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Introduction

On 19 and 20 August 2003, Brazil’s National Petroleum Agency (ANP) held its Brasil Round 5 (“Round 5”) of oil and natural gas exploration block concession bidding. Introducing a new ‘cell’ block subdivision and other significant contractual changes, the round set local minimum content requirements that were intended to stimulate and protect the local petroleum industry and sought to attract small-sized oil company participation, both Brazilian and foreign, which had been lacking from the previous rounds. The results of Round 5 were successful in these respects. Rounds 6 and 7 are now anticipated to take place within the second and last quarters of 2004, respectively, geared to the large foreign oil companies that had shied away from Round 5. Given the predominance of small deepwater heavy oil discoveries in Brazil to date, more favourable fiscal regime conditions appear to be the crux to securing the Brazilian petroleum industry’s future potential through this interim period.

Background History

The history of Brazilian oil exploration and production can be traced back to as early as 1858 when the first research and mining concessions were granted in what is today called the Camamu-Almada basin, near Ilhéus, Bahia. (1) Other early concessions were granted between 1892 and 1897, in the Paraná basin, Bofete, São Paulo (2) and, by 1907, along the Bahia, Maranhão and São Paulo state shorelines. (3) In 1907, the Geologic and Mineralogical Service of Brazil (SMGB) was founded, (4) representing the state in pursuing the potentially lucrative possibilities to such enterprise and, in 1919, the first ‘official’ drilling was made in the Marechal Mallet region of Paraná state. (5) This drilling project was, however, abandoned the following year and, although public, foreign and national private sector ‘research studies’ in the states of Bahia, Sergipe, Alagoas and Amazonas continued through the 1930s, the results were consistently disappointing. (6) 

From the early 1850s to the 1930s, the major activity of the Brazilian state was in granting concessions as a service to the foreign capital important to development of the Brazilian economy and infrastructure. Between 1930 and 1945, with the revolution of 1930, the ascendance of Getúlio Vargas to the Presidency and the imposition of the ‘Estado Novo’ in 1937, ‘nationalistic intervention’ formally defined the state’s role as the petroleum industry regulator. The National Petroleum Council (CNP), the precursor of Petrobras, was founded in 1938 as a stateoperated initiative and, under the law, refinery ownership was restricted to Brazilian nationals. An oil strike in Lobato, Bahia, followed in 1939. (7) Although considered sub-commercial, the strike encouraged studies to be conducted in the Recôncavo region of Bahia and, in 1941, a well was drilled at what would later become known as the Candeias field, producing Brazil’s first oil. (8) Other strikes also occurred in Bahia and the CNP expanded exploration into other states. (9) 

In 1945, President Vargas was overthrown by the military in a ‘return to democracy’, which leaned towards liberal international policies, and the CNP opened refinery construction bidding to private Brazilian companies. However, with domestic production at only around 2,000 barrels per day, and local refining capacity at only approximately 4,000 barrels per day, growing oil consumption imposed a heavy reliance on refined petroleum product importation,(10) which, under the successful O Petróleo e Nosso campaign, resulted in a backlash towards nationalist restrictions on petroleum development. In 1950, President Vargas was reelected and, in 1953, Law no. 2.004 created Petróleo Brasileiro SA – Petrobras – to exercise a state monopoly over the researching, extracting, refining and transportation of oil and its by-products. (11) 

The state’s involvement in the Brazilian economy generally increased with the ascendance of the ‘desenvolvimento’ ideology adopted from the late 1950s into the late 1960s. The military dictatorship (1964 to 1985) that followed the 1964 overthrow of President João Goulart applied a marked economic liberalism and technological entrepreneurship to state control to develop Brazil’s industrial potential and, concurrently, state enterprises consolidated their positions in their respective industry sectors. Petrobras matured during this time period into one of the largest corporations in the world and a top importer of petroleum and supplier of crude oil. With regard to oil exploration, important onshore basin strikes were made in the Recôncavo (Bahia), Sergipe and Alagoas fields in the 1950s. (12) In the late 1960s, the first offshore oil strike was made at the Guaricema field off the Sergipe coastline. (13) As a result, Petrobras intensified its exploration and a number of other oil strikes off the Brazilian continental shelf soon followed. (14) 

Petrobras’ primary concern at the beginning of the 1970s as an aggressive state-owned enterprise was in the search for new reserves. (15) In the wake of the 1973 Middle East crisis (which quadrupled oil prices in 1974), the first oil strike in the Campos basin took place in the Garoupa field off the coast of the state of Rio de Janeiro. (16) The discovery of the giant deepwater oil fields of Marlim, Albacora, Barracuda and Roncador in the 1980s established the Campos basin region as the most important oil-producing area in Brazil. (17) By the mid 1990s, Brazil had more than tripled its oil production. (18) 

In the 1990s, Brazil’s political economy gradually shifted to a different configuration, that of private financing and competition, which in turn brought about important petroleum sector change. Constitutional Amendment no. 9/95 opened the petroleum sector to private company contracting while Law no. 9.478/97 (“The Petroleum Law”), in addition to creating the ANP and the National Energy Policy Council (CNPE), designated Petrobras (which had historically maintained an exclusive exploration, exploitation, refining, maritime, and pipeline transportation monopoly over petroleum, oil and natