The Regulation of Oil and Gas Industry Concerning Exploration and Production in Presalt Layer
CNPE
MME
ANP
Defines the exploration and production policy of blocks in the pre-salt layer and strategic areas
Defines policy for the development of the oil and gas industry and provides support to the CNPE
Regulates and monitors the industry based on policies formulated by the CNPE and MME
Based on this institutional setup, it becomes evident that the orientation of regulation in Brazil shifted from the original format when the concept was introduced to tackle state reform. Whereas before the roles of devising and executing public policy were intertwined, the new scenario separates these tasks between different public entities, representing a new concept of state intervention in the Brazilian economy.
4.3 Procurement Regime for the Presalt Area
Of all the changes introduced by Federal Law No. 12.351/2010 governing the exploration and production of oil and gas in the presalt region, the most significant is the introduction of shared production contracts.33
The concept of shared production is not unique to Brazil and has been implemented in several countries around the world.34 More than the introduction of the model itself, as explained above, the changes to the regulatory structure and adoption of this regime indicate a shift in the position of the Brazilian government. This has provoked much debate about the constitutionality of the shared production regime.35
The rationale for the shift, as mentioned in the introduction of this study, is that, given that the oil and gas reserves in the presalt area are of good quality and substantial size, the Brazilian government feels the concession regime would not serve the country’s interests since, even with the payment of taxes and royalties, the concessionaire would reap the greatest economic benefits from the oil and gas. In order for the government to gain a greater share of this wealth, the system needed to be altered to that of shared production.
It is important to highlight that the existence of the production sharing regime does not abolish the concession regime. As previously mentioned, Brazil has a hybrid system: the shared production systems for presalt areas and those considered strategic, and the concession regime for regions outside this demarcation.
Under the shared production regime, the legal configuration of ownership of the oil and gas extracted changes. Whereas the concession regime transferred ownership of the oil and gas extracted from the state to the concessionaire, under shared production it remains the property of the government, which pays the company for the production services.36
Brazilian law established the shared production scheme under the following parameters: the company will be reimbursed for costs in oil, corresponding to the costs and investments incurred through the exploration and production of oil and gas. It will also receive the excess oil, representing the portion of production to be shared between the company and the Federal Union.37
As a general rule, the risks and costs of activities under the production sharing regime are borne by the company under contract. These costs are reimbursed in the event of a commercially declared discovery. Nevertheless, the law allows an exception: the Federal Union may create a special fund through which it can participate in the activities carried out by the company under contract. In this situation, the risks will be shared between the two parties.38
Another new feature is the mandatory inclusion of Petrobras in all shared production contracts as the operator of exploration and production.39 Under the concession system, the involvement of Petrobras in the concessionaire’s composition and as an operator is not a legal requirement but a choice left up to the companies. The new regulatory design causes problems not because of the imposed partnership but as a result of the mandatory participation of Petrobras as the operator.
In fact, the law went even further by allowing two forms of contract granting under the shared model: direct contracting and tendering.
Contracts can be granted directly to Petrobras if the CNPE can prove to the President of the Republic that this will better serve national interests and those of the national energy policy.40 This direct modality is an exception to Brazilian bidding legislation.41 The problem with this legal provision lies in its conformity with the Brazilian Constitution after the sector’s reform.
With the promulgation of the 1988 Federal Constitution, the Brazilian oil and natural gas industry remained a state monopoly, which governed exploration, production, transport, import, and export. There were no opportunities for participation in these activities by private companies, not even in the form of service provision contracts.42
As previously mentioned, government restructuring throughout the 1990s eased the monopoly. The term “ease” is used because ownership of the activity was not entirely transferred to private entities, but rather access to the sector was expanded, allowing the Brazilian government to hire private entities to carry out activities in the gas industry, with ownership of the monopoly remaining in the hands of the state. The most dramatic change in opening the monopoly was the transformation of Petrobras into another economic agent in the sector operating under competition, as opposed to the controlling agent in the monopoly.43
Constitutional Amendment No. 09/1995 opened the monopoly, formerly in the hands of Petrobras, which retained ownership, but enabled public or private companies to be hired to perform the activities of the monopoly in the natural gas industry. In this respect, it does not put an end to the monopoly, since ownership is not transferred to the private sector (constitutional ruling that this is a private initiative activity), but allows services to be tendered out without the obligation of performing them directly (article 177, paragraph 1). The distinction between ownership and activity can be found in the Brazilian Supreme Court decision regarding oil and gas monopoly in ADI No 3.273. According to this decision, notwithstanding the constitutional provision that oil and gas industry activities can be performed by private companies, the ownership of oil and gas remains at the hands of the Brazilian State. For this reason, all economic activities regarding the industry must be regulated and granted by the Brazilian State.
Nevertheless, even if the Brazilian government no longer wishes to tender out oil and gas activities, it is not authorized to confer this role to Petrobras, both because of the constitutional changes described here and the current statute of Petrobras as restructured by Federal Law No. 9478/1997, which places it in competition with other companies.44
The other form of procurement allowed under the concession regime is that of tendering. Tenders are conducted in the form of auctions in which any interested company, including Petrobras, may participate provided it meets the stipulated requirements.45
The difference between the two regimes is that, regardless of the system used, bidding or direct procurement, there must be a consortium with a public company (PPSA) that will manage the contracts on behalf of the Federal Union46 (only the public company in the event of direct procurement or when Petrobras wins the bid) or with a public company and Petrobras when the tender is secured by a company or consortium of companies.47 The Brazilian Oil and Natural Gas Administration Company S.A. (PPSA), controlled by the Brazilian government, shall be the company responsible for managing production sharing contracts and commercializing oil, natural gas and other hydrocarbon fluids from the presalt reserves.48
Procurement by means of tender is mandatory under Brazilian law with respect to public assets,49 though specific rules apply to oil and gas that differ from the General Procurement Law (Federal Law No. 8.666/1993) and the Oil Law. Thus, procurement conditions must be stipulated in the bid data sheet, which also contains the basic draft of the contract. In addition to the contract, the law requires that the bid data sheet contains the following elements: (a) the block subject to shared production; (b) decision criteria for the tender; (c) minimum percentage of profit oil for the Federal Union; (d) formation of a consortium with a public company to manage contracts and minimum participation by Petrobras; (e) limits, deadlines, criteria, and conditions for the calculation and allocation of cost of oil and the production volume corresponding to royalties owed; (f) criteria defining profit oil allocated to the contracted company; (g) minimum exploration program and estimated corresponding investments; (h) minimum local content and other criteria related to the development of the national industry; (i) value of the signing bonus and amount allocated to the public company responsible for contract management; (j) rules and stages of the tendering process; (k) rules applicable to joint company participation in the bid; (l) list of required documents and criteria for the technical, legal, economic, and financial approval of bidders; (m) warranty to be presented by the bidder for licensing; (n) date, place, and time that bidders will be informed of the data, studies, and other elements and information needed to compile the proposals, as well as the purchasing costs; (o) location, time, and format for proposal presentation.50
The tender process allows joint participation by companies in bidding provided they commit to a consortium (preventing joint participation as a means for solely winning the bid) and prohibits participation by the same company, whether alone or in partnership, in more than one bid for the same block.51 Foreign companies are also permitted to participate in bids. Should a foreign company secure the tender, it must comply with Brazilian law and have headquarters in Brazil.52
The deciding criterion for tender is the highest profit oil offer for the Federal Union, provided it complies with the minimum value established by the MME.53 This implies that Brazilian law defines allocations not according to a criterion stipulated under the law but rather in accordance with the Brazilian regulatory policy and bids by participants in the tender process.
The consortium formed will share responsibilities among the members, with Petrobras as the operator.54 The partnership will be managed by a special committee formed by its members, whose role is to implement and supervise the exploration and production activities needed to develop the object under contract.55
The shared production agreement is a form of administrative contract governing an economic activity that, although not characterized as a public service, is of public interest due to the energy resources involved.56 As such, in much the same way as the concession contract under the Oil Law, Federal Law No. 12.351/2010 outlines a series of requirements for shared production agreements.
