The Brazilian constitution of 1988 establishes the federal government's ownership over petroleum and mineral resources located in the subsoil, in the continental shelf and in the exclusive economic zone (Articles 20 and 176). Also, pursuant to the constitution, oil and natural gas E&P activities, refining, the importation and exportation of by-products, maritime transportation of crude oil or by-products, and pipeline transportation of petroleum and natural gas are activities under the monopoly of the federal government (Article 177).

However, the federal government can contract with state-owned or private entities to conduct the petroleum activities referred to above, subject to certain conditions set forth in the applicable laws.

End of the Petrobras Monopoly

After several years of monopoly over petroleum activities exclusive to Petróleo Brasileiro S.A. (Petrobras) since 1953, the government authorities concluded that keeping the federal government's monopoly over the exploration and production of oil and natural gas could be an obstacle to the development of the petroleum industry.

Thus, aiming to provide legal mechanisms to attract both domestic and international private capital to Brazil, the Brazilian Congress enacted Constitutional Amendment No 9/95, which amended the first paragraph of Article 177 of the constitution and allowed petroleum activities to be contracted by the federal government with state-owned or private entities (subject to certain conditions set forth in the applicable laws).

In this context, Law 9,478/97 (the "Petroleum Law") was enacted and, among other provisions, it implemented the concession regime for the award of E&P rights by the federal government in Brazil. A few years later, following the discoveries of huge oil reserves in the ultra-deep waters of the pre-salt layer in the Campos and Santos basins, announced by Petrobras in 2007, and several discussions within the federal government and congress about the best way to exploit those resources, Law 12,351/2010 (the "Pre-Salt Law") introduced the production-sharing regime in Brazil, which is applicable to areas located within the pre-salt areas (within the limits of a defined pre-salt polygon) and other strategic areas.

In addition, in view of the massive investments that Petrobras was required to make in the oil and gas sector, Law 12,276/2010 introduced the so-called "Transfer of Rights" (ToR) regime which defined a special capitalisation of Petrobras at the time and gave Petrobras (upon consideration) the right to produce up to five billion BOE (barrels of oil equivalent) in certain pre-salt areas.

Petroleum activities are regulated by the following main government bodies:

• the Ministry of Mines and Energy (Ministério de Minas e Energia);
• the National Council of Energy Policy (Conselho Nacional de Política Energética); and
• the National Agency of Petroleum, Natural Gas and Biofuels (Agência Nacional do Petróleo, Gás Natural e Biocombustíveis).

The Ministry of Mines and Energy

The Ministry of Mines and Energy (MME) was originally created by Law 3,782/1960 and then later recreated by means of Law 8,422/1992, which governs its organisational structure. MME’s main activities are focused on political co-ordination and interaction with its related entities.

MME promotes and supervises the implementation of public policies in several sectors, such as energy, mining, oil, fuel and power, including nuclear energy.

The National Council of Energy Policy

The National Council of Energy Policy ("CNPE") was created by the Petroleum Law. It is a joint ministerial entity, presided over by the minister of mines and energy and formed by representatives of other ministries and relevant entities, such as the Energy Research Office ("EPE").

CNPE is a consulting body that assists the president of Brazil with proposals on policies and guidelines for the energy sector. CNPE is responsible for promoting the rational use of energy resources and ensuring a constant supply of energy throughout the country.

The National Agency of Petroleum, Natural Gas and Biofuels

The National Agency of Petroleum, Natural Gas and Biofuels ("ANP") is the regulatory agency for petroleum activities. It is connected to MME and is part of the indirect public administration.

ANP was created by the Petroleum Law and has the authority to regulate, intervene and oversee petroleum activities, including the creation of infra-legal rules (eg, resolutions); to institute administrative proceedings and the application of penalties; to issue authorisations to regulated agents; and to promote and disclose geological and geophysical studies related to petroleum activities.

ANP is also authorised to promote and organise bid rounds for the award of E&P rights, and to execute concession contracts on behalf of the federal government.

Brazil also has two state-owned companies related to E&P activities, namely Petrobras and Empresa Brasileira de Administração de Petróleo e Gás Natural or Pré-Sal Petróleo SA (PPSA).

Petrobras

Petrobras was created in 1953 by Law 2,004/1953, following a heavily nationalist debate over the most appropriate policy for oil and natural gas E&P activities in Brazil. Petrobras had a monopoly with regulatory attributions for over four decades until the opening of the market in the late 1990s.

PPSA

PPSA is a state-owned company linked to MME, the creation of which was authorised by Law 12,304/2010 and Decree No 8,063/2013. Its main purposes are the management of production-sharing contracts (PSCs) – to which it is a party without assuming liabilities – and the management and marketing of the federal government’s share of oil and natural gas. The company also represents the federal government in unitisation matters in pre-salt areas.

The regulatory framework for the petroleum sector in Brazil encompasses two main laws: the Petroleum Law and the Pre-Salt Law.

The Petroleum Law

The Petroleum Law was a major milestone for the petroleum sector in Brazil (both onshore and offshore) and implemented the concession regime for the award of E&P rights by the federal government. In this context, the Petroleum Law created the ANP and CNPE (and defined their authority), outlined the relevant bidding rules and procedures to be observed in the bid round and the main provisions of the concession contracts, and provided the government's policy objectives for the rational use of the country's energy resources.

The Pre-Salt Law

The Pre-Salt Law established an additional contractual regime – the production-sharing regime – to fields located within Brazil’s pre-salt areas (offshore) and other strategic areas. The Pre-Salt Law also gives Petrobras preferential rights to choose the areas in which the company intends to operate, and the relevant participating interest (minimum 30% PI).

The ToR

The ToR (despite the debates about its classification as another legal-fiscal regime) was also enacted by Law 12,276/2010 exclusively for Petrobras to allow for its capitalisation, as detailed in 6.3 Unique or Interesting Aspects of the Petroleum Industry.

Both the concession regime (governed by the Petroleum Law) and the production-sharing regime (governed by the Pre-Salt Law) allow for the acquisition of E&P rights by any company that meets the requirements established by ANP.

Such acquisitions may be direct (through participation in the bid rounds promoted by ANP) or indirect (through the acquisition of a participating interest in an E&P contract previously granted in a bid round), subject to the approval of ANP or MME (the latter for PSCs).

The Concession Regime

The concession regime has been in effect since 1997, pursuant to the Petroleum Law. Under this regime, a concessionaire will carry out E&P activities at its own risk and expense. Access to the bid rounds is open to any company that meets the legal, technical and financial requirements established by ANP. Operators must undergo a qualification process to operate onshore or offshore (shallow and/or deep waters), depending on their prior operating experience. The criteria used by ANP to determine the winning bidders are based on a formula that considers the amount of signature bonus (80%) and the minimum exploratory programme (20%).

The concession contract is entered into by ANP and the concessionaires. In addition to the payment of a signature bonus offered during the bid round, the concession contract determines the payment of the following:

• a retention fee that is proportional to the size of the concession area retained;
• royalties;
• special participation; and
• payment for occupation or retention of an area (onshore blocks).

For the areas located within the pre-salt polygon and others that are considered strategic, CNPE decides whether a bid round will be held or whether Petrobras will be hired directly (in order to preserve the national interest and achieve other energy-policy objectives), in accordance with the Pre-Salt Law. In both cases, contracts are executed under the production-sharing regime. Bid rounds are also conducted by ANP.

The Production-Sharing Regime

Under the production-sharing regime, a contractor will also carry out E&P activities at its own risk and expense. In the case of a commercial discovery, the contractor will have the right to be reimbursed for properly incurred E&P costs (cost oil), and will receive a percentage of the profits generated by the project (profit oil). The contractor’s share of project profits will be defined in the PSC.

