12

Legal Models of Petroleum and

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Natural Gas Ownership in Brazilian Law
Yanko Marcius de Alencar Xavier*

I. Introduction

The exploration and production of oil and gas in Brazil have been government
monopolies for a considerable time. Under this model, these mineral resources
belong to the government, and are to be used in accordance with the national
interest. In addition, the regulation of the oil and gas sector in Brazil was for many
years strongly characterized by action of the state as a financing and planning
agent. The state-run company,¹ Petrobras—Petróleo Brasileiro SA—maintained
exclusive control of all oil industry activities in Brazil for four decades following
its establishment in 1953.²
The state’s monopoly over the petroleum industry was confirmed—and
indeed extended—by the Brazilian Federal Constitution of 1988. However,
by the mid-1990s, as a large importer of petroleum and without the financial
means to expand oil activities, Brazil’s oil industry needed private investment.³
Moreover, the global wave of market liberalization of the 1990s, the increas-
ingly competitive nature of the international oil market, and pressure from
international oil companies who were keen to exploit Brazil’s extensive oil and
gas reserves, all provided arguments for the opening of the oil sector to wider
participation.
In 1995, Amendment No 9 to the 1988 Federal Constitution changed the
legal structure of the state monopoly, and established a new regulatory frame-
work for the Brazilian oil industry. Although government monopoly has been
retained, the amended Constitution and the Oil and Natural Gas Act (Federal

*
Yanko Marcius de Alencar Xavier is Professor of Energy Law, Department of Public Law,
Federal University Rio Grande do Norte, Natal, Brazil; email: ymxavier@ufrnet.br.
¹ Petrobras is a private corporation, with a majority of private stockholders, in which the Federal
Union has a majority of voting shares.
² Federal Law No 2004/1953.
³ P. Valois, ‘A evolução do monopólio estatal do petróleo’ (2001) Lumen Juris 116–17.

Legal Models of Petroleum and Natural Gas Ownership in Brazilian Law. Yanko Marcius de Alencar
Xavier.
© Oxford University Press 2010. Published 2010 by Oxford University Press.
 Petroleum and Natural Gas Ownership in Brazilian Law 223
Law No 9478/1997) allow private companies to exercise ownership over oil and
gas through concession contracts and the payment of fees and surtaxes to the gov-
ernment. The opening of the petroleum market has permitted a very large influx
of money from national and international companies, which has been sufficient
to increase the number of proven oil reserves and enhance energy security.
Nevertheless, the global energy crisis, the gradual rise of oil and gas prices,

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and the recent discoveries of new reserves in Brazilian deep waters (the so-called
‘pre-salt’ fields) have led to renewed political debate about the legal structure of
oil industry activities, with arguments being made for it to be changed back in
the direction of greater governmental participation. Over the course of the past
century, the balance of public and private involvement in the Brazilian petroleum
industry has in fact undergone a number of changes, as this chapter will dis-
cuss. As the Brazilian Congress prepares to debate the bills sent by the President
regarding new rules in the exploration of oil and natural gas in the pre-salt and in
other ‘strategic’ areas, the history of the changing legal framework of petroleum
exploration may indicate what lies ahead for legal analysts and investors alike.

II. Private entities in the history of the Brazilian oil industry

Since the late nineteenth century, there have been a number of legal regimes
governing oil and gas exploration and production. The regime adopted in the
1891 Federal Constitution (Art 72 § 17) assured the full rights of the owner
of the surface land over all resources in its subsoil. Since the adoption of the
Federal Constitution of 1934, however, Brazil has distinguished ownership of
the soil (land surface) from ownership of the subsoil. Th is is confirmed by Art
176 of the current (1988) Federal Constitution, which provides that oil and
gas reserves and mineral resources found in the subsoil belong to the Federal
Union.⁴ To the extent that private individuals or corporations are allowed to
explore these resources by the Federal Union, royalties are to be paid to the
Brazilian state.

A. From free enterprise to regulation

The change in approach in the 1934 Federal Constitution came about despite
considerable scepticism about the existence of petroleum in Brazil.⁵ However,
although there was at the time no national petroleum industry, exploratory
searches for oil on Brazilian territory were under way. Notwithstanding the res-
ervation of the ownership of oil to the Federal Union, the 1934 Constitution

⁴ Since the beginning of the Republican period, the federal government in all its branches has
been constitutionally named ‘Union’, or ‘Federal Union’ for all domestic legal purposes.
⁵ M. Vaitisman, O petróleo no império e na república (2nd edn, 2001) 170–1.
224 Yanko Marcius de Alencar Xavier

allowed for the grant of exploration licences, and gave both the Federal Union
and the member state jurisdiction over the authorization and supervision of oil
exploration (Art 119 § 3). Under this system, exploration licences were to be
granted exclusively to Brazilian citizens or Brazilian corporations, and a ‘doman-
ial’ system was established, by which the owner of the topsoil had priority in
the exploration or participation in the profits.⁶ In accordance with these provi-