First, and similar to the requirements for the concession regime, shared production contracts must consist of two stages: (a) the exploration phase and (b) the production phase, which only begins following declaration of commercial discovery.57
The agreement should include the following essential clauses: (a) definition of the block under contract; (b) obligation of the company under contract to bear the risks of activities performed; (c) indication of guarantees; (d) right of the company under contract to use cost oil; (e) limits, deadlines, criteria, and conditions for the calculation and allocation of cost oil and the production volume corresponding to royalties owed58; (f) criteria for calculating the value of oil or natural gas, as a function of market prices, product specification, and field location; (g) rules and deadlines for the distribution of profit oil; (h) attributes, composition, operation, means of decision making, and dispute settlement within the operational committee; (i) accounting rules and procedures for monitoring and controlling exploration, evaluation, development, and production activities; (j) regulations applicable to the activities performed, with costs and risks borne by the contractor and without any obligation by the Federal Union or inclusion in the value of cost oil; (k) minimum duration of the exploration phase and conditions for its review; (l) criteria for formulating and revising exploration and production development plans, as well as the respective work plans, including measurement points and the distribution of oil, natural gas, and other liquid hydrocarbons produced; (m) mandatory obligation to provide reports to the ANP and public company regarding the execution of the contract; (n) criteria for the handing over and vacating of areas by the contractor; (o) penalties applicable in the event of breach of contractual obligations; (p) procedures regarding the termination of contractual rights and obligation; (q) regulations governing dispute settlement; (r) term of the contract, limited to 35 (thirty-five) years, and conditions for its termination; (s) value and form of payment of the signing bonus; (t) mandatory presentation of a periodic inventory of greenhouse gas emissions; (u) presentation of a contingency plan; (v) mandatory environmental audit of the entire operational process for the extraction and distribution of presalt oil and gas.59
In the case it is more interesting for other companies to carry out oil and gas exploration and production, the shared agreement may be transferred to those companies. The assignment is subject to authorization by the MME, after consultation with the ANP.60
The shared production contract may be terminated in the event of the following: (a) upon expiration of the term, (b) by mutual agreement; (c) for the termination reasons stipulated in the contract; (d) at the end of the exploration phase when no commercial discovery has been made; (e) by the contractor exercising his right to withdraw in the exploration phase, provided minimum exploration has been completed or subject to payment for the portion not fulfilled; (f) by refusal to sign the unitization agreement, following a decision by the ANP.61
As in the concession regime, under shared production contracts, Federal Law No. 12.351/2010 stipulates the mandatory signing of a unitization agreement when the reservoir spans more than one block.62 In the event of conflicts between the two systems, unitization is applied not only to blocks under the shared production agreement but also to those subject to the concession regime.
The existence of a field spanning more than one block must be reported to the ANP by the contractor. Once advised of this fact, the ANP will instruct the parties to reach an agreement and monitor the process in line with CNPE guidelines.63 The unitization agreement will result in the formation of a consortium indicating the participation of each member, the development plan for the common field, dispute settlement mechanisms, and a designated operator. The agreement will be submitted to the ANP, which shall either authorize it or not. Without ANP approval, activities pertaining to the common area will be suspended, with refusal to do so resulting in termination of the contract.64
4.4 Royalty Payments in the Presalt Area
Regarding the payment of royalties, several changes were introduced by altering the framework provided for areas under the concession regime.65 The main difference is the increase in the number of beneficiaries of royalty payments. This has provoked much debate about the new framework’s constitutionality since it changes the understanding and practice of royalty payments in Brazil.66
Royalty payments for the exploration of oil and gas deposits are stipulated in the Constitution. The deposits are initially deemed assets of the Federal Union and, as such, provide economic benefits solely to the federal government. However, the Federal Constitution, in turn, ensures a share in the result or financial compensation for states, municipalities, the Federal District, and Direct Administration entities of the Federal Union.67
This difference between participation and financial compensation has never been well defined under Brazilian law. Both are often addressed interchangeably as royalties. Nevertheless, it is clear that the practice tends towards a form of financial compensation in the case of states and municipalities since only producing states and municipalities or those affected by oil and gas production activities received royalties directly.
With the onset of the presalt legal regime, this reality has shifted, with nonproducing states and municipalities not affected by oil and gas industry operations also benefitting from royalty payments.
Another change implemented is the percentage stake in royalties. Under the concession regime, this varied between 5 and 10 % of oil and gas production. In the regime applicable to the presalt layer, this has risen to a fixed percentage of 15 %.68 Under the new scheme, royalty beneficiaries and profit percentage vary according to the location where activities are carried out.69