CHAPTER 3 OIL AND GAS EXPLORATION AND PRODUCTION IN BRAZIL THE NEW PETROLEUM LAW AND CONCESSION CONTRACT
| Jurisdiction | Derecho Internacional |
(Mar 1999)
OIL AND GAS EXPLORATION AND PRODUCTION IN BRAZIL THE NEW PETROLEUM LAW AND CONCESSION CONTRACT
PetroBras Internacional, S.A. (Braspetro)
Rio de Janeiro, Brazil
for
the Special Institute on Oil & Gas Development in Latin America sponsored by
The Rocky Mountain Mineral Law Foundation
Caracas, Venezuela, 17-19 March 1999
1. Pg. 3.3 — 2nd paragraph — 1993 should read 1973
2. Pg. 3.3 — 3rd paragraph — 850 Million Barrels per Day should read 850 Thousand Barrels per Day
3. Pg. 3.5 — 3rd paragraph — Following "Board of Directors" (line 7) it should be added: the ANP's Board of Directors is composed of four directors plus one director general directly appointed by the President of the Republic, subject to prior approval by the Senate. The Board shall be governed under a collegial regime.
4. Pg. 3.5 — 5th paragraph — Following "shall be made in" please read item III.6.
5. Pg. 3.13 — 2nd paragraph — Should read: The Brazil Round 1 offers 27 blocks, being 23 in seven offshore basins, including 12 in the Campos and Santos basins.
6. Pg. 3.14 — 2nd paragraph — The exchange rate used for the amounts of rental surface fees was: U$1/R$2
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I- Introduction to Brazilian Macro-Economic and Oil Industry Scenarios
As a result of trade liberalization and economy deregulation process as well as the implementation of the economic stabilization policy as from 1994, Brazilian Government made significant structural reforms following the international trend, including in the energy and petroleum sectors, aiming at attracting foreign investments and capital inflows to the country.
The lowering of barriers against foreign goods and capital coincided with the creation in 1991 of the Common Market of the Southern Cone (MERCOSUL) which includes Argentina, Paraguay and Uruguay besides Brazil as partners and also Bolivia and Chile as "associated members". The Asunción Treaty in effect as of 1991, which provides for the objectives to be achieved in MERCOSUL, created an economic area with common external tariffs, free circulation of goods and services and an unified trade policy. Consequently, foreign and domestic companies interested in such huge regional market increased their investments and are looking for new business opportunities, mainly in the infrastructure sector. Indeed, trade between Brazil and other MERCOSUL countries have tripled during this time (oil imports from Argentina to Brazil reached nearly 140.000 barrels per day in 1997, involving daily amounts of up to US$ 2.1 million)
Brazil occupies nearly one half of the Latin American continent and has potential hydrocarbon bearing provinces comprising 5.4 million sq. km. in 31 sedimentary basins. It is worth noting that Brazil has enjoyed a significant success regarding oil exploration and production during the last two decades when the oil production increased to more than 1 million barrels per day and current plans estimate to reach 2 million barrels per day by around 2005. This remarkable effort should be attributable to PETROBRAS' success since 1984 in the Campos Basin (located at Rio de Janeiro State and where giant fields have been discovered) responsible for almost 70% of Brazilian total hydrocarbons production. During this period, PETROBRAS also developed its excellence in deepwater production (oil production at a depth of 1,709m became a reality in 1997 at South Marlim field in the Campos Basin and country reserves reached 16.9 billion barrels of oil and natural gas equivalent, being 28% located in deep waters-from 400 to 1,000 m and 45% in ultradeep waters-over 1,000m).
Notwithstanding the impacts of the global financial crisis on Brazilian economy, especially after Russia's crisis in October 1998, important upstream and downstream investments are under execution or planned for Brazil and other South American countries. For example the Bolivia Brazil Pipeline — where investments are forecast at roughly US$ 2 billion; Urucu National Gas Project — a gas pipeline from Argentina to the city of Uruguaiana in the South of Brazil; US$ 2 billion development of Barracuda and Caratinga oil fields; etc. According to Petroleum Intelligence Weekly, PETROBRAS is now the fifteenth largest oil company in the world.
