Exploration And Production In Brazil: A Rewarding Business

Article by Ivan Tauil and Roberta Caneca

The Brazilian oil and gas monopoly started to became more flexible in 1995, after the enactment of Constitutional Amendment No. 09 by the National Congress. The amendment removed constitutional barriers to the participation of the private sector in oil and gas activities in Brazil.

The flexibility of the monopoly has allowed the inflow of private investment in the Brazilian oil and gas industry. Previously, legislation granted the national oil exploration and production company - Petrobras - the exclusive right to operate the monopoly. The enactment of Law No. 9.478 (the "Petroleum Law") in 1997, made possible competition and investment from foreign oil companies, thus starting a new period in the country's petroleum history and turning Brazil into one of the most attractive markets in the world.

According to the law, the investors own 100% of the oil and gas production (subject to the payment of government royalties and taxes) and are allowed to operate all aspects of the petroleum chain from exploration and production to refining and distribution, under the supervision of an independent regulatory agency. After the opening up process, six bid rounds have been held since 1999.

As with all commodities, oil is a "risky business." It carries not only the usual risks attached to the geological uncertainties of the exploration, but also market and political risks. Nonetheless, economists say that Brazil offers a safe and strong environment for E&P investors. According to current studies, the regulatory environment in Brazil is less burdensome than in West Africa and about the equivalent of the Gulf of Mexico.

When making an investment decision, a foreign company generally takes many aspects into consideration. Overall crude potential is the main consideration, followed by political, economic, and legal aspects. The stability of taxation rules and contract terms and the size of the local market will also affect the company's decision. We can distinguish three different main aspects of the legal framework, related to (a) independent and stable regulatory agencies, (b) taxation, including government takes and the corporate tax regime, and (c) import/export rules for equipment and supplies.

Independent and Stable Regulatory Agencies

The National Petroleum Agency (ANP) was created by the Petroleum Law with the purpose of implementing the national oil and gas sector policy. The ANP is a special government...