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sions, several corporations searched for signs of oil across the Brazilian territory.
However, private participation in the exploration of state-owned oil generated
intense debate about the meaning of national sovereignty in this context.⁷

B. Government monopoly and Petrobras

Following the fall of the 1937–1945 civil dictatorship, a new democratic
Constitution was enacted in 1946. This post-war Constitution re-established
personal liberties, but allowed for a more active participation of the federal gov-
ernment in economic matters. Although the 1946 Federal Constitution did
not include specific rules on petroleum industry activities, Art 146 established
that the ‘[Federal] Union might, by way of a special law, intervene in the eco-
nomic domain and monopolize a certain industry of activity’—including the oil
industry.
Populist sentiment, symbolized by the ‘O Petróleo é nosso’ (‘the oil is ours’)
movement, became increasingly influential in the 1950s and led to the enactment
of Federal Law No 2004/1953, which established Petrobras during the second
Vargas government (1951–1954). A new era had begun in the Brazilian oil indus-
try: the age of government monopoly.
According to Art 1 of Federal Law No 2004/1953, the government monopoly,
under Art 146 of the 1946 Federal Constitution, included: the exploration and
production of oil, rare gases, and other hydrocarbonic substances; the refining
of domestic and imported oil; the transportation by sea of domestic or imported
oil products; and the transportation by pipeline of oil and rare gases. The state
monopoly would be exercised by Petrobras, and the federal government would
retain a majority of voting shares (Art 10). The national oil market became syn-
onymous with Petrobras.⁸ The governance of the state monopoly was granted to
Petrobras and to the newly-created National Petroleum Council (CNP; Art 2,
I and II). Petrobras was given the right to expropriate private property, as well as
to pay indemnities to proprietors of the topsoil for damages related to the activ-
ities developed on their land (Arts 24 and 30).

⁶ A. R. Barbosa, A natureza jurídica da concessão para exploração de petróleo e gás natural in

Temas de Direito do Petróleo e Gás Natural II (P. Valois, ed, 2005) 5–6.
⁷ G. Cohn, Petróleo e nacionalismo (1968) 170.
⁸ Art 6 of Law No 2004/1953 established as Petrobras’s mission the following activities con-
cerning oil (derived from reserves or shale) and its products: exploration, production, refining,
selling, transportation, and other similar activities.
 Petroleum and Natural Gas Ownership in Brazilian Law 225
Among the legal obligations established by law, Petrobras was responsible for
maintaining a minimum of oil reserves (Art 31) and for providing any informa-
tion requested by Congress regarding corporate decisions (Art 33). Additionally,
the CNP was granted the competence to supervise domestic oil supply (Art 30).
Until 1967, the federal monopoly rested purely on statute, since, although
monopolies were generally authorized by the 1946 Federal Constitution, it did

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not mention specific activities by name. However, the 1967 Federal Constitution
not only reaffirmed state ownership of mineral reserves (subject to the continuing
right of the owner of the topsoil to receive royalties on oil income (Art 161, § 2)),⁹
but also explicitly included in its text the state monopoly over oil exploration and
production (Art 162), although the monopoly over the remaining activities of the
industry remained a matter of statute only. The separation of the property of the
riches of the subsoil from that of the soil was included in the constitutional text
(Art 161).
The public monopoly over the oil sector was intended to protect the public
interest, provide for national defence, and maintain a non-profit character.¹⁰
The Brazilian government acted both as producer and supplier,¹¹ although the
oil and gas industry was classified as an economic activity with the status of a
public monopoly, rather than a regular government-run service. The rigid struc-
ture of the domestic market, closed to competition, was based on the idea of
protection of the public interest due to the strategic position of petroleum in the
world.

C. The evolution of the government monopoly:

Petrobras and risk contracts
Following the first oil crisis of 1973,¹² there was a need for new investment in
order to increase national oil production and reduce dependence on foreign
sources. In that same year, President Ernesto Geisel and the CNP announced the
possibility of granting private corporations the right to act in exploration activ-
ities under ‘risk contracts’ and through a bidding process. In this system, the
lessee takes on the risks of the enterprise and is paid according to the discoveries
they make and the costs of exploration and production.

⁹ A. R. Barbosa, ‘A natureza jurídica da concessão para exploração de petróleo e gás natural’ in

Temas de Direito do Petróleo e Gás Natural II (P. Valois, ed, 2005) 3.
¹⁰ ibid at 21.
¹¹ L. M. D. Nascimento, A água produzida na extração de petróleo: o controle estatal sobre o seu uso,
tratamento, reaproveitamento e descarte (2007) 34.
¹² The oil crisis following the Yom Kippur War led to an increase in oil prices from $2.90 to
$11.65, Brazil produced at the time only 20% of the oil that was consumed domestically. The
second oil crisis in 1979 raised the price from $13.00 to $34.00. In the previous year, Braspetro,
the international branch of Petrobras, had been created. See C. Barreto, ‘Geopolítica do petróleo:
tendências mundiais pós-Guerra do Iraque de 2003’ in Brasil: situação e marco regulatório in Estudos
e pareceres: direito do petróleo e gás (M. R. D. S. Ribeiro, ed, 2005) 9.
226 Yanko Marcius de Alencar Xavier