Cost oil

The cost oil is the share of production costs that the contractor is entitled to recover (in the case of a commercial discovery) for costs it incurred and investments it made during exploration, appraisal, development, production and abandonment activities. The terms, conditions and limitations of the cost oil will be detailed in the PSC.

Profit oil

The profit oil is the share of production profits to be divided between the federal government and the contractor, and represents the difference between the total volume of production and the share of cost oil and royalties.

Signature bonus

In addition to royalty payments, the production-sharing regime also establishes the payment of a signature bonus. Unlike the concession regime, the value of a signature will be determined in advance by the relevant PSC – it will not, however, be among the criteria used to determine the winners of a bid round. Rather, the criteria used by ANP to determine winning bidders during the production-sharing regime’s bid rounds will be based exclusively on the highest share of profit oil offered to the federal government by the competing companies.

The applicable rules for a direct acquisition are outlined in the Petroleum Law or the Pre-Salt Law, and detailed in the tender protocols of each relevant bidding procedure. In the case of an indirect acquisition, the requirements set forth in the tender protocol of the most recent bidding procedure carried by ANP must be met.

In a nutshell, the tender protocols detail the relevant phases of the bidding procedures, such as registration/expression of interest, qualification (legal, technical and financial), submission of bid bond guarantees, public sessions for submission of offers (bids), payment of a signature bonus and the awarding of the contract.

Since 1998, Brazil has consistently held bid rounds for the awarding of concession and production-sharing contracts. Brazil has also found time to innovate and is now committed to implementing the Permanent Offer system for the award of E&P rights under both concession and production-sharing regimes.

The Permanent Offer System

ANP approved the process of the Permanent Offer of areas back in 2017 with the initial purpose of allowing, through a differentiated system, the development of relinquished fields and exploratory blocks that had not been awarded during past bid rounds under the concession regime. 

The innovative factor of the Permanent Offer system is the on-demand bidding rounds, the so-called “Cycles”. Each Cycle encompasses a public session for presentation of offers only for the sectors that have had an expression of interest accompanied by a bid bond. Only bidders that undergo the registration process may submit an expression of interest for ANP's analysis. Three Cycles of Permanent Offer under the concession regime have already been held, which resulted in the award of over 100 blocks and 13 areas with marginal accumulations.

After such positive results, CNPE published Resolution 27 at the end of 2021, appointing the Permanent Offer system as the preferential mechanism for the offer of E&P rights. CNPE also authorised ANP to appoint and include in the Permanent Offer, under the concession regime, any onshore and offshore blocks, in addition to the non-awarded and relinquished fields (or those in the process of being relinquished).

CNPE Resolution 27/2021 established that fields and blocks included in the pre-salt area or in strategic areas are not covered by this authorisation. Pre-salt blocks may be exceptionally included in the Permanent Offer by means of a specific determination of CNPE, which defines the parameters applicable to each field or block.

Registration or Qualification

One individual registration with the payment of a single participation fee allows the interested companies to participate in all Cycles of each Permanent Offer under the concession regime or under the production-sharing regime. Such payment grants access to a sample of data from the sectors of the Permanent Offer.

Only bidders that undergo the registration process may submit an expression of interest indicating the block for which they intend to bid. The expression of interest must be submitted with a valid bid bond. To participate in the presentation of offers of the current Cycle, a bidder must observe the specific schedule disclosed by ANP relating to such Cycle.

In the concession regime, only the registration phase will take place. The qualification process of the winning bidders occurs after the public session. In the bid rounds and Cycles under the production-sharing regime, however, the qualification process must occur before the public session.

The Bidding Process

The schedule of each Cycle of the Permanent Offer starts with the approval by ANP of the first expression of interest and bid bond. Only bidders whose registration (or qualification, in the production-sharing regime) is approved by ANP and who present a timely expression of interest accompanied by a valid bond are eligible to place bids in the public session.

The bid bonds may be provided in the following categories:

• letter of credit;
• performance bond; and
• escrow account deposit (in the concession regime).

The bids placed in a specific public session will be ranked and the winning bidder will be announced (in the same public session).

If the winning bidder either is not qualified (in the case of the concession regime) or fails to execute the relevant contract, the bid bond guarantees will be enforced, as applicable, and the penalties provided for in the tender protocol are applied. In this case, the remaining classified bidders will be called to express their interest to meet the amount of the bid placed by the previous winning bidder.

Execution of the Contract

Winning bidders must proceed with the following main steps towards the execution of the relevant contract:

• submit proof of payment of the signature bonus, in accordance with the tender protocol;
• provide ANP with financial guarantees for the minimum exploratory programme within the term established in the tender protocol; and
• provide ANP with a performance guarantee, if necessary (applicable for an operator only, if its technical qualification was based on the experience of its economic group).

The bidding process is concluded with the execution of the contracts.

The Approval Process

The assignment of an E&P contract – full or partial – is allowed under Article 29 of the Petroleum Law and Article 31 of the Pre-Salt Law, provided that the assignee fulfils the technical, financial and legal requirements set forth by ANP in the relevant E&P contract and the rules set forth in the tender protocol. ANP’s prior approval is required before the assignment becomes effective. For PSCs, ANP will issue a recommendation to MME, which is the government body required to approve the assignment. PSCs also provide that, in any case of assignment by any contractor, the right of first refusal of the other contractors must be observed.

The Petroleum Law and Decree No 2,705/1998 set forth that the exploration, development and production of petroleum are subject to payment of the following government deductions:

• a signature bonus (see 2.1 Forms of Allowed Private Investment in Upstream Interests);
• royalties;
• special participation; and
• payment for occupation or retention of an area (in the case of onshore blocks).

Royalties

Under the concession regime, the basic rate for royalties is 10%, but this can be reduced by up to 5% depending on geological risks, expected production, and other relevant factors. Resolution 853/2021 allows the reduction of the royalty rate to 5% for fields operated by small-sized companies and to 7.5% for fields operated by medium-sized companies, subject to ANP's approval.

Under the production-sharing regime, royalties are levied at a rate of 15%.

In both cases, the royalties are calculated on the value of the production of oil and natural gas.

Special Participation

Special participation only applies to fields with large production volumes under the concession regime. Special participation is calculated based on the net revenue of the quarterly production of each field, after the deductions allowed by paragraph 1 of Article 50 of the Petroleum Law (royalties, exploration investments, operating costs, depreciation and taxes). The rates range from 0% to 40%.

Payment for Occupation or Retention

The amounts to be paid for occupancy or withholding of an area (only due under the concession regime), are calculated in Brazilian reals per square kilometre. They must be paid and adjusted annually, as of the date of execution of the concession contract.

In addition to the government deductions detailed in 2.3 Typical Fiscal Terms under Upstream Licences/Leases, companies engaged in the petroleum industry are also subject to the payment of federal, state and municipal taxes levied in different situations.

Corporate Income Taxes

Brazilian companies are subject to corporate income taxes (IRPJ and CSLL) on their worldwide income. IRPJ is levied at a rate of 15%, with a surtax of 10% levied on the taxable income exceeding BRL240,000 a year, while CSLL is levied at a rate of 9%.

Brazilian companies may elect to pay IRPJ and CSLL on a deemed income determined by a percentage of gross revenues ("presumed profit methodology" or PPM) or on their actual income adjusted by add-backs and exclusions determined by tax legislation ("actual profit methodology" or APM).

