E&P Contracts and Foreign Companies
© Springer International Publishing Switzerland 2015
Yanko Marcius de Alencar Xavier (ed.)Energy Law in Brazil10.1007/978-3-319-14268-5_1010. E&P Contracts and Foreign Companies
(1)
Department of Private Law, Federal University of Rio Grande do Norte, Natal, Brazil
10.3 Mechanisms to Protect Foreign Investment Contained in Comparative Law and in E&P Contracts in Brazil
Abstract
The present chapter will discuss the way in which foreign companies can exercise these economic activities in Brazilian territory by focusing on how the administrative agreements of exploration and oil and gas production allow and condition foreign companies’ operations in Brazil. To that end, we will discuss aspects inherent to private international law in force in Brazil, focusing on the legal format of national and international companies operating in this sector and addressing the features, specificities and peculiarities of foreign company participation in E&P activities in Brazil. Given the foreign investments made by companies in these activities here in Brazil, the end of this chapter deals with the mechanisms that protect foreign investment in Comparative Law and in E&P Contracts in Brazil.
10.1 Legal Format of E&P Activities in the Oil and Gas Industry in Companies in Brazil
The 1988 Constitution was limited to direct State intervention in the economic domain, allowing private entities a certain degree of freedom of initiative, given that the direct exploitation of economic activity by the State is admissible only in accordance with article 173, when necessary for national security or collective interest. Framers of the 1988 Constitution preferred to emphasize the preponderant role of the State in terms of its prescriptive and regulatory function in economic activity and responsibility for oversight, incentive and planning.
Thus, oil and natural gas exploration and production in Brazil is conducted primarily by companies subjugated to private law. In a competitive environment involving calls for bids on exploration blocks promoted by the Brazilian Government through the competent regulatory agency, the ANP, these companies take part on an equal footing with other participants and, when successful, receive authorization to explore a determinate block, fulfill obligations imposed by the ANP in terms of the competition and eventually initiate production activities.
Oil Law states that the economic activities contained in article 4 (the exploration and production of oil and natural gas reserves and other fluid hydrocarbons; the refining of national or foreign oil; the import and export of products and basic derivatives; and the maritime transport of national crude oil or basic oil derivatives produced in the country, as well as the transport through pipelines of crude oil, its derivatives and natural gas) will be regulated and monitored by the Federal Government and can be conducted through concession, authorization or contract under the production-sharing regime, by companies constituted under Brazilian laws, with headquarters and management in the country. The specific case of E&P activities, the current focus, deals only with the activities of exploration and production of reserves. These are subject only to the administrative and public contract between the Brazilian State and the private entity, which will contain the provisions relevant to the call for bids, concession or production sharing.
Thus, irrespective of the model selected for a certain offer of exploration blocks to private and/or public entities that will compete freely and on equal footing and conditions, if the concession contract or production sharing model is adopted, winners who will effectively detain the seal of the Brazilian State to execute E&P activities will be private or public companies. The Brazilian State must be present in one of the contractual formats in order to exert more influence on decisions, as well as by participating in the activities developed.
10.2 Particularities of Foreign Company Participation in E&P Activities in Brazil
It is quite true, as discussed above, that the Oil Law, denominated Oil Law, stipulates that only Brazilian companies, with headquarters and administration in Brazil, may be directly contracted by the Brazilian Government, after the call for bids, to execute exploration, development and production of oil and natural gas, a monopoly of the Brazilian State, according to constitutional provisions.
However, it should be clarified that this, in itself, does not eliminate or prevent participation by foreign companies in calls for bids issued by the ANP on behalf of the Brazilian Government, in order to promote the contracting of the winning company that offered the best proposal, within the criteria established. Foreign companies are forbidden, however, from engaging in activities under Brazilian state monopoly, subject to delegation to private entities through a specific public contract, which, in its final phase, requires “nationalization” of the foreign company that took part in the call for bids.
This means that Brazilian law provides protection for natural resources located in its territory since the ANP and other government authorities exercise greater control over national companies contracted by the Government to execute E&P activities than foreign companies, particularly considering that the contractual object in question is in the public domain and strategic for the entire country and given the numerous difficulties involved in implementing certain administrative or even legal decisions related to these foreign companies.
Framers of the constitution imposed the condition of contracting private entities because of doubts and uncertainties regarding the real level of applicability of decisions made by the Brazilian Government through the ANP in relation to the contracted company’s capacity to engage in E&P activities. These doubts were caused primarily by the initial nonsubmission of the foreign company not to Brazilian legal dictates but rather to the sovereignty of the State in which it is headquartered and administered. The aim of the condition imposed was to ensure fulfillment of oil industry best practices existing in the oil industry in line with the national public interest.
In this respect, § 1 of art. 176 of the Brazilian Constitution of 1988 stipulates that the exploration and production of mineral resources, including oil and natural gas, can only be performed through authorization or concession from the Federal Government, in the national interest, by Brazilians or companies constituted under Brazilian laws and headquartered and administered in the country.