In the same period, the Plan of [Economic] Goals adopted by the 1964–1985
military regime determined that Brazil should reach a production of 500,000 bar-
rels per day by the end of the 1980s—an amount which justified the adoption of
risk contracts.
Foreign companies—including Shell, BP, ELF, Pecten, Exxon, Texaco, Total,
Marathon, CONOCO, Hispanoil, and Penzoil—and three Brazilian companies—

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Paulipetro, Azevedo Travassos, and Camargo Corrêa—signed risk contracts with
Petrobras. The first contracts were signed in 1975 for a 12-year period. It was the
first attempt to open the domestic market after 20 years of rigid public monopoly.
The model failed due to unimpressive results and political pressure. The pol-
itical opposition to the military regime argued that risk contracts were unneces-
sary, since Petrobras was capable of sustaining the required investment and
technological development itself. On the other hand, governmental authorities
argued that the failure was due to the excessive rigidity of the contracts and the
high risks of the fields over which the contracts had been granted.¹³

D. Enlarged government monopoly in the original

text of the 1988 Federal Constitution
The 1987–1988 Constitutional Convention, which followed the re-establishment
of full democratic civil rule in 1985, established the foundations of the oil and gas
regulation present in the original text of the 1988 Federal Constitution. The state
monopoly on oil and gas was extended even further to include not only explor-
ation and production, but also refining, import, export, and maritime and pipeline
transportation (Art 177)—the new structure of the federal monopoly did not even
allow for new ‘risk contracts’. The separation of the property of the resources of the
subsoil from that of the topsoil was kept, granting the land surface owner the right
to receive royalties over the income from oil exploration (Art 20; Art 176).
State monopoly was founded on the ‘principles of the economic order’ established
in the current Brazilian Constitution (Art 170), that is, oil and gas exploration had
the aim of effecting social change, based on ‘national sovereignty’, ‘free compe-
tition’, and the search for ‘full employment’, in accordance with a ‘Democratic
Rule of Law’. However, private capital could not be applied in oil and gas activ-
ities belonging to the state monopoly (Art 177, § 1). This constitutional provision
ensured that all costs and risks were to be borne by the Federal Union, which could
not grant any right or participation to any other entity or corporation.¹⁴

¹³ J. Dias and M. Quagliano, A questão do petróleo no Brasil: uma história da Petrobras (1993) 131–3;
145. Roberto G. de Souza points out some reasons for the failure of risk contracts: Petrobras’s geologists
were forbidden to be contracted by the corporations; the technical ineptitude of foreign corporations
when evaluating national workers; and the lack of interest of foreign countries in developing projects in
Brazil. See R. G. de Souza, Petróleo: Histórias das descobertas e o potencial brasileiro (1997) 230–1.
¹⁴ With the exception of the division of public revenue with, or the distribution of proportion-
ate compensation to, the member states and municipalities in which the federally-owned resources
were explored: Art 20 § 1.
 Petroleum and Natural Gas Ownership in Brazilian Law 227

E. State reform and the new model of state monopoly:

Constitutional amendment number 9 and the Oil and Natural Gas Act
Since the 1950s, Petrobras had expanded the national oil production infra-
structure, created jobs, trained new professionals, undertaken the mapping of
resources in the continental shelf and sedimentary basins, collected data and

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technical information, and paid dividends to the federal government.¹⁵ Its per-
formance was strategic to the organization of the oil economy, to the structure
of the Brazilian energy demands, and to the national economy as a whole. The
recovery of the world oil market, the discovery of giant offshore oilfields (Campos
and Albacora), and increased onshore production (in Bahia and Rio Grande do
Norte) had all made clear the technological advantages to Brazil of Petrobras’s
ongoing activities. Nevertheless, because it was a vertically-integrated corpor-
ation, whose activities covered all stages of the oil supply chain, the large structure
of Petrobras demanded a great amount of public investment, which the federal
government was not able to provide, and innovative strategies, which the corpor-
ation was unwilling or unable to develop. After several economic plans had failed
in the 1980s and early 1990s, the Brazilian government had considerable internal
and external debt, and inflation had spiralled out of control. Consequently, severe
budget restrictions meant fewer resources for state-run corporations, including
Petrobras. The perceived advantages of a large and exclusive public oil corpor-
ation vanished within a context of economic and financial crisis.
The uncertainties in the responsibilities of different governmental bodies and
Petrobras regarding the organization of the sector, the gradual economic inef-
ficiency of the monopolistic model, and the need for an expansion of oil trans-
portation and storage systems seemed to be the major problems of the Brazilian
oil industry.¹⁶ The gigantism of governments in Latin America was at that time
considered to be a central economic problem: the Welfare State conceived by the
Brazilian Constitution, for example, was not sufficient to meet the needs of citi-
zens, public utilities worsened,¹⁷ and questions were raised about the actual bene-
fit that the activities of state-owned companies provided to the general public.

