Editor’s note: Mattos Filho, Veiga Filho, Marrey Jr. e Quiroga Advogados’ Giovani Loss has become a key figure in Brazil’s oil and gas sector. His practice stood out at the same time the country became a major oil producer by developing its deep-sea oil deserves. He has been ranked by Chambers for about a decade, rising to the Band 1 position in 2015. In 2021, Loss was ranked as Star Individual in the sector after leading year by year some of the main mandates in the area and getting recognition from peers and clients for his leadership. He is seasoned assisting major international E&P companies. Recently, UK’s Premier Oil and Brazil’s Petro Rio have relied on his counsel for key deals in the sector. Loss co-signs the following market overview with Associate to Watch Bruno Chedid and Caio Bernardes Vianna. Both are also members of Mattos Filho’s Band 1 oil and gas practice.
Oil & Gas in Brazil
Despite major impacts of COVID-19 to economies worldwide, which caused a plunge in the oil prices to USD21.04/b in April last year, oil and gas production in Brazil continues to grow. In 2020, Brazil’s oil and gas production reached a record high of 3.74 million of barrel of oil equivalent per day (boe/d), being 2.94 million barrels of oil per day (bbl/d) and 127.4 million cubic metres of natural gas per day (m³/d). Brazil’s oil production remains predominantly offshore, with Petrobras still being the major player in the market, responsible for roughly 74.01% of the oil and gas production. Pre-salt areas account for 68.6% of the national production.
With Brent prices returning to USD60/70 levels, companies that stalled their investments amidst the outbreak are expected to resume their projects. Petrobras’ ongoing divestment programme, the resume of annual bidding rounds by ANP and the enactment of highly anticipated regulations, such as the New Gas Law, are also key features in the industry which are expected to create new opportunities and different businesses models in all upstream, mid-stream and downstream segments of the Brazilian oil and gas industry.
The Brazil E&P recovery is also evidenced by the investment plans of major players for 2021. According to the latest available Capex figures collated by BNamericas, twenty-seven of Latin America's principal oil and gas operators expect to outlay USD164.39 billion this year, representing an increase of USD18.6 billion when compared to 2020. This trend is aligned with the general optimism on the Brent price forecast of relevant stakeholders. With other countries in Latin America still struggling with their political scene, Brazil presents positive signs to the oil and gas industry, having the potential to attract investors with already developed assets, as well as expectation of new exploration opportunities in deep water off the Brazilian coast.
Integrated gas projects, such as gas-to-power and LNG-to-power, are becoming more of a reality in the country, with different players seeking to develop gas-based projects and regasification terminals on the Brazilian coast from the south east to the northern part of the country. Some recent developments in this segment are: the acquisition of the entirety of Golar’s businesses in Brazil by New Fortress Energy; the execution of a Memorandum of Understanding between Hydro and New Fortress to supply gas to their alumina plant in Bacarena; the announcement by Porto do Açu regarding the obtaining of the operation licence for its first thermal power plant located in Rio de Janeiro State, which is part of the largest thermoelectric power complex in Latin America; the declaration of public utility by Santa Catarina and São Paulo States regarding areas destined for regasification terminals to be operated by Golar and Compass, respectively; the tender process for the lease of the Petrobras LNG regasification terminal in Bahia with processing capacity of 20 million m³/d; and the request for new licences by Petrobras for the expansion of the regasification terminal in the city of Rio de Janeiro from 20 to 30 million m³/d.
Petrobras's divestment programme has been ongoing since 2015, with more than USD42 billion in assets being sold, including TAG, NTS and a myriad of mature oil and gas onshore and offshore fields. The agreement entered into by Petrobras with CADE is also pushing for the sale of eight refineries opening the so-closed Brazilian downstream market to new players, additional stake in NTS etc. Among the assets being divested by Petrobras, it is worth mentioning:
• eight oil refineries, representing approximately 50% (fifty per cent) of Brazil's refining capacity;
• onshore and shallow water fields, (i) Norte Capixaba Cluster, with 5 onshore concessions; (ii) Carmópolis Cluster, with 11 production concessions; (iii) Potiguar Cluster, with 23 onshore and 3 offshore producing concessions; (iv) Bahia Terra Cluster, with 28 onshore concessions; (v) Urucu Pole, with 7 production concessions; (vi) Merluza Cluster, with two offshore concessions;
• offshore fields, (i) Albacora and Albacora Leste deepwater concessions; (ii) Marlim Complex, with four offshore deepwater concessions; (iii) BM-S-51 concession; (iv) Golfinho and Camarupim Clusters;
• natural gas carriers, (i) 51% stake in Transportadora Brasileira Gasoduto Bolívia-Brasil – TBG; (ii) remaining 10% stake in Nova Transportadora do Sudeste S/A – NTS;
• local gas distribution companies, 51% of Petrobras Gás S.A. – GASPETRO, which is the holding company of 19 Brazilian local gas distribution companies.