Brazilian companies engaged in the petroleum industry usually elect to use APM because it allows losses to be carried forward indefinitely and it allows up to 30% of the taxable income of subsequent tax periods to be offset. In addition, it is mandatory for companies that had gross revenues in the previous calendar year in excess of BRL78 million.

PIS/COFINS

In addition to the taxes levied on income, revenues earned by Brazilian companies are subject to PIS/COFINS at a combined rate of either 3.65% for companies under the cumulative regime, or 9.25% for companies under the non-cumulative regime. The latter regime is mandatory for companies under the APM and allows the calculation of non-cumulative credits for certain inputs, costs and expenses incurred by the company to be offset against PIS/COFINS amounts otherwise payable.

Withholding Tax

While dividends are exempt from income tax, payments of other income, capital gains and earnings to beneficiaries domiciled overseas are subject to withholding tax (WHT) at rates ranging from 0% to 25%. The remittance of fees for the charter of FPSO and other vessels used in E&P activities may be subject to a 0% tax rate if certain requirements are met. Except for dividends, payments made to beneficiaries domiciled in tax haven jurisdictions are subject to WHT at a rate of 25%, regardless of their nature.

Taxes on Importation of Services

Brazilian companies are also subject to taxes levied on the importation of services (WHT, PIS/COFINS-Importation, CIDE, ISS, and IOF) and goods (II, IPI, PIS/COFINS-Importation, ICMS and AFRMM).

Repetro-Sped

The importation of goods may benefit from Repetro-Sped, which is a new special tax and customs regime applicable to the importation of goods used in E&P activities. This regime is valid until 2040 and allows the importation of certain goods expressly listed by Normative Instruction RFB No 1,781/2017 with the suspension or exemption of federal taxes otherwise levied on the temporary or definitive importation of those goods. Goods not listed may be imported under the temporary admission regime with the proportional payment of taxes.

Repetro-Sped also encompasses the so-called "Repetro-Industrialização regime", which allows both the importation and the local acquisition of raw materials, intermediate products and packaging materials for the manufacturing of products to be used in E&P activities, with the suspension of federal taxes. Although the sale of the final manufactured product is exempt from ICMS, its purchase by the E&P company is subject to ICMS of 3%.

State VAT (ICMS) is not regulated by Repetro-Sped legislation, but ICMS Agreement No 03/2018, with the changes implemented by ICMS Agreements No 220/2019 and 137/2020, grants the reduction of ICMS levied on the definitive import of goods and the local purchase of goods manufactured under the Repetro-Industrialização regime to 3% provided that Repetro-Sped requirements are met. Goods imported on a temporary basis are exempt from ICMS and this rule is now expressly mentioned in the ICMS Agreement.

Tax Reforms

Tax reforms are under discussion in the Brazilian congress and the resumption of taxation on dividends, which became exempt from income tax in 1996, is being proposed.

Tax reform proposals also provide for the creation of a tax like VAT to be levied on the operation of goods and services, with the consequent extinction of other federal, state and municipal taxes currently levied on these operations. The actual extent of the reform, such as the rate of the new tax and which taxes will become extinct, varies depending on the proposal and there is still no consensus in congress regarding which proposal will advance.

The bill that is currently at the most advanced stage is Amendment Bill No 110/2019, which aims to replace the consumption taxes with two taxes on the consumption of goods and services, creating the so-called “IBS” and amending the Brazilian constitution in order to allow the creation of the Social Contribution on Goods and Services ("CBS"), which bill of law was proposed by the executive branch, influenced by the international standards of VAT.

Petrobras

The most relevant national oil company with an operational role in Brazil is Petrobras, which is still responsible for the majority of petroleum produced in the country.

Since the opening of the market, Petrobras has been carrying out the economic activities related to its corporate purpose in free competition with other companies, in line with market conditions and other principles and guidelines set forth in the Petroleum Law and also Petrobras by-laws.

Preferential right

Since the enactment of the Petroleum Law, no special rights have been given to Petrobras in connection with E&P contract awards. The Pre-Salt Law grants Petrobras certain preferential rights to choose the areas in which it intends to operate with a minimum 30% participating interest.

Decree No 9,041/2017 further regulated the "preferential right" and provides that, within 30 days from the publication of the CNPE resolution with the technical and economic guidelines for the blocks to be offered under the production-sharing regime, Petrobras must express its interest in participating as an operator in the relevant blocks and its intended participating interest, which cannot be lower than 30%.

After Petrobras has expressed its interest, the CNPE presents the potential blocks to be operated by the company to the president of the republic, indicating its minimum participation in the consortium (between a minimum of 30% and that indicated by Petrobras).

According to Decree No 9,041/2017, if Petrobras does not exercise its preferential right, the blocks will be offered in the bid round, and Petrobras may participate on equal terms and conditions with the other bidding companies.

Withdrawal option

Furthermore, regarding Petrobras's areas of interest, Decree No 9,041/2017 benefits the company with a “withdrawal option”, allowing Petrobras to refuse to enter into a PSC with another company or consortium declared as the winner of the bid round. The "withdrawal option" only applies in cases where the profit oil percentage offered to the federal government by another consortiumis higher than the minimum percentage established in the tender protocol. In such cases, however, if the profit oil percentage offered by another consortium (winner) is equal to the minimum established in the tender protocol, Petrobras will be part of the consortium, jointly with the winning bidder.

If Petrobras is not integrated into the consortium, the winning bidder must appoint the operator and the participating interest of each party to the consortium, as a necessary condition for the approval of the bidding results by ANP.

Local content requirements in Brazil correspond to a contractual obligation arising from the concession contract or the PSC, which may vary in accordance with the tender protocol and the applicable rules of each bid round.

Local Content Certificates

Compliance with local content requirements must be evidenced by the contractor or concessionaire through the submission of local content certificates to ANP, which will run an audit process in this regard. The certificates are issued by third-party certifying entities that are accredited by ANP.

Upon assessment of the certificates, if ANP verifies that the concessionaire/contractor has not complied with the relevant local content requirements, a penalty may apply, corresponding to the difference between the percentage achieved and the percentage actually committed to.

Removal of Local Content from Bid Criteria

Historically, local content obligations have been encompassed in E&P contracts in Brazil ever since the first bid round under the concession regime, as they were originally bid criteria. At the beginning of 2017, the federal government started to implement several regulatory changes in the petroleum industry, including the removal of local content from the applicable bid criteria by means of CNPE Resolution 07/2017.

Percentages

In order to improve the attractiveness of the bid rounds, CNPE Resolution 07/2017 also reduced the minimum percentages of local content requirements (which were historically high), to be complied with by the concessionaire or contractor of offshore blocks, to the following:

• 18% in the exploration phase; and
• 25% (well construction), 40% (offloading systems) and 25% (offshore production rigs) in the production development phase.

As for onshore blocks, CNPE established a global commitment of 50% in the exploration phase and 50% in the development phase.

This adjustment represented a significant reduction (50% on average) on local content requirements for the upcoming bid rounds at the time – it eventually contributed to the organisation of General Bid Rounds 14–16 (under the concession regime), and Pre-Salt Bid Rounds 2–6 (under the production-sharing regime), all of which were held in 2017–2019.

Rules

In 2018, further improvements were made under ANP Resolution 726/2018, which regulated the amendments to the local content clauses of concession contracts executed up until and including the 13th bid round, and also established rules regarding exemptions (waivers), adjustments of percentage and transfers of local content excess regarding the concession contracts from the seventh to the 13th bid rounds.