There is no doubt, therefore, that Brazilian law prohibits contracting foreign companies to execute E&P activities. However, since the Constitution forbids contracting, the final stage in the bidding process, infraconstitutional laws determined that large foreign companies would be allowed to participate in the Brazilian oil sector and would not violate the Federal Constitution, with a view to ensuring that foreign investment is not completely excluded from E&P activities in Brazil.
It can be said that despite constitutional provisions on the issue, infraconstitutional provisions allowing foreign company participation, based on federal laws that regulated E&P activities, were in line with the perceived importance of foreign investment in an economic activity that receives and needs substantial financial resources to develop. This is especially true in a country like Brazil, where, in terms of the opening of the Brazilian market through flexibilization of the Federal monopoly over E&P activities, the oil industry of 1995 was not at the same level as that sector in producing countries.
In the most recent phase of Brazilian E&P activities, there are two important moments that will be discussed below as to the relevance of infraconstitutional law regarding foreign investment: (1) opening of the Brazilian market through flexibilization of the Federal monopoly over E&P activities in 1995, which occurred via a constitutional amendment that allowed the contracting of companies to engage in E&P activities through the concession contract model (tax and royalty), followed by infraconstitutional regulation through the Oil Law, Federal Law No. 9.478, of August 6, 1997, and (2) creation of a new and different contractual regime to contract companies for E&P activities, at the end of 2010, modifying the manner in which the Brazilian State takes part in these activities directly or indirectly, with different provisions for remunerating the Brazilian State. This results in a production-sharing contract that retains features of the concession model, inaugurated with the Oil Law. Neither of these contractual moments in Brazil have been revoked or replaced, given that both coexist.
Both the concession contract regime, governed by Federal Law No. 9.478, of August 6, 1997, and the production-sharing regime, governed mainly by Federal Law No. 12.351, of December 22, 2010, provide identical treatment in terms of foreign company participation in calls for bids, in accordance with each of the two possible contractual situations between the Brazilian Government and companies. Foreign companies and their investment potential in E&P activities receive clear, identical and well-defined regulation under both of the aforementioned laws.
In addition to their proposal, foreign companies that wish to compete alone or in a consortium for blocks under a concession or production-sharing regime must present, according to the type of contractual regime involved, the same proof, information and documentation, which, in the case of Federal Law No. 9.478, of August 6, 1997, is contained in article 39 and, in the case of Federal Law No. 12.351, of December 22, 2010, in article 17.
In this vein, there are four provisions that Brazilian law requires in the call for bids, under penalty of absolute nullification, to allow foreign investment in E&P activities notwithstanding the constitutional impediment to hire foreign companies to do so, but only companies established in national territory, with headquarters and administration in Brazil.
First of all, the foreign company must provide proof of its technical capacity, financial insolvency, as well as legal and fiscal good standing in the terms of the regulation to be enacted by the ANP. Proof of technical qualification is based on production volume, amount of investment in exploration and prior operational experience of the foreign partnership or, alternatively, experience of the members of its technical team in oil and natural gas exploration and production.
It is important to underscore that the aforementioned requirements imposed on foreign companies do not discriminate against them or impose additional demands in relation to Brazilian companies. Rather, they ensure that the system as a whole adapts to the peculiarities of foreign investment in these types of specific economic activities, considering the strategic characteristics that guide the creation of noncompromising or discriminatory differences.
Similarly, proof of technical capacity and financial and legal good standing required for foreign companies are also mandatory for Brazilian companies that compete in the same bidding process, either for access to concession or production-sharing contracts. As we will see further on, there is a farsighted adaptation of the Brazilian bidding process in E&P activities with respect to foreign capital access, despite the constitutional provision preventing contracts with foreign companies.
In addition to the requirements for foreign companies under laws regulating the oil sector in Brazil, they are also obliged to provide their full acts of incorporation, with proof that they are operating in accordance with the laws of their respective countries. Brazilian law is established as the connection element to the place of the company’s incorporation, in a clear indication of substantive law applicable to the legal personality of a foreign company, a guideline of private international law, and therefore coadunating with art. 11 of the Law on the Introduction to Brazilian Legal Norms, Decree-Law No. 4.657, of September 4, 1942.
Within the context of private international law lies the question of knowing which law should be followed in line with the constitution and the functioning of a legal person headquartered or constituted in a determinate country while engaging, temporarily or definitively, in some or all of its activities in another State.
From a more objective perspective aimed at the concrete case of foreign companies and E&P activities in Brazil, in order for the Brazilian State to recognize the interested party as having a legal personality and, therefore, qualified to take part in the bidding process in any of the contractual modalities, it would be essential to adopt a parameter for that purpose, defined as the “connection element,” which has the function of indicating the substantive company norm (or law) that would apply for the ANP, for example, to consider a foreign company qualified or not to participate.