¹⁵ Petrobras is, according to 2006 data, the world’s 14th largest oil company, with a production
of 1,912,733 bpd of oil and profits of over $ 12 billion. It employs 48,558 workers, and has oper-
ations in Brazil and other countries, including Argentina, Bolivia, Colombia, the United States,
Ecuador, Nigeria, Peru, Trinidad and Tobago, and Venezuela. In Brazil, it runs over 7,200 gas
stations and 16,000 kilometres in pipelines across the country. It is the domestic leader not only in
exploration and production, but also in fuel distribution (see: <http://www.petrobras.com.br>).
¹⁶ A. R Chequer, A flexibilização do monopólio e a Agência Nacional do Petróleo in Direito
Empresarial Público (2002) 317.
¹⁷ B. Brodbekier, Poder regulamentar da administração pública in (2003) 233 Revista de Direito
Administrativo, 150. Marcos Jurena argues that a large government generates high costs for all
society and that high taxation is not fair in a context in which the state does not provide high qual-
ity public utilities (M. S. Vilella, Desestatização—privatização, concessões, terceirizações e regulação
(4th edn, 2001) 131).
228 Yanko Marcius de Alencar Xavier

Against this background, the National Plan of Privatization (Plano Nacional

de Desestatização, or PND), established by Federal Law No 8031/1990 and regu-
lated by Federal Law No 9491/1997, was adopted with the following goals: an
expansion of public utilities in a competitive environment; the sale of state-run
companies or of government shares in corporations; and the delegation of gov-
ernmental obligations to private entities by way of licences, permissions, or

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authorizations.

1. Constitutional Amendment Number 9/1995

Eight years after the promulgation of the 1988 Federal Constitution,
Constitutional Amendment No 9/1995 paved the way for reform of the oil sector.
The text of Art 177 was altered with the introduction of clauses which moderated
the state monopoly.¹⁸ The Federal Union, while retaining a firm legal monop-
oly over the industry, was allowed to license private companies to exercise the
activities described in the Article (Art 177 § 1). According to some authors, this
introduced what is known in Brazilian administrative law as ‘flexibilization’, or
a ‘monopoly by government choice’. In other words, constitutional rules allowed
the government to choose between maintaining a single state-owned corporation
in charge of all oil and gas activities, or licensing both private and public corpor-
ations.¹⁹ However, others argue that if the government does not choose to license
private corporations, Petrobras remains, by default, the only company entitled to
explore the activities of the state monopoly.²⁰
Because of the contrast between the social welfarist model of government
embodied in the original text of the 1988 Federal Constitution, and the econom-
ically liberal ideas that underpinned Constitutional Amendment No 9/1995,
questions were raised about the constitutional validity of the amendment.
However, in 2005, the Brazilian Supreme Court held²¹ that, according to Arts 20
and 177 of the Federal Constitution, the concept of government monopoly in the
oil industry must not be confused with that of property: that is, (1) public own-
ership of oil, gas, and other mineral resources, and (2) the exercise of activities
related to these natural resources are two different legal concepts. In the Court’s
view, there is no unconstitutionality in the development of petroleum activities
by other companies besides Petrobras, since such economic activity does not
imply ownership of the resource that is explored.

¹⁸ Brodbekier, above n 17 at 151. Other names have been given to the process of change initiated
by Constitutional Amendment No 9/1995. cf A. Ferreira, A desmonopolização do mercado in Temas
de direito do petróleo e gás II (P. Valois, ed, 2005) 32–3.
¹⁹ A. D. Moraes, Regime jurídico da concessão para exploração de petróleo e gás natural (2001), 12
April 2009, available at <http://jus2.uol.com.br/doutrina/texto.asp?id=2426>.
²⁰ A. R. Barbosa, A natureza jurídica da concessão para exploração de petróleo e gás natural in
Temas de Direito do Petróleo e Gás Natural II (P. Valois, ed, 2005) 24–5.
²¹ Ação Direta de Inconstitucionalidade (Writ of Unconstitutionality) No 3273, brought by the
governor of the State of Paraná before the Supreme Court regarding the constitutionality of specific
rules included in the Oil and Natural Gas Act, 22 April 2009, available at <http://www.stf.jus.br>.
 Petroleum and Natural Gas Ownership in Brazilian Law 229

2. The Oil and Natural Gas Act and the creation of the National Agency
of Petroleum, Natural Gas and Biofuels (ANP)
The text of Art 177 § 1 of the current Federal Constitution, as modified by
Amendment No 9/1995, introduced a new framework of oil and gas regulation
in Brazil. In order to enforce the new constitutional rules, a new legal text had to