Conduct Adjustment Agreement

ANP Resolution 848/2021 provided for the Conduct Adjustment Agreement ("TAC"), which allows local content infractions and/or fines to be replaced by new investments in national goods and services in relation to terminated contracts or already concluded contractual phases.

See 2.8 Other Key Terms of Each Type of Upstream Licence for a comprehensive analysis of the key terms of concessions and PSCs in Brazil, including the requirements to proceed to development and production.

E&P Phases

Concessions and PSCs in Brazil typically provide for two distinct phases:

• the exploration phase, which comprises the appraisal of a discovery, if any; and
• the production phase, which includes the development stage.

During the exploration phase, concessionaires/contractors are obliged to perform all the activities contemplated by the minimum exploration programme, including conducting seismic works and drilling wells.

Concessionaires/contractors must provide ANP with financial guarantees for the minimum exploration programme within the term established in the tender protocol.

Failure to comply with the minimum exploration programme at the end of the exploration phase may result in the lawful termination of the contract, without prejudice to the enforcement of the financial guarantees for exploration activities and the application of penalties.

After performance of the minimum exploration programme and within the expected term for the exploration phase, concessionaires/contractors may do the following, after providing written notice to ANP:

• propose a discovery appraisal plan and relinquish the remaining area;
• inform ANP about the commercial feasibility of the discovery (declaration of commerciality), initiating the production phase;
• retain the areas in which postponement of the declaration of commerciality is applicable; or
• fully relinquish the concession area.

ANP must be informed of any discovery of oil and/or natural gas in the concession area within 72 hours. If the company decides to proceed with the appraisal of a discovery, it must submit a discovery appraisal plan for approval by ANP.

Upon compliance with the discovery appraisal plan approved by ANP, concessionaires/contractors may, at their sole discretion, submit the declaration of commerciality of the field, along with the final discovery appraisal report. Within 180 days of receiving a communication on the approval of the final discovery appraisal report, concessionaires/contractors must also submit the development plan to ANP, describing in detail the activities and investments to be made in its entire life cycle.

The production phase usually lasts up to 27 years for concession contracts, counted from the submission of the declaration of commerciality. A total contractual term of 35 years will apply for PSCs.

The field must be relinquished to ANP at the end of the production phase, in compliance with the applicable laws and regulations and the best practices of the oil industry.

Liability

Concessionaires/contractors may carry out oil and gas E&P activities either individually or through a consortium with other companies. Under a consortium agreement, a leader company must be appointed to be the operator. The other consortium members will be jointly and severally liable before ANP and the federal government for the obligations undertaken under the relevant contracts.

Decommissioning and Abandonment

Concessionaires/contractors must also provide a decommissioning and abandonment guarantee as of the production starting date, in an amount corresponding to the expected cost for the decommissioning and abandonment of the facilities in place. This guarantee may be issued in the form of a performance bond, a letter of credit, a provisioning fund, or other type of guarantee, at ANP’s discretion.

The amount of the decommissioning and abandonment guarantee for a development area or field must be reviewed at the request of the concessionaires/contractors or ANP, if there are any events that could alter the cost of the abandonment and decommissioning of the relevant operations.

In 2020, ANP published Resolution 817, which was a milestone for the energy industry, consolidating and modernising the technical regulation for decommissioning of E&P facilities and making ANP's analysis more dynamic. In the following year, ANP published Resolution 854/2021, reinforcing its commitment to promoting legal certainty and clarity on the obligations and deadlines for the presentation of abandonment guarantees.

A financial guarantee or deed already in place, that ensures the decommissioning of facilities, must be presented within 180 days from the production starting date of the field. The financial guarantee or deed may be presented in a way that composes the amount to be guaranteed annually, pursuant to the Progressive Allocation Model ("MAP"). The total amount to be guaranteed must correspond to the estimated decommissioning cost, pursuant to the latest version of the approved Annual Work Plan ("PAT").

The types of guarantees accepted by ANP are:

• a letter of credit;
• an insurance bond;
• an oil and natural gas pledge; and
• a corporate guarantee.

ANP may also accept self-insurance by the contractor by means of an extra-judicial guarantee, according to the total value of the obligation defined in the MAP, and upon signature of an extra-judicial enforceable deed pursuant to the Brazilian Civil Procedure Code.

The financial guarantee or deed will be accepted at ANP's discretion, and ANP may, at any time, determine the replacement of a type of decommissioning guarantee or deed, whenever a technical evaluation concludes that such guarantee or deed is inefficient and inadequate in the specific case.

Entitlement, Domestic Supply Requirements and Export Rights

Concessionaires and contractors are entitled to sell or dispose of the petroleum produced. As a rule, concession contracts and PSCs do not provide for restrictions on export rights.

The contracts provide for an exception in cases where the domestic supply of oil, natural gas or their by-products is at risk (an "emergency situation"), in which case, ANP may determine that the concessionaire/contractor must limit its petroleum exports. An emergency situation must be declared by the president of the republic.

Termination Events

Concession contracts and PSCs provide for several termination events, which are divided into three categories:

• lawful termination;
• bilateral termination (upon mutual agreement between the parties, without prejudice to the performance of the obligations thereunder) and unilateral termination (at any time during the production phase, giving ANP at least 180 days' prior notice); and
• termination for default (failure of concessionaire/contractor to perform the contractual obligations within the term established by ANP; or the occurrence of a judicial or extra-judicial reorganisation; or if the concessionaire/contractor's economic and financial capacity to fully meet all contractual and regulatory obligations is not evidenced to ANP).

In a lawful termination, the termination events apply at one of the following points in time:

• at the end of the contractual term;
• upon completion of the exploration phase without performance of the minimum exploration programme;
• at the end of the exploration phase, if there has been no commercial discovery;
• if the concessionaire/contractor fully relinquishes the concession/contract area;
• if the concessionaire/contractor exercises its right to withdraw during the exploration phase;
• upon failure to deliver the development plan within the term established by ANP;
• upon non-approval by ANP of the development plan;
• upon refusal of the consortium members to execute, in whole or in part, the production unitisation agreement after ANP’s decision in this regard; or
• upon adjudication of bankruptcy or non-approval of any concessionaire/contractor’s request for judicial reorganisation by the court.

Under any of the termination events set out above, the concessionaire/contractor will not be entitled to any reimbursement. Upon termination, the concessionaire/contractor will be liable for losses and damages arising from their default and termination, paying all applicable indemnifications and compensations, as provided by Brazilian law and the relevant contracts.

Dispute Resolution

Both the concession contract and PSC establish arbitration as the main dispute resolution method. The arbitration procedure will be administered by a recognised arbitration institution with a sound reputation, appointed by mutual agreement of the parties. If the parties do not reach agreement as to the choice of arbitration institution, ANP will indicate one of the following:

• the International Court of Arbitration of the International Chamber of Commerce;
• the London Court of International Arbitration; or
• the Hague Permanent Court of Arbitration.

The city of Rio de Janeiro, Brazil, will be the seat of the arbitration and the place where the arbitral award is rendered. On the merits, arbitrators will decide based on Brazilian laws, and the arbitration proceeding will be in Portuguese. It is worth noting that there are already disputes in place against ANP, based on the arbitration clause of the relevant contracts.

Both the Petroleum Law and the Pre-Salt Law allow the assignment – in whole or in part – of concession contracts and PSCs, as long as the assignee meets the technical, economic and legal requirements set forth by ANP in the relevant E&P contract and the rules under the tender protocol. ANP’s prior and express approval (or recommendation for approval by MME, for PSCs) is required before the assignment can actually be effective.

