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Oil & Gas in Brazil

Contributors:
Caio Bernardes Vianna
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Long before COVID-19, investors and companies were already coping with an increasing pressure to shift their businesses away from hydrocarbons towards a low-carbon sources. With governments and businesses increasingly committing to decarbonization targets and major oil companies leading such transition, the rebound of economic activities to pre-COVID-19 levels together with high oil prices during 2021 boosted the energy transition plans. Such factors together with the war in Ukraine in early 2022, triggered high volatility in energy prices and supply risks, reinforcing the need of sustainable and resilient assets with focus in renewable sources. The bridge to a “greener” future, however, still relies in the oil and gas core activities at least for the short and medium term.

Brazil may be a perfect summary of the current energy transition and, particularly, its opportunities. The country assembles the natural conditions and a regulatory framework that may enable said desired shift into a renewable energy hub.

In the upstream segment, Brazil is home to most of the offshore projects under development in the world with more than 15 offshore production units scheduled to start operation until 2025 and with an increase forecast of oil production of 20% by 2025, reaching 3.65 Mbpd and 5Mbpd by 2030. Brazil’s main oil production comes from pre-salt deep water assets (approx. 76%), which are not only highly productive but also deemed to be one of the most decarbonized oils in the world with an issuance rate below 10kgCO2/boe. This will be a key factor for reaching decarbonization goals, while assuring the necessary volumes of oil for the upcoming years.

A trend in the Brazilian upstream has been the M&A activity of mature fields, those with 25 years of production or with at least 70% of accumulated production, aiming at increasing their recovery factors. Throughout 2021 ANP implemented certain regulatory incentives to enable such favorable environment for M&A of secondary assets, including (i) the reduction of royalties applicable to blocks operated by small and medium companies (ANP Resolution No. 853/2021); (ii) rules applicable to the decommissioning guarantees with clear procedure and applicable terms (ANP Resolution No. 854/2021); (iii) the procedure for nomination of area by a company of the oil & gas industry indicating an area as “exploratory block” or “marginal accumulation” on a confidential basis to be studied by ANP for potential offering in future bidding rounds (ANP Resolution No. 837/2021); and (iv) rules for the adjustment agreement to remedy the non-compliance of local content provision of concession contracts (ANP Resolution No. 848/2021).

The outcome in 2021 for upstream segment was the record in annual production of pre-salt, 2 bidding rounds with 5 areas sold in the 17th Bidding Round and 2 blocks (Sépia and Atapu) auctioned under the Second Transfer of Rights Surplus Production Sharing Bidding Round, as well as 118 assets acquisitions approved by ANP. Brazilian upstream scenario continues to be a relevant drive for our economy.

New Gas Market and Midstream 

The modernization of the Brazilian gas market with the enactment of New Gas Law (Law No. 14,134/2021) and further regulations is expected to bring substantial benefits to Brazilian economy. Fostering liquid wholesale gas markets and creating demand of capital-intensive infrastructure investments will not only create new investment opportunities but it will also provide a monetization solution for the increasing natural gas production of pre-salt. The increase of gas stake in Brazilian energy matrix shall also ensure an energy system with high capacity to meet peak seasonal energy demand and paving the way for crucial gas infrastructure that will be used by renewable fuels, including biomethane and hydrogen, enabling a smoother energy transition.

From 2019 to 2021 the Brazilian gas market perceived an increase of players in the different areas of the sector with new commercialization, shipping and import authorizations being granted by ANP: (i) 71 new authorizations for shipping of natural gas by pipelines; (ii) 76 new commercialization authorization of natural gas; (iii) 55 new import authorizations of natural gas.

Several Brazilian States have been also amending local state legislation to comply with the principles of the New Gas Law and to regulate the free market, which is a crucial milestone to consolidate the market and attract new players (Amapá, Amazonas, Ceará, Espírito Santo, Maranhão, Minas Gerais, Paraíba, Paraná, Pernambuco, Rio de Janeiro, Rio Grande do Norte, Rio Grande do Sul, São Paulo, Santa Catarina, Sergipe). Consolidating the competition in the gas distribution segment, Petrobras concluded the sale to Compass of its 51% stake in Gaspetro, which is a holding company with equity interests in 18 natural gas distribution companies located in all regions of Brazil.

Another relevant movement to boost the new gas market in Brazil relates to the recent decision of ANP to resume public tendering for the transportation of natural gas along the Bolivia-Brazil gas pipeline (Gasbol), which was suspended due to consequences of COVID-19. The offer is a contract for 10.08 million m3/day at the entry point of Corumbá (Mato Grosso do Sul state) and the total capacity of each of the Gasbol exit zones, covering five states (Mato Grosso do Sul, São Paulo, Paraná, Santa Catarina and Rio Grande do Sul). The fees will be the same as those in the contracts signed under Public Call to tender in 2019.

Downstream and Other Opportunities 

In a new attempt to sell its last refineries, Petrobras announced in June 2022 to recommence the divestment of Abreu e Lima (Pernambuco State), Presidente Getúlio Vargas (Paraná State) and Alberto Pasqualini (Rio Grande do Sul State).

It is also worth noting new initiatives in the Brazilian renewable fuels industry with well-established companies investing in biofuels, biogas/biomethane and, more recently, hydrogen. The update of natural gas regulation giving similar treatment to biogas and enabling the use of the network transportation together with government programs to foster the adoption of such fuels (such as, the Incentive Program for the Production and Use of Biogas, Biomethane and Associated By-products – PIBB) will help decarbonize Brazilian energy matrix.

Brazil implemented important regulatory framework changes in the entire O&G sector to enhance its competitiveness and to expedite its energy transition. Despite the need to continue the regulatory work to address a more dynamic market, the basis for a consistent energy transition is already established and companies are betting in Brazil.

Editor's Note: Mattos Filho's 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. Loss co-signs the following market overview with associate Caio Bernardes Vianna. Both are also members of Mattos Filho’s Band 1 oil and gas practice.