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be published; a law which would aim to ensure oil and fuel supply throughout the
Brazilian territory, establish the conditions for new licences, and create the struc-
ture of the agency responsible for the regulation of the new model of government
monopoly (Art 177 § 2 of the Constitution).²²
The Congress approved, with modifications, the bill sent by the President,
which became the Oil and Natural Gas Act (Lei do Petróleo, Federal Law No
9478/1997), which regulated the entire domestic oil industry and created the
National Agency of Petroleum, Natural Gas and Biofuels (Agência Nacional do
Petróleo, Gás Natural e Biocombustíveis—ANP),²³ responsible for enforcement,
regulation, and implementation of public policies in the oil and gas sector. The
Act included guiding principles for national energy policy and activities belong-
ing to the state oil monopoly, established not only the ANP, but also the National
Council of Energy Policy (Conselho Nacional de Política Energética—CNPE),
and repealed Federal Law No 2004/1953. In Chapter III, the Act provides that
the exercise of the government monopoly of oil industry activities may be granted
through concession or authorization to companies incorporated according to
Brazilian Law and with headquarters located in Brazil (Art 5).
In the upstream petroleum industry, the Act defined the activities involved in
exploration and production. These activities are to be exercised through conces-
sion of, and public bidding for, exploration blocks.²⁴ The process is conducted by
the ANP, and the Act specifies certain terms that must be expressly included in
the contract (Art 43).²⁵
The ANP was closely based on the American model of regulatory agencies.²⁶
The agencies operate within a special constitutional and statutory framework,

²² A. Ferreira, A desmonopolização do mercado in Temas de direito do petróleo e gás II (P. Valois,

ed, 2005) 45–9.
²³ The agency was renamed Agência Nacional do Petróleo, Gás Natural e Biocombustíveis
(National Petroleum, Natural Gas, and Biofuels Agency) by Federal Law No 11097/2005.
²⁴ Exploration blocks are delimited by the ANP (cf Resolution No 08/2003 of the CNPE, avail-
able at <http://www.mme.gov.br/mme/menu/conselhos_comite/cnpe.html>). The delimitation
must consider the availability of geological and geophysical data, the potential of areas, and envir-
onmental concerns. The bidding involves, among other aspects, the offer of a signature bonus and
the presentation of a minimum exploration programme.
²⁵ eg, the definition of the block included in the concession and the term and duration of the
contract.
²⁶ In Brazil, the agencies are fully integrated into the Executive Branch, although, unusually,
their directors serve for fi xed terms, determined by law: cf O. M. de Medeiros Alves, ‘Agências
reguladoras e proteção do consumidor de serviços de telecomunicações’ (2001) 226 Revista
de Direito Administrativo 219–29. The question whether the directors of federal regulatory
agencies can be dismissed by the President before the end of their respective terms remains
230 Yanko Marcius de Alencar Xavier

which includes regulatory, supervisory, and planning powers.²⁷ Their regulatory

powers are threefold: the enactment of new rules, the enforcement of the law, and
the power to hand down administrative sanctions.²⁸ This means that the pow-
ers of the agency are considerable, but limited:²⁹ the ANP has broad regulatory
power (Art 8), but it shares power to regulate the market with the Ministry of
Mines and Energy (Ministério de Minas e Energia—MME) and the CNPE.³⁰

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3. Private interests and the oil industry in Brazil:
authorization and concession
According to the current Brazilian regulatory structure, private corporations
may make economic use of oil and natural gas resources—that is, they may
legally profit in all stages of the oil industry, including exploration. There are
three legal instruments by which a private entity may be granted the use or
exploration of a public good in Brazil (concession, permission, and authoriza-
tion), two of which are included in the Oil and Natural Gas Act (authorization
and concession).
An ‘authorization’ is, in Brazilian administrative law, a unilateral, discretion-
ary, and temporary licence,³¹ by which the licensee is granted the right to use
the public good without prior bidding.³² It is defined and regulated in Arts 5
§§ 2, 53, 56, and 60 of the Oil and Natural Gas Act. Authorizations are typic-
ally used for licences related to oil and natural gas transportation (by pipeline or
by sea), imports, and exports. Because they are unilateral, they may be revoked
at any time by the government for reasons of public interest, which significantly
increases the risks for investors.
A ‘concession’ is a different kind of administrative licence with the follow-
ing characteristics, among others: it is bilateral in nature (that is, it creates typ-
ical contractual obligations for both the licensing authority and the licensee), it
depends on prior bidding, and the exploration and use of the public resource are
established in a contract.³³ The Oil and Natural Gas Act established that explor-
ation and production activities must be granted through concession contracts
and that their risks are to be borne exclusively by the licensee (Art 23).

unsettled: see O. M. de Medeiros Alves, ‘Demissão de dirigente de autarquia nomeado a termo:

discussão renovada’ (2002) 13 Revista Jurídica In Verbis 161–71.
²⁷ C. A. B. de Mello, Curso de direito administrativo (13th edn, 2000) 611.
²⁸ M. Gentot, Les Autorités Administratives Indépendantes (2nd edn, 1994) 41.
²⁹ H. L. Meirelles, Direito Administrativo Brasileiro (2000) 326. See also C. A. Sundfeld,
‘Introdução às agências reguladoras’ in Direito administrativo econômico (C. A. Sundfeld, ed, 2002)
26–7.
³⁰ The ANP also takes part in multilateral government committees, such as the National
Environmental Council and the Administrative Council for Economic Defence.
³¹ Although some authors view it as bilateral in nature: see S. J. L. D. Farias, Regulação jurídica
dos serviços autorizados (2005) 66–9.
³² M. S. Z. D. Pietro, Direito Administrativo (19th edn, 2006) 658.
³³ ibid at 661–3.
 Petroleum and Natural Gas Ownership in Brazilian Law 231