The assignment may materialise as an actual/direct assignment of participating interest from one concessionaire/contractor to another or, indirectly, by means of a corporate transaction. Thus, a change in control or a merger, amalgamation or other corporate transaction may trigger a need for the concessionaire/contractor to request ANP’s approval.

The assignment process is initiated at the request of the assignor by means of an application submitted to ANP. Upon issuance of the technical opinions of ANP’s internal bodies and the opinion of the partnership proposal evaluating committee ("CAPP"), as well as the recommendation of the Attorney-General’s Office of the Agency, the request will be submitted for approval by ANP's board of directors. The decision of ANP's board of directors is issued by means of a board resolution, which is published on ANP's website and in the Official Gazette. For PSCs, ANP will issue a recommendation to MME on approval of the assignment.

PSCs also provide that, in any case of an assignment, the other contractors must be given the right of first refusal.

The transaction may also be subject to the approval of the Brazilian Antitrust Authority ("CADE"), if the gross revenues of the parties involved in the transaction (and the relevant economic groups) meet certain thresholds established in Article 88 of Law 12,529/2011, updated by Interministerial Ordinance No 994/2012.

ANP Resolution 785/2019, regarding the assignment of rights, consolidates the procedures for the assignment of E&P contracts (previously established in several different documents) and improves the legal certainty of the related mechanisms. This resolution also has provisions relating to upstream funding based on the reserve-based lending concept.

There are no specific legal or regulatory restrictions on production rates.

Petrobras still plays a major role in the midstream sector, although this role has been reduced over the past few years as a result of actions taken by both the antitrust authorities and the federal government to reduce the role of Petrobras and to create a competitive regulatory framework for local midstream and downstream markets. Petrobras undertook a major asset divestment programme involving its midstream and downstream assets, and its quasi de facto monopoly of the pipeline transportation business has been reduced.

There is no restriction on private investments or statutory monopoly in refining, pipelines, transportation or the distribution and retail of fuels or lubricants. Private investors interested in carrying out midstream/downstream activities in Brazil must be authorised by or registered with ANP. In the course of granting these authorisations or registrations, ANP as a public body must limit itself to verifying fulfilment of the requirements set out in the existing legislation and regulations.

There are no legal national monopolies in Brazil in relation to downstream operations.

Petrobras has a dominant market position in some areas, currently under review by CADE. As a result, in June and July 2019, Petrobras and CADE entered into agreements for the cessation of practices ("TCCs"), whereby Petrobras agreed to divest approximately 40% of its refining capacity in Brazil and to exit completely from gas pipeline transportation and gas distribution activities in Brazil. The planned outcome of those TCCs is in accordance with federal government policies for the opening of the midstream and refining sectors in Brazil, set by CNPE in April 2019.

Refining Activities

All licences for downstream activities must be granted by ANP in the form of authorisation issued by ANP or registration with ANP.

Refining activities, including construction, the expansion of capacity and the operation of refineries, are subject to prior and express authorisation from ANP, which is granted in a two-stage process:

• construction authorisation (construction, modification or expansion of capacity); and
• operation authorisation.

Companies that are interested in applying for refining-related authorisations must comply with the requirements of ANP Resolution 852/2021, ANP Technical Regulation No 1/2010 and relevant attachments. The applicant must be a company existing and incorporated in Brazil.

Upon completion of the works relating to the construction authorisation, the applicant must formally request ANP to inspect the facilities. To obtain the authorisations, the company must submit the relevant environmental licences, a specific fire safety certificate, and proof of ownership of the facilities or a lease agreement for a minimum period of five years to ANP, among other documents and information.

Storage, Marketing and Distribution

The authorised refiner can only market refined products with distributors that are authorised to operate by ANP. Such distributors must exclusively market the refined products with retail carriers ("TRRs") and retailers of automotive fuels, liquefied petroleum gas (LPG) and aviation fuels.

Distribution is also subject to prior authorisation by ANP following a process of staged application and the filing of documents as specified by ANP Resolution 58/2014.

Only companies incorporated in Brazil, with the business purpose of distributing fuels, may be authorised by ANP. Such companies must also have a minimum paid-in capital of BRL4.5 million (updated periodically by ANP) and storage capacity of 750 cubic metres.

The applicant must also own at least one storage facility or have a participating interest percentage in “pooled” facilities that meet the minimum storage capacity.

Retail sale of automotive fuels may only be exercised by companies incorporated in Brazil that are authorised by ANP to sell automotive fuels, and that comply with the provisions set forth in ANP Resolution 41/2013.

In April 2019, ANP issued ANP Resolution 784/2019, establishing new rules regarding the authorisation of operations of storage facilities for automotive liquid fuels, aviation fuels, solvents, basic and finished lubricant oils, LPG, fuel oil, illuminating kerosene and asphalts.

Midstream/downstream operations in Brazil are not granted or awarded by the federal government to a private investor. Any private investor that is eligible and capable of complying with the existing requirements may apply for authorisation or registration with ANP. This application has no costs attached to it, and if it is accepted by ANP, the applicant is not required to submit to any specific fiscal terms vis-à-vis the federal government.

The main transactional taxes applicable to midstream/downstream activities are PIS/COFINS, CIDE-Fuel and ICMS.

Comments regarding IRPJ and CSLL made in 2.4 Income or Profits Tax Regime Applicable to Upstream Operations also apply to midstream/downstream activities.

Other Key Taxes

CIDE-Fuel

This is levied on the importation and trading of petroleum and its derivatives, natural gas and its derivatives, and ethyl alcohol fuel, currently available from the producer, importer and formulator at variable rates, as governed by the Complementary Law 192/2022 and 194/2022. The CIDE-Fuel levy on ethanol and gasoline transactions is 0% until 31 December 2022.

PIS/COFINS

The general aspects of this are detailed in 2.4 Income or Profits Tax Regime Applicable to Upstream Operations. There are differentiated rates/regimes depending on the product and the specific activity segment of the taxpayer – currently, taxation is concentrated at the level of the producers, importers and/or distributors (the so-called monophasic regime). Importers, manufacturers or the ordering party of certain fuels may opt to use the so-called RECOB regime, which allows the payment of PIS/COFINS by ad-rem rates, multiplying the quantity of fuel acquired by specific values defined by tax legislation, as ruled by the Complementary Law 192/2022 and 194/2022. The PIS/COFINS levied on import transactions of diesel oil, biodiesel, liquefied petroleum gas, oil and gas derivatives, aviation kerosene, and alcohol is 0% until 31 December 2022.

ICMS

Transactions with fuels are usually subject to a “pre-payment" regime where the tax substitute (usually the producer/importer) advances the ICMS due on the next transactions of the production chain (ICMS-ST) up until the sale is made to the final consumer, based on statutory value-added margins. Complementary Law 192/2022 regulated a new tax regime for anhydrous ethanol, gasoline, diesel, biodiesel, and liquefied petroleum gas transactions (the so-called monophasic regime), in which the ICMS is due only once the fuel is in the production chain. In this regime, the ICMS is levied as the fuel exits the producer’s establishment or in the customs clearance carried out by the importer. There are currently some legislative controversies regarding the ICMS ad–rem rate in the transactions listed above, since, as ruled by Complementary Law 192/2022, the rate must be the same among the different states.

Exemptions

The Special Regime of Incentives for the Development of Infrastructure ("REIDI") may apply to projects related to the construction of the infrastructure necessary for producing or processing natural gas and related pipelines. If so, such projects will be exempt from the PIS and COFINS normally levied on certain acquisitions used in pre-approved projects.

