The Brazilian pre-salt case: governmental interference and challenges for potential joint ventures

Abstract

The exploration of the so-called ‘pre-salt area’ of offshore Brazil under a specific production sharing regime is relatively new and brought about several changes in the Brazilian oil and gas regulatory framework as opposed to the system originally based on the concession regime. This paper presents a brief background of the Brazilian oil and gas industry, notably with respect to the changing process that introduced the new production sharing regime, and analyses the details involving the interferences from the Brazilian governmental authorities in the industry's activities and the implications for joint ventures intending to be involved with these activities.

Keywords:

• joint venture
• pre-salt
• PSA
• concession regime
• bidding rounds
• NOC
• governmental intervention

Notes

1 Until 1995, Petrobras had the exclusive rights to explore for and produce oil and gas in Brazil. Although Petrobras is a listed company with private capital, the Brazilian government has the controlling shares of the company.

2 The Petroleum Law was implemented in 1997 and the first licence round occurred in 1999.

3 World Economic Forum, ‘Resource Management in Brazil's Oil and Gas Sector: The Swinging Pendulum’ (2015) http://reports.weforum.org/global-energy-architecture-performance-index-report-2015/energy-reform-in-major-emerging-economies-new-models-for-sustained-growth/enacting-sound-policies-in-solid-institutions/case-study-ii-resource-management-in-brazils-oil-and-gas-sector accessed 6 June 2017.

4 ANP, ‘Relação de Concessionários’ www.brasil-rounds.gov.br/portugues/lista_de_concessionarios.asp accessed 6 June 2017.

5 The ‘pre-salt area’ is described in the Pre-salt Law and subject to the PSA regime.

6 ‘Brazil: Platform for Growth’ Financial Times (London) www.ft.com/cms/s/0/fa11320c-4f48-11e0-9038-00144feab49a.html#axzz1f7GkIt18 and World Oil, ‘Brazil Pre-Salt: Master Plan for the Santos Basin Pre-Salt Cluster Development’ www.worldoil.com/BRAZIL-PRE-SALT-Master-plan-for-the-Santos-Basin-pre-salt-cluster-development.html accessed 6 June 2017.

7 Petrobras, ‘Libra Auction Result’ www.petrobras.com/en/magazine/post/libra-auction-result.htm accessed 6 June 2017.

8 Jonathan Watts, ‘Operation Car Wash: Is This the Biggest Corruption Scandal in History?’ The Guardian (London, 1 June 2017) www.theguardian.com/world/2017/jun/01/brazil-operation-car-wash-is-this-the-biggest-corruption-scandal-in-history accessed 19 June 2017.

9 A Muricy, ‘Pré-sal e Mudança no Marco Legal’ (November 2010) www.relop.org/files/eventos/201011/5%20-%20ANP%20-%20Muricy_Apresenta%C3%A7%C3%A3o_RELOP_v2.pdf accessed 6 June 2017.

10 MBP COPPE/UFRJ, ‘História do Petróleo’ (17 February 2014) www.petroleo.coppe.ufrj.br/historia-do-petroleo accessed 6 June 2017.

11 Ibid.

12 Three bid rounds took place in 1976, 1977 and 1978, and the results did not meet the expectations at that time.

13 Brazilian Federal Constitution 1988, art 45, sole paragraph.

14 Ibid, art 177. The activities described are: exploration, production, refining, importation and transportation.

15 Federal Law no. 9.478/1997, Brazilian Petroleum Law, art 1, item I. The national policies for the rational use of energy sources will aim, among other objectives, to preserve the national interest. As one of CNPE's attributions then, the Petroleum Law contemplates (in broad terms) the promotion of the rational use of the country's resources.

16 Cláudia Schüffner, ‘Mudanças trazem indefinição para investidor’ (pressreader, 18 April 2008) www.pressreader.com/brazil/valor-econômico/20080418/281638185928552 accessed 6 June 2017.

17 Eduardo G Pereira, ‘Governmental Participation in Upstream Projects: The Brazilian Pre-Salt Case’ [2016] UEF Energy Law Review www2.uef.fi/documents/1996296/0/Volume+1+Issue+1+2016/97bca492-d5a4-49a0-9138-c0a7f15f908a accessed 6 June 2017.

18 Federal Law No 12.351/2010, Brazilian Pre-salt Law, implemented the PSA and social fund. Federal Law No 12.304/2010 created the new NOC known as Empresa Brasileira de Administração de Petróleo e Gás Natural SA – Pré-Sal Petróleo SA Federal Law No 12.276/2010 increases Petrobras’ financial capabilities for the pre-salt area.