4. The concession of ‘exploration blocks’ and the ANP bidding rounds

The ANP is the authority with the legal competence to issue licences. Following
the guidelines set by the Act and other applicable rules, it defines ‘exploration
blocks’: specific physical areas over which oil exploration and production activ-
ities may be developed. These blocks are then offered, through a process of public

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auction, to corporations, individually or in consortia, that are granted the right to
explore the block, and to develop, at their own risk (Art 26 of the Act), the means
of extraction of oil and natural gas, if the exploratory phase leads to satisfactory
results.³⁴ The licensee’s ownership over any oil and natural gas extracted in its
area is, nonetheless, not absolute, as trade in both commodities is also regulated
by the ANP, notwithstanding the overwhelming influence of market forces (for
instance, on prices).³⁵ Since 1998, the ANP has organized ten³⁶ ‘bidding rounds’
of public auction of exploration blocks,³⁷ as well as the so-called ‘Round Zero’.³⁸

III. The ‘pre-salt’ mega-reserves and the search

for a new legal structure

A. The discovery of the ‘pre-salt’ reserves and early public debate

On 31 January 2007, the CNPE published a new resolution aiming to organize
new bidding rounds for oil and gas exploration blocks. The resolution authorized
the ANP, under the supervision of the Ministry of Mines and Energy, to perform
geological studies on sedimentary basins with considerable future prospects.
On 8 November 2007, soon before the ANP’s Ninth Bidding Round, Petrobras
announced the discovery of a large oil and natural gas field (the ‘Tupi’ field) in
ultra-deep waters, under layers of salt, 280 kilometres off the coast of Santos,
with an estimated five to eight billion barrels of oil equivalent (boe). After the
announcement, 41 exploration blocks close to the Tupi Field were excluded from
the Ninth Bidding Round.³⁹ Offshore blocks were also removed from the Tenth

³⁴ L. M. C. D. Castro, Contratos de concessão: uma análise jurídica na indústria do petróleo e gás

no Brasil (2004) 15, 26.
³⁵ The Brazilian Supreme Court declared that the constitutional provision of Art 176 of the
1988 Federal Constitution allowed the federal government to transfer the risks and results of oil
activity through contract. For other related aspects of the Court’s opinion, see above n 21.
³⁶ cf <http://www.brasil-rounds.gov.br/index_e.asp>.
³⁷ The edicts, contracts, and other documents relating to all bidding rounds are available at
<http://www.anp.gov.br/petro/rodadas_de_licitacoes.asp>.
³⁸ In 1998, the ANP entered into specific agreements with Petrobras, as foreseen by Art 33 of
the Oil and Natural Gas Act—the so-called ‘Round Zero’—under which Petrobras kept its rights
over 282 fields, covering an area of over 450,000 km 2, for three years.
³⁹ Despite the legal instability brought about by the unilateral move of the Brazilian govern-
ment, the Ninth Bidding Round yielded a record amount of 2.1 billion Brazilian Reals (‘Balanço
da 9ª Rodada da ANP’, Estado.com, 14 August 2009, available at <http://www.intelog.net/site/
232 Yanko Marcius de Alencar Xavier

Bidding Round amidst proposals for tax changes and a new regulatory structure
for the so-called ‘pre-salt’ fields.⁴⁰ Although, the existing legal structure seems to
be, at least in theory, perfectly compatible with the exploration of new and larger
reserves, change is considered to be necessary, essentially for political reasons.
The government’s initial proposals involved changes in the tax structure applic-
able to the new resources. At least two models were among those suggested:⁴¹ an

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increase in royalty fees on the oil and gas extracted in highly productive areas; and
amendment of the rules governing the collection of special government surtaxes.⁴²
The suggested increase in tax rates worried investors, but it had the merit of avoid-
ing a rupture in the current structure for the regulation of the oil and gas industry,
since such proposals could be enacted with relatively few legislative changes.
Subsequently, however, several government authorities suggested that an
entirely new regulatory model might be necessary for the new ‘pre-salt’ areas.⁴³
The crucial argument behind this proposal was that the current concession
model, adopted during the 1990s, included a high premium due to the consider-
able risks involved in most licensed exploration blocks—risks which do not seem
to be present in the case of ‘pre-salt’ areas. It is thus argued that keeping the cur-
rent legal structure in place, even for the exploration and production of pre-salt
reserves, would damage legitimate national interests.
On 17 July 2008 a Presidential Decree established an inter-ministerial commission
responsible for studying and proposing changes to the legal structure of oil and gas
exploration and production in the new oil fields of the pre-salt area.⁴⁴
The pre-salt stratum extends from the state of Espírito Santo to the state of
Santa Catarina, covering nearly 160,000 km2. There are doubts about the actual
amount of petroleum in it (up to 100 billion boe) and about the viability of its
extraction. Great technical challenges will be involved and high investment will
be needed for the extraction of oil and natural gas in an area which is 300 kilo-
metres away from the coastline and 7,000 metres below the surface of the ocean.
Sources in the Ministry of Mines and Energy estimate that investment
of approximately $270 billion will be needed for the exploration of the area,⁴⁵
while other studies suggest that investment requirements might be as much as $1