The REPETRO-SPED regime usually does not apply for importation or local purchase of assets or goods used in midstream/downstream operations. As a general rule, REPETRO-SPED applies only to operations related to the exploration, development and production of oil and gas.

Reform Proposals

As mentioned in 2.4 Income or Profits Tax Regime Applicable to Upstream Operations, tax reform proposals currently under discussion in the Brazilian congress may also affect the taxes levied on midstream/downstream operations.

As per 3.2 Rights and Terms of Access to Any Downstream Operation Run by a National Monopoly, there are no legal national monopolies in Brazil in relation to upstream/downstream activities. There are also no special rights for Petrobras (the national oil and gas company) or its subsidiaries in the Brazilian downstream sectors.

There are no mandatory local content requirements in connection with midstream/downstream activities in Brazil.

See 3.3 Issuing Midstream/Downstream Licences.

A cornerstone of the Brazilian constitution is the protection of private property. Property rights in Brazil can be acquired by all means admitted under Brazilian civil law, and eminent domain rights and condemnation are admitted in certain circumstances as an exception to the private property protection general regime.

Law 8,987/1995 (the Concessions Law) sets forth that only a public authority has eminent domain rights. In Brazil, those rights translate into the power of certain public authorities to declare a property (including real estate) to be of "public interest" for the execution of a public service or work.

Condemnation in Brazil must be carried out directly by a public authority or by a private party by means of a delegation of powers, in which case, the private party will be the one liable to pay any third party(ies) the applicable financial compensation for the asset declared to be of public interest.

Expropriation of Property

Regarding the expropriation of real estate properties or the establishment of an administrative servitude on a private property for the performance of petroleum activities in particular (eg, the implementation of refineries, natural gas processing, liquefaction or regasification units, storage terminals, pipelines, etc), ANP has the authority to conduct the relevant processes and to declare any assets (including real estate) necessary for the execution of a certain public activity to be of public interest, as provided in the Petroleum Law and in Law 14,134/2021 (the "New Natural Gas Law").

ANP Resolution 44/2011 sets out the applicable rules and requirements to be met by the parties interested in having a property declared by ANP as being of public interest for the purposes of expropriation and/or the establishment of an administrative servitude.

Both the Petroleum Law and the New Natural Gas Law provide interested parties with third-party access rights to transportation pipelines and maritime terminals.

Third-party access to transportation pipelines is governed by ANP Resolution 11/16 (oil transportation pipelines) and ANP Resolution 35/12 (gas transportation pipelines).

Under the open access regime, a transporter must give third parties non-discriminatory access to transportation facilities in exchange for adequate remuneration, calculated using criteria established by ANP, taking into account any exclusivity rights held by the owner of the facility, if applicable.

More recently, the New Natural Gas Law extended third-party access to essential facilities (eg, gas offloading systems, gas processing facilities and LNG terminals). Such access must be negotiated in good faith and in a non-discriminatory manner by the facilities’ owners, who will retain preference for using the facilities.

There are no restrictions on product sales into the local market in Brazil.

ANP Resolution 777/2019 establishes the framework for export activities relating to biofuels and petroleum and its by-products. Such resolution revoked more than 20 diplomas governing export activities, thereby providing standardised authorisation requirements and administrative proceedings for both export and import licence applications.

The applicable ANP regulations, relevant requirements and available downstream licences in Brazil are addressed under 3.3 Issuing Midstream/Downstream Licences. The transfer of downstream licences typically requires prior approval from ANP, and is subject to the ability of the transferee to evidence their capacity to undertake the related downstream activity and to comply with the applicable regulatory requirements.

BITs and the PCFI

Brazil’s traditional position regarding the international foreign direct investment (FDI) system is usually a topic of significant discussion. Brazil is still not a major player when it comes to bilateral investment treaties and agreements (BITs) – although it signed 25 BITs between 1990 and 2014, none of them has yet come into force. Beginning in 2015, Brazil accelerated the pace, signing BITs with several countries (Post-2015 BITs) and entering into a Protocol of Co-operation and Intra-MERCOSUR Investment Facilitation ("PCFI") with Argentina, Paraguay and Uruguay. Of these, only the BITs with Angola and Mexico and the PCFI (as it pertains to Uruguay) have come into force.

Creating a Climate for Foreign Investment

Over the years, Brazil has implemented crucial domestic changes to create an appropriate climate for foreign investment, by adopting rules in favour of neutral dispute resolution and international commercial transactions, including the enactment of pro-arbitration legislation, international sales of goods, rules on the protection of property rights and free enterprise.

Dispute resolution

In the petroleum industry, arbitration has gained a prominent position in Brazil among public and private parties. For public parties, for instance, the Petroleum Law states that one of the mandatory clauses in concession contracts for oil and gas exploration and production is "the rules for the resolution of disputes… including conciliation and international arbitration". Moreover, Pre-Salt Law states that one of the mandatory clauses in PSCs is "the rules for the resolution of disputes, which may set forth conciliation and arbitration".

The adoption of arbitration by Brazilian law, especially in Brazilian oil and gas legislation, and its acceptance by local courts represent a great attraction for investors. The possibility of having disputes settled by an independent and impartial arbitral tribunal, where the award can be enforced in Brazil (following the ratification of the New York Convention), is considered a major advantage for foreign investors.

Protection of property

Under Brazilian domestic substantive law, the protection of foreign investment is included in the current legal-normative structure of Brazilian public administration. The Brazilian constitution also guarantees the right to private ownership of property and free enterprise.

Unlike many other jurisdictions, Brazil does not impose unilateral sanctions against persons and/or entities. There is no legislation in place regulating such practice. Brazilian law and certain international treaties require Brazil and Brazilian persons and entities to comply with a number of multilateral sanctions databases and foreign requests to enforce measures against sanctioned parties. In any case, many companies that operate in Brazil may be subject to foreign sanctions regimes that could bind them to other databases or restrictions to conduct business in certain countries and/or with certain foreign persons and entities. As a practical matter, this means that there may be cases in which a Brazilian company or a foreign company incorporated in Brazil will be compelled to comply with sanctions unilaterally imposed by a given foreign jurisdiction or international organisation even if Brazilian law does not formally recognise their direct enforceability.

The Brazilian constitution provides for environmental protection (Article 225), stating that every person has the right to an ecologically balanced environment. Federal authorities can pass general laws and regulations on environmental control, while states and municipalities can supplement federal legislation in issues of local interest. Moreover, the Brazilian constitution ensures that all three administrative levels are responsible for the enforcement of environmental laws, so federal, state and municipal environmental agencies are all involved.

Complementary Law 140/2011 details the activities subject to environmental licensing by federal, state and municipal environmental protection agencies, and co-ordinates the enforcement power of those agencies.

Law 6,938/1981 implements the National Environmental Policy Act (NEPA) and details the environmental authorities at the federal, state and municipal levels. Among these authorities, it is worth mentioning the Federal Environmental Agency ("IBAMA"), the Federal Agency for Conservation Units ("ICMBio"), and state and municipal environmental agencies, which are responsible for the execution and enforcement of environmental laws at federal, state and municipal levels.

Environmental Liability

The Brazilian constitution provides for environmental liability, which may be imposed against individuals or legal entities in three different fields, as follows.

Civil liability

This is tied to the concepts of pollution and polluter, and is strict, joint and several, and unlimited. Strict liability means that no fault or wilful misconduct of the polluter needs to be evidenced in order to establish the obligation to repair or pay compensation for environmental damage. Joint and several liability means that each polluter may be called to indemnify or repair the entire damage, provided that the right of contribution is secured.