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II-The Development of Brazilian Petroleum Regime up to the Re-Opening of the State's Oil Monopoly by the Constitutional Amendment of 1995
The development of Brazil's petroleum regime may be separated into four historic phases. The first phase began with the granting of a concession to explore for oil in 1864 and ended in 1938 with a law restricting foreign investment in oil exploration. During this phase only a few deep wells were drilled and no significant oil flows were recorded. During the second phase (1938-1953) responsibility for hydrocarbons was solely in the hands of a public sector organization. The exploration effort was moderately successful, with some commercial fields being reported. The creation of Petrobras started a third phase (1953-1995). During this phase, Petrobras developed the oil industry in the country by acquiring know-how, improving personnel training and pushing the national petroleum market for equipment, materials and services.
As a consequence of the 1993 petroleum crisis, in this third phase there was a period (1975-1988) during which foreign oil companies were invited to sign risk contracts with Petrobras, under a special type of agreement called "Service Contract with Risk Clause".
By the time this phase ended with the re-opening of the country to foreign and private exploration investments in 1995, oil production had reached 850 Million Barrels Oil Per Day, with an annual average of 716 BOPD. The consumption was 1,450 MBOD in the same year.
Following the general trend towards a more liberal economic policy, on November 1995 the Brazilian Congress passed Constitutional Amendment modifying the sub-items to Article 177 of the Brazilian Federal Constitution to create a new legal framework on the State oil monopoly. Until such time the State Constitution of 1988 and Law 2.004 of 1953 established the exclusive exercise and operation by PETROBRAS of the oil monopoly in the upstream and most part of downstream activities. The Constitutional Amendment no. 9 is the beginning of what can be called the fourth phase of the petroleum industry in the country when private investment was finally allowed to participate in all the phases thereof.
According to the amended Article 177, country's oil monopoly remained vested in the State that is now entitled to contract with public and private companies the performance of the following monopoly activities:
• hydrocarbons exploration and production;
• the refining of domestic and foreign crude oil;
• the import and export of oil and gas basic by-products; and
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• maritime transportation of domestic crude oil and by-products produced in Brazil as well as transportation through pipelines of domestic or foreign crude oil, its by-products and natural gas.
III- A Summary on the Law no. 9.478/97 — The New Petroleum Law
III.1 - New Energy Policy
On August 6, 1997, in connection with said new constitutional orientation, the Brazilian Congress approved and Government enacted Law 9,478 (hereinafter referred to as "The Petroleum Law" or "PL"). The PL is composed of 83 articles and deals with several aspects of the opening of Brazilian oil industry which can be summarized as follows:
• The new country's energy policy, its principles and objectives, including amongst other measures the environment protection, the increase of natural gas use and the promotion of free market competition, the supply of oil fuels in all the territory, the protection of consumers' rights;
• The creation of two governmental entities which will be in charge of planning, implementing, regulate, licensing and controlling energy and petroleum sectors in the countries: the National Council of Energy and the National Petroleum Agency;
• The new general legal framework for the oil industry, the adoption of a concession contract as the model agreement for exploration and production activities, and the regulation and requirements applicable to the acquisition of concession rights and permits for carrying out downstream activities; and
• New PETROBRAS's role in the free competitive market, ratification of its current rights on fields under production and special rules applying to it for acquiring new concession rights on fields under exploration and development.
The National Council of Energy is headed by the Minister of Energy and Mines and directly subordinated to the President of the Republic, also acting as the President's advisor and consultant. Such Council is responsible for proposing plans and actions aiming at the implementation of the national energy policy and its objectives that are properly defined in Article 2 of the PL.
PL's Chapter III reserves to the State the title and ownership on any and all petroleum, natural gas and other fluids hydrocarbons reservoirs existing within the national territory, which is composed of the onshore lands, the territorial waters, the continental shelf and the exclusive economic zone. It also entitles the State to grant concessions and permits to carry out monopoly activities referred o hereinabove to public and private enterprises organized under Brazilian law and having their headquarters and administration in Brazil.
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Finally, Chapter III brings an extensive list of twenty-three technical and legal definitions that should be carefully read in connection with those provided for in the model concession agreement for hydrocarbons exploration and production.
III.2 - New Regulation Agencies and their Roles
One of the most important changes introduced by this new regulatory regime was undoubtedly the creation of the National...
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