default.asp?TroncoID=907492&SecaoID=508074&SubsecaoID=715548&Template=../artigos-
noticias/user_exibir.asp&ID=534604 >).
⁴⁰ ‘The next oil giant?’, The Economist Intelligence Unit Viewswire, 12 August 2009, available
at <http://www.economist.com/daily/news/displaystory.cfm?story_id=13348824>.
⁴¹ ‘ANP defende alteração das normas para pagamento de participações especiais’, O Globo Online,
12 August 2009, available at < http://oglobo.globo.com/economia/mat/2007/12/05/327463573.asp>.
⁴² Currently, licensees for areas with production of less than 450 million m3 of oil do not have to
pay the special surtax; specific conditions apply to areas of the continental shelf.
⁴³ ‘New regime sought by big hitter’, Financial Times, 12 August 2009, available at <http://
royaldutchshellplc.com/2008/06/30/new-regime-sought-by-big-hitter/>.
⁴⁴ Available at <http://www.planalto.gov.br/ccivil_03/_Ato2007–2010/2008/Dnn/Dnn11699.htm>.
⁴⁵ ‘Brasil precisa de US$270 bi para reservas do pré-sal, diz Lobão’ G1, 14 April 2009, available
at <http://g1.globo.com/Noticias/Politica/0,,MUL1049770–5601,00-BRASIL+PRECISA+DE+
US+BI+PARA+RESERVAS+DO+PRESAL+DIZ+LOBAO.html>.
 Petroleum and Natural Gas Ownership in Brazilian Law 233
trillion.⁴⁶ Considering these steep and disparate estimates, the price of oil in the
world market will be a key factor in any decision-making process in the pre-salt
area. Petrobras has indicated that investments in pre-salt exploration are practica-
ble at prices ranging from a minimum of $40 to $50 per barrel of oil equivalent.⁴⁷
The initial debate over a new legal model for the exploration and production
of pre-salt fields occurred at a time of record-high prices of oil in the world mar-

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ket: in June 2008, soon before the Presidential Decree on the matter was pub-
lished, the price of a barrel of oil (Brent and West Texas Intermediate) reached a
level of almost $150. The vertiginous decline of oil prices in the following seven
months (an almost $100 fall) added new elements to the viability debate, which
was revived by the slight recovery of oil prices in the second quarter of 2009.
On 28 March 2009, at a press conference that took place in Chile, the Brazilian
President declared that a Fund designed to reduce poverty and strengthen national
education could be formed out of the pre-salt income.⁴⁸ The Brazilian govern-
ment had indicated from the outset of public debate regarding the new explor-
ation areas⁴⁹ that the new regulatory model might be inspired by the Norwegian
twofold model, ⁵⁰ with a production-sharing system being introduced for pre-salt
areas, while the current concession model would be kept for all other blocks. In
addition, a new state-owned corporation would be created to manage the fund.

B. The government proposals

The proposals of the inter-ministerial commission were delivered to the President
on 5 August 2009.⁵¹ On 31 August, President Luiz Inácio Lula da Silva finally
presented to the nation the set of legal measures prepared by the inter-ministerial

⁴⁶ ‘Petróleo e etanol devem dar novo status ao Brasil até 2020’, BBC Brasil, 11 August 2009, avail-
able at <http://www.bbc.co.uk/portuguese/lg/noticias/2009/03/090330_brasil_bric_energia.shtml>.
⁴⁷ ‘Gabrielli: crise afetou debate para explorar pré-sal’, Agencia Estado, 11 August 2009, avail-
able at <http://www.estadao.com.br/noticias/economia,gabrielli-crise-afetou-debate-para-ex-
plorar-pre-sal,344697,0.htm >.
⁴⁸ ‘Lula anuncia criação de fundo social com dinheiro do petróleo’, G1, 22 April 2009, available
at <http://g1.globo.com/Noticias/Mundo/0,,MUL1062632–5602,00-LULA+ANUNCIA+CRI
ACAO+DE+FUNDO+SOCIAL+COM+DINHEIRO+DO+PETROLEO.html>.
⁴⁹ ‘Governo deve anunciar marco do pré-sal em abril’, G1, 22 April 2009, available at <http://
g1.globo.com/Noticias/Economia_Negocios/0,,MUL1062162–9356,00-GOVERNO+DEVE+
ANUNCIAR+MARCO+DO+PRESAL+EM+ABRILFONTE.html>.
⁵⁰ The Norwegian twofold petroleum exploration model involves the participation of the
state both by way of a semi-privatized corporation (originally Statoil, founded in 1972, now
StatoilHydro) and by a public fund or portfolio which manages oil exploration licences in specific
geographic areas (the state’s Direct Financial Interest, Statens direkte økonomiske engasjement—
SDFI, founded in 1985), managed, since 2001, by a fully state-owned corporation, Petoro AS. cf R.
Solberg, ‘The new structure of the Norwegian state’s interests on the Norwegian continental shelf ’,
International Financial Law Review—Supplement—Nordic Region, 11 August 2009, available at
<http://www.iflr.com/Article/2027301/Oil-and-gas.html>.
⁵¹ ‘Lobão: Lula recebeu 3 projetos com regras para pré-sal’, Estadão.com, 11 August 2009,
available at <http://www.estadao.com.br/noticias/economia,lobao-lula-recebeu-3-projetos-
com-regras-para-pre-sal,414188,0.htm>.
234 Yanko Marcius de Alencar Xavier