Administrative liability

This subjects the violator of a legal provision to administrative sanctions described in the Environmental Crimes Act (ECA), in Federal Decree No 6,514/08 and in other laws and regulations. Environmental administrative liability is enforced by the competent federal, state or municipal environmental protection agency, through the application of auto-enforceable sanctions, which may include fines of up to BRL50 million, the suspension or cancellation of a registration/permit/authorisation, the restriction or suspension of tax benefits/incentives or credit from official institutions, and the prohibition to execute contracts with public authorities.

Environmental criminal liability

This is also provided for in the ECA and establishes criminal sanctions applicable to activities deemed harmful to the environment. The determining element of accountability for the application of criminal sanctions is the existence of fault on the part of the agent that committed the crime (negligence, imprudence, malpractice or wilful misconduct). Liable parties may be sanctioned with fines, the rendering of community services, the restriction of rights and, in the worst cases, imprisonment. Executive officers, directors, administrators, managers, etc, may also face environmental criminal liability along with companies.

Other Federal Laws and Regulations

Other laws and regulations are also important in the context of petroleum activities. At the federal level, the following should be highlighted:

• Federal Law 9,966/2000 and Federal Decree No 4,136/2002, which provide for pollution at sea, in line with the International Convention for the Prevention of Pollution from Ships ("MARPOL") and other international conventions signed by Brazil regarding the matter;
• Federal Decree No 8,437/2015, which defines the activities that are subject to federal environmental licensing;
• Federal Law 9,985/2000 and Federal Decree No 4,340/2002, which regulate the environmental compensation due from potentially polluting activities; and
• MMA Ordinance No 422/2011, which defines and details the environmental licensing procedure for offshore petroleum activities, among others.

Potentially polluting activities require environmental licences, whether they are major upstream projects or involve midstream or downstream operations, through which the relevant environmental agency authorises the location, installation, operation and expansion (alteration) of the relevant projects and activities. Environmental licences usually establish a series of obligations with which companies must comply, which include measures to avoid, mitigate or compensate potential environmental impacts arising from the licensed activity.

The installation, operation or alteration of projects without proper and valid environmental licensing, or without complying with the conditions of the respective environmental licences, may subject transgressors to civil liability (in the case of environmental damage), administrative sanctions and criminal liability.

While IBAMA conducts environmental licensing for offshore E&P activities for conventional resources, and onshore or offshore E&P activities for unconventional resources; state EPAs conduct proceedings for onshore E&P activities for conventional resources and, as a general rule, for midstream and downstream activities.

MMA Ordinance No 422/2011 governs the federal environmental licensing of offshore E&P, and comprises the Seismic Survey Licence; the Drilling Operation Licence; Preliminary, Installation and Operation Licences for the production and flow-off of petroleum activities; and Preliminary, Installation and Operation Licences for extended well tests (EWTs).

The proceeding begins with a Term of Reference granted by IBAMA, which details the type of environmental study required in accordance with the complexity of the project and the sensitivity of the area. More complex projects require an environmental impact assessment (EIA), a report on environmental impact ("RIMA") and at least one public hearing.

Offshore development is subject to environmental licensing proceedings and compliance with several environmental laws on the management, control and reporting of incidents; see 5.1 Principal Environmental Laws and Environmental Regulator(s) and 5.2 Environmental Obligations for a Major Petroleum Project.

ANP is appointed in the Petroleum Law ANP as the entity responsible for inspecting E&P activities, with the objective of preventing operational safety failures and avoiding possible harm to life, the environment and property.

One of the main regulations concerning offshore facilities issued by ANP in this regard is ANP Resolution 43/2007, which provides the Operational Safety Regime and establishes the Technical Operational Safety Management System Regulation ("SGSO Regulation").

ANP Resolution 41/2015 also establishes the Sub-sea Systems Operational Safety Regime and the Technical Regulation of the Sub-sea System Operational Safety Management System ("SGSS"), with requirements and minimum safety and operational standards.

From a labour law perspective, companies are legally required to implement both the Occupational Health Control Programme ("PCMSO") and the Environmental Risks Prevention Programme ("PPRA"). Companies are also required to have an Internal Committee for Accident Prevention (CIPA) and Specialised Services in Health and Safety ("SESMT") for the purposes of guaranteeing the safety of employees in the workplace and preventing the occurrence of occupational diseases and labour accidents.

The concessionaire/contractor – or, jointly, the consortium members – is/are responsible for the decommissioning liabilities of the field before ANP. ANP Resolution 817/2020 established obligations and deadlines for the decommissioning of oil and gas production systems, including the content of the decommissioning programme and the final decommissioning report. This resolution attempted to establish a more integrated approach between the different existing regulatory agencies that should be involved (eg, ANP, environmental agencies and the navy). See 2.8 Other Key Terms of Each Type of Upstream Licence ("Decommissioning and Abandonment") for a more comprehensive analysis.

Brazil is a signatory of several international treaties, such as the Paris Agreement, which was ratified in 2017. In signing this agreement, Brazil undertook to reduce its greenhouse gas emissions to 37% below the levels of 2005 by 2025 and to 47% below by 2030, through reaching a 45% share of renewable energy in the energy mix, and increasing biofuel consumption, ethanol supply and biodiesel content in the diesel blend, among other means.

Brazil enacted the National Policy on Climate Change Act (Law 12,187/2009), seeking to reduce GHG emissions, strengthen carbon capture initiatives and promote the recovery of degraded areas, among other objectives.

Brazil is also known for encouraging an increase in biofuels in its energy mix, having implemented several related mechanisms, such as a national biofuel policy called “RenovaBio”.

Fracturing ("fracking")

In Brazil, exploration activities in the sedimentary basins have been carried out through two main conventional methods:

• in most cases, based on the occurrence of a porous and permeable deposit, protected by an effective "cap rock" and filled with hydrocarbon from "source rocks" (capable of generating oil and/or gas); and
• in less frequent situations, in naturally fractured reservoirs with production capacity.

In both cases, a fracturing ("fracking") process may be necessary to increase the flow area in the deposit, with the hydrocarbon lifted to the top of the well through induced fractures, considerably increasing the drainage area.

Brazil has tried to promote the use of such techniques to evaluate the potential of gas production in its onshore basins of Recôncavo, São Francisco and Paraná.

Resolution 21/2014

ANP published Resolution 21/2014, which addresses operational safety regarding the protection of people and the environment while using hydraulic fracturing techniques in an unconventional reservoir.

Campaigns and public civil action

ANP also promoted the 12th Bid Round for the exploration and production of petroleum, offering 110 exploratory blocks with the objective of attracting investment to regions that are not well known from a geological standpoint or that have had technological challenges. Non-government organisations initiated a campaign against hydraulic fracturing in unconventional reservoirs, being supported by the Office of the Prosecutor General, which proposed public civil actions in all the states where the offered blocks were located. Several preliminary injunctions were rendered, suspending the execution of the E&P contracts.

The Poço Transparente initiative

In recent years, the Brazilian government implemented the Poço Transparente (transparent well) initiative, which is a pilot project with the objective of monitoring operations involving fracking in unconventional reservoirs. At the end of 2021, CNPE published Resolution 28 to establish the preparation and publication of a tender protocol with the rules for a project to be qualified under the Poço Transparente initiative, as well as to recommend ANP to consider reducing the royalty rate for such projects to 5%. Such tender protocol was launched earlier this year and was made available for public consultation.

See 5.5 Climate Change Laws.