19 Ibid (n 4 to 9).

20 Federal Decree no. 9.041/2017.

21 Federal Law No 12.351/2010, Brazilian Pre-salt Law and Federal Decree no. 9.041/2017.

22 Petrobras, ‘New Divestment Portfolio’ www.investidorpetrobras.com.br/en/press-releases/new-divestment-portfolio and Petrobras, ‘Check Out Our 2016 Financial Results’ www.petrobras.com.br/en/news/check-out-our-2016-financial-results.htm accessed 19 June 2017.

23 The term basically relates to the relation between the exportation of natural resources and the decline of the manufacturing sector – which can later affect the economic development of a host country; it refers to the episode that occurred in the 1960s in the Netherlands.

24 Information made available by the ANP indicates that the average local content penalty value is of approximately R$4m. In any case, note that the highest local content penalty (between 2011 and 2015) was of R$275,533,923.35 levied against a consortium led by BG relating to concession BM-S-52 – ANP bid round seven. The consortium decided to pay the fine upfront and benefit from a 30 per cent statutory discount for accepting the fine without appeals. ANP, ‘Multas e Regularizações’ www.anp.gov.br/wwwanp/multas-e-regularizacoes accessed 19 June 2017.

25 World Oil, ‘Cooperation between Libra Consortium Partners Reduces Project's Break-even Price’ www.worldoil.com/news/2017/5/9/cooperation-between-libra-consortium-partners-reduces-projects-break-even-price accessed 19 June 2017.

26 Although local content policy in Brazil has suffered from mistakes and lessons had to be learnt, it is important to recognise as well the relative success of the local content policies to bring the attention of the industry to build capacity, knowledge and supply locally with a fairly well-managed certificated system to follow up the compliance with these obligations.

27 Federal Decree no. 8.637/2016.

28 Brazil Rounds, ‘Edital de Licitações – 14ª Rodada de Licitações’ 16–18 www.brasil-rounds.gov.br/arquivos/Round14/edital/preedital_R14_18052017_vfinal.pdf accessed 20 June 2017.

29 Term used to refer to activities where fewer than all parties of the consortium decide to join and conduct them.

30 Rules of Consortium (Libra) is described as per clause 4.2 of the relevant PSA: ‘4.2 The following Operations, whereas the paragraph 3.3 3.3 of this Annex, may be proposed and carried out as Transactions with Exclusive Risks:

1. Drilling and or test of exploratory wells and evaluation wells, except the Operations required to fulfill the obligations of the Minimum Exploratory Program;

2. Continuation of the Exploration Phase after decision of early closure of this Phase by the Operational Committee;

3. Deepening, lateral deviation, secondary cementation and or re-completion of wells;

4. Acquisition of geological and geophysical data, with the exception of Operations required to meet the obligations of the Minimum Exploratory Program’.

31 NYSE, ‘Petróleo Brasileiro S.A. – Petrobras (PBR)’ www.nyse.com/quote/XNYS:PBR accessed 17 June 2017.

32 Federal Decree no. 8.063/2013, art 5, para 1.

33 Reuters, ‘Brazil May Let Petrobras Sell Transfer of Rights Area Oil Stakes’ (Reuters, 30 September 2016) www.reuters.com/article/petrobras-investment-offshore-idUSL2N1C61BN accessed 9 June 2017.

34 Petrobras, ‘Clarification on the Review Process of the Transfer of Rights Agreement’ (11 April 2016) www.investidorpetrobras.com.br/en/press-releases/clarification-review-process-transfer-rights-agreement accessed 9 June 2017.

35 Federal Law no. 6.075/1973, Public Registry Law, art 148.

36 Brazilian Civil Procedures Code, art 157.

37 Brazil Rounds, ‘Production Sharing Contract for Exploration and Production of Oil and Natural Gas’ 90–100 www.brasil-rounds.gov.br/arquivos/Edital_p1/Minuta_Edital/minuta_contrato_autorizada_09072013_ingles.pdf accessed 16 June 2017.

38 Prominp, ‘Categorias Profissionais para a Indústria de P&G’ www.prominp.com.br/prominp/pt_br/categorias-profissionais-para-industria-p-g/categorias-profissionais-para-industria-p-g-2.htm accessed 9 June 2017

39 Ibid (n 4 to 9).

40 Ibid (n 4 to 9).