Petrobras's divestment of mature assets allows for new independent oil and gas companies, private equity funds and financial institutions to enter the market and expand their portfolio. The diversification of players in mature fields together with the recovery of the Brazilian capital markets represents a new important trend of funding through public listing with the Brazilian stock market (B3 S.A.), as it would be the case of PetroRecôncavo S.A., Petro Rio S.A. and 3R Petroleum Óleo e Gás S.A.
The consolidation of the mature fields segment is a result of the regulatory effort of the Brazilian National Agency of Petroleum, Natural Gas and Biofuels ("ANP") to address key aspects of E&P financing through ANP Resolution No. 785/2019, which established new rules for the assignment procedure of concession agreements and settled new rules about security interests over rights arising out of E&P agreements (i.e. reserve-based lending). Another important regulatory innovation was ANP Resolution No. 817/2020 regulating the decommissioning of E&P facilities. This resolution addresses relevant concerns on assignment procedures, as well as sale and purchase of E&P assets, by requiring a clear allocation of responsibilities between assignor and assignee regarding the assets to be decommissioned.
The diversification of the Brazilian E&P market with the entrance of small and medium size companies was also enabled by the creation of the open acreage tenders, which consists of the continuous offer of exploratory blocks and areas with marginal accumulations located in onshore and offshore basins returned or in the process of being returned to the ANP. Another regulatory measure expected to foster this segment is the reduction of royalties applicable to small and medium size companies (up to 5% and 7.5%, respectively), which draft resolution has been recently discussed under a public hearing and consultation procedure and its publication is expected for this year.
The opening of the Brazilian refinery market is ongoing after Petrobras entered into a settlement agreement with the Brazilian Antitrust Authority (CADE) for the sale of eight oil refineries and associated infrastructure. Such settlement represents a milestone in the modernization of the sector due to both (i) sale of half of Petrobras's operations, representing half of the Brazilian refinery capacity; and (ii) the potential development of new refineries, in view of a more competitive and free market. Although Petrobras’s refinery divestment is only expected to be concluded by December 31, 2021, several new projects are being built or planned throughout Brazil and existing refineries are being expanded (e.g. Oil Group is planning the construction of a small refinery in Açu Port in Rio de Janeiro State and it is negotiating two refineries with EnP in Espírito Santo State; Noxis is studying three projects in Sergipe, Ceará and Espírito Santo State; Dax Oil expanded a small refinery in Camaçari in Bahia State).
Modernization of the Gas MarketLaw No. 14,134/2021 (New Gas Law) was finally enacted in April 2021 bringing a long-awaited modernization of natural gas legislation in favour of a more open, dynamic and competitive market. The New Gas Law, further regulated by Decree No. 10,712/2021, introduced relevant changes from upstream to downstream segments more aligned with the opening of the market after the divestments of Petrobras and enabling the integration with the electric power sector, including the following:
• Access to Essential Facilities - ensures non-discriminatory and negotiated access for third parties interested in production flow pipelines, natural gas treatment or processing facilities and LNG terminals, detailing the rules on access and enhancing the transparency to the third-party access of such infrastructure;
• Natural Gas Transportation – establishes (i) an authorization regime, which shall expedite the construction or expansion of new gas pipelines; (ii) an entry/exit model for contracting capacity, increasing the liquidity and flexibility of transportation network; (iii) the unbundling of the industry by prohibiting direct or indirect control or affiliation between transporters and the remaining segments (exploration, development, production, importing, shipping and commercialization of natural gas);
• Classification of Gas Pipelines – new criteria more aligned with the reality of the existing or ongoing transportation projects and delegating to ANP regulation the classification of pipelines not covered by the New Gas Law, favouring, in theory, a technical assessment and fostering flexibility of new projects;
• Underground Storage – establishes an authorization regime, which is simpler than the previous concession model, and may foster investments in order to create a market in Brazil;
• Distribution and Commercialization - preserved the possibility for free consumers, self-producers, and self-importers to directly build and set facilities and pipelines for their specific use when their natural gas flow needs cannot be met by the states' piped natural gas distributors. The New Gas Law also authorizes ANP to adopt mechanisms to stimulate efficiency and competition of the segment (through reduction of the concentration of supply and mandatory transfer of transportation, production flow, and processing capacities; mandatory sale of natural gas by agents with high market share; and restrictions on the sale of natural gas between producers in the production areas).
Summary of ANP Bidding Rounds
After the postponement of the 17th bid round due to COVID-19, ANP resumed the bidding rounds and announced the following schedule for presentation of proposals: (i) 17th bid round, on October 7, 2021; and (ii) Second Transfer of Rights Surplus Bid Round, on December 17, 2021. ANP is also planning the 18th bid round, and the 7th and 8th Bidding Round for exploration blocks under the production sharing regime, which schedules are still to be published.
The bottom line is that the Brazilian energy sector, and more particularly the oil and gas industry, is undergoing fundamental changes from a legal and practical perspectives. The mid and downstream markets are finally opening with the divestments of Petrobras, new regulatory frameworks are being placed to foster a more competitive market aiming at the integration with the power sector, and the upstream segment is diversifying bridging capital market funding to a sector traditionally dominated by big oil companies.