commission, and four bills were sent to Congress overhauling the legal structure
of oil exploration.⁵²
The first bill⁵³ establishes a specific set of rules regarding the exploration of oil
and natural gas in the pre-salt and in other ‘strategic’ areas. It also alters the 1997
Oil and Natural Gas Act, and grants to Petrobras pre-eminence or even exclu-
sive rights in the distribution of oil and natural gas whenever the Federal Union

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chooses to do so.
The second bill⁵⁴ includes the creation of a new fully federally-owned cor-
poration, the Empresa Brasileira de Administração de Petróleo e Gás Natural
SA—PETRO-SAL. Like Norway’s Petoro AS, it will administer all production-
sharing contracts between the Ministry of Mines and Energy and corporations
allowed to explore the newly discovered areas, but will not be responsible for any
direct exploration or distribution activities.
The third bill⁵⁵ creates the Fundo Social (‘Social Fund’). This will receive part
of the financial proceeds of the exploration of oil and natural gas in the new areas,
as well as of the royalties paid to the Federal Union, and its goals will include pov-
erty reduction and environmental sustainability.
The fourth bill⁵⁶ authorizes the Federal Union to grant to Petrobras exclusive
research and exploration rights over oil and natural gas resources in new areas,
with no need for any prior bidding process.

IV. Concluding remarks

There seem to be both political and financial motives for the legal changes that
are being studied by government authorities. As the current Minister for Mines
and Energy has recently stated, the ‘1997 Oil and Natural Gas Act was written at
a time in which the nation imported 40 per cent of its oil consumption, and the
exploratory risks of our sedimentary basins were deemed to be high’, a situation
which has clearly changed.⁵⁷

⁵² ‘Lula encaminha projetos de lei sobre o pré-sal ao Congresso’, Agência Brasil, 31 August
2009, available at <http://www.agenciabrasil.gov.br/noticias/2009/08/31/materia.2009–08-
31.8146387483/view>.
⁵³ Projeto de Lei No 5938/2009, available at <http://www.planalto.gov.br/ccivil_03/Projetos/
PL/2009/msg713–090831.htm>.
⁵⁴ Projeto de Lei No 5939/2009, available at <http://www.planalto.gov.br/ccivil_03/Projetos/
PL/2009/msg714–090831.htm>.
⁵⁵ Projeto de Lei No 5940/2009, available at <http://www.planalto.gov.br/ccivil_03/Projetos/
PL/2009/msg715–090831.htm>.
⁵⁶ Projeto de Lei No 5941/2009, available at <http://www.planalto.gov.br/ccivil_03/Projetos/
PL/2009/msg716–090831.htm>.
⁵⁷ Edison Lobão, ‘Uma nova fronteira’, Ministério de Minas e Energia, 11 August 2009, avail-
able at <http://www.mme.gov.br/mme/noticias/destaque3/destaque_0029.html>.
 Petroleum and Natural Gas Ownership in Brazilian Law 235
In general terms, there does not seem to be any unconstitutionality in the
introduction of different regulatory models for different kinds of oil fields
(land, regular deep-sea, or the new pre-salt areas), since the 1988 Federal
Constitution does not establish a single model for the licensing and exploration
of the state’s oil and natural gas resources. Nevertheless, experts have already
questioned whether it is constitutionally permissible for the government to

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privilege Petrobras above all other corporations in the exploration of the new
areas.⁵⁸
The four bills, now under the scrutiny of Congress, will probably be consider-
ably altered in the coming months. However, their content will have to be thor-
oughly analysed by investors, and the new legal texts will certainly be scrutinized
by Brazilian courts for any sign of unconstitutionality in their specific details, as
well as the ever-present risk of breach of current contracts.

⁵⁸ See G. A. de Toledo, ‘A questão do pré-sal’, O Estado de S Paulo, 4 September 2009, available

at <http://www.estadao.com.br/estadaodehoje/20090904/not_imp429374,0.php>.