or indirectly, or anything of value to a foreign official to obtain or retain business, applies to US companies or foreign companies listed on a US stock exchange.

    Thus, proof of a US territorial nexus is not required for the FCPA to be implicated against US companies, and FCPA violations can occur even if the prohibited activity takes place entirely outside of the US.

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