The typical structures for LNG projects in Brazil are as follows:

• a structure where the imported LNG is regasified at a Floating, Storage and Regasification Unit, which is connected to the power plant through pipelines (Offshore Regasification Terminal); or
• a structure where the imported LNG is regasified at a regasification plant within a certain industrial site, in which case a special LNG pipeline may connect the storage facilities to the regasification plant (Onshore Regasification Terminal).

Both the Offshore Regasification Terminal and the Onshore Regasification Terminal are classified as an LNG Terminal, pursuant to the New Natural Gas Law and ANP Resolution 50/2011.

Authorisation

The main permits required for the construction and operation of an LNG Terminal are environmental permits, port and maritime permits, and LNG and gas regulatory permits.

ANP Resolution 52/2015 regulates the relevant authorisations for the construction and operation of LNG Terminals. Accordingly, such authorisations are granted by ANP in two phases: construction authorisation and operation authorisation.

Most of the requirements imposed by ANP for the issuance of construction authorisation and operation authorisation relate to technical information regarding the LNG Terminal, which must be in accordance with certain specific technical requirements set forth by ANP and other technical bodies. ANP also requires the applicable environmental, port and maritime permits for the LNG Terminal, which must be secured by interested parties for the construction and operation of such facilities.

In order to be able to import LNG, the company or consortium must also obtain authorisation (MME Ordinance 232/2012), as well as LNG Self-Importer Registration (ANP Resolution 51/2011).

The above authorisations are obtained through the submission of certain corporate documents and detailed presentation of the project, including a description of all involved facilities and pipelines, as well as the gas technical specification.

Reducing Carbon Emissions

Brazil has announced its commitment to reducing its carbon emissions by 50% by 2030. Such commitment does not seem to be affecting the development of upstream and midstream projects in the country. The Ten-year Energy Expansion Plan (PDE 2031) indicates a significant increase in petroleum production in Brazil – expected to reach 5.2 million barrels per day (bbl/day) in 2031 – mainly resulting from the pre-salt units (particularly the Búzios, Tupi, Mero, Sépia and Atapu fields). In line with its carbon reduction target by 2030, Brazil has been extending its carbon capture, utilisation and storage (CCUS) activities over the past years. A CCUS project developed by Petrobras alone contributed with the capture of roughly seven million tonnes of carbon per annum in 2020, which corresponds to almost 19% of the total worldwide.

Brazil's Energy Matrix

Brazil has a diversified energy matrix with only 25% of the country's total installed capacity corresponding to thermal power plants, and the other 75% divided between renewable sources, such as hydro, wind and solar, occupying a favourable position in comparison with other countries worldwide. In its commitment to more sustainable development, early in 2021, CNPE published Resolution 2, prioritising the allocation of research, development and innovation resources to the following subjects:

• hydrogen;
• nuclear energy;
• biofuels;
• energy storage;
• technologies for sustainable thermo-electric generation;
• digital transformation; and
• strategic minerals for the energy sector.

CNPE also established the National Hydrogen Programme as a committee in charge of issuing strategic guidelines for the development of the sector in Brazil. In addition, the senate proposed, in 2022, Bill 757 to qualify hydrogen as a sustainable resource, define the applicable administrative competence and impose the addition of at least 5% of hydrogen into pipelines by 2032 and 10% by 2050. 

More recently, the Brazilian government published Decree 10,946/2022, which is the first legislation on offshore power generation projects, governing the implementation and operation of such projects in areas under the domain of the federal government. This further reinforces Brazil's commitment to the continuous development of its diversified energy matrix.

The Transfer of Rights (ToR)

To increase the financial capacity of Petrobras to explore and produce pre-salt reserves, Law 12,276/2010 introduced the Transfer of Rights (ToR), which defined a special capitalisation of Petrobras at the time and assigned Petrobras (upon consideration and through direct contracting) the right to produce up to five billion BOE in certain pre-salt areas.

As consideration, Petrobras paid BRL74.8 million for the ToR, and the company's capitalisation process amounted to BRL120 billion (representing the largest capitalisation in world history at the time). As mandated by Law 12,276/2010, the federal government and Petrobras entered into a special E&P contract to govern the ToR.

In addition to the five billion BOE that Petrobras has the right to produce, studies indicate the existence of a surplus volume of oil and gas ranging from six billion to 15 billion BOE in the ToR area (the "ToR Surplus"). In order to encourage bigger and more diversified private investment in the petroleum sector in Brazil and to collect funds for the federal government, in November 2019 ANP organised a specific bid round for the ToR Surplus (the "ToR Bid Round"). The ToR Bid Round was held under the production-sharing regime and offered private companies the opportunity to jointly develop the ToR Surplus with Petrobras within the Atapu, Búzios, Itapu and Sépia areas.

ToR Bid Round

Under the ToR Bid Round, Petrobras acquired Itapu (100%), and a consortium formed by Petrobras (90%), CNOOC (5%) and CNODC (5%) acquired Búzios. There were no bids for the Atapu or Sépia areas. The federal government collected approximately BRL70 billion in signature bonuses, in addition to its profit oil from eventual production.

ToR Bid Round 2

In December 2021, both the unawarded areas of Atapu and Sépia were acquired in ToR Bid Round 2, which amounted to BRL11.14 billion in signature bonuses. The Atapu area was acquired by a consortium formed by Petrobras (52.5%), TotalEnergies EP (22.5%) and Shell Brasil (25%), with 31.68% profit oil. The Sépia area was acquired by a consortium composed of Petrobras (30%), QP Brasil (21%), Petronas (21%) and TotalEnergies EP (28%), with 37.43% profit oil. Petrobras exercised its preferential rights to be operator in the areas. The tender protocol of ToR Bid Round 2 established the co-participation agreement model and the amount to be paid to Petrobras as compensation (over USD3.253 billion for Atapu and over USD3.2 billion for Sépia). By disclosing such information, the federal government’s main goal was to provide adequate predictability and legal assurance for interested companies to participate in ToR Bid Round 2.

Over the past year, the main changes in the oil and gas laws and regulations in Brazil were:

• Enactment of Decree 10,946/2022, establishing rules for the implementation and operation of wind offshore power generation projects;
• Enactment of CNPE Resolution 3/2022, which establishes strategic guidelines for the design of the new natural gas market, improvements to energy policies aimed at promoting free competition in this market, and the grounds for the transition period;
• Enactment of CNPE Resolution 27/2021, which –
1. indicates the Permanent Offer system as preferential for the offer of E&P areas;
2. allows ANP to appoint and include any onshore and offshore blocks in the Permanent Offer under the concession regime; and
3. allows fields and blocks included in the pre-salt area or in strategic areas to be exceptionally included in the Permanent Offer under the production-sharing regime; and
• Enactment of CNPE Resolution 26/2021, which authorises ANP to include 11 blocks under the production-sharing regime in the Permanent Offer (Petrobras exercised its preferential right to be the operator in Água Marinha and Norte Brava, with a minimum participating interest of 30%).

The Impact of COVID-19

At the beginning of the pandemic, ANP issued two important resolutions. ANP Resolution 815/2020 extended certain deadlines related to oil and natural gas exploration and production contracts. In parallel, ANP Resolution 816/2020 (replaced by ANP Resolution 836/2020) established procedures for ANP's regulated agents during the pandemic.

The pandemic affected the bid round schedule, with the ANP board of directors suspending concession regime Bid Round 17, which was planned for 2020 and which took place in October 2021. ANP continued to take action and issued (i) Resolution 865/2022, which extended deadlines for investments in research, development and innovation documents; and (ii) Resolution 878/2022, allowing contractors to request an extension to the exploration period for contracts that were in effect on 28 September 2021 and on the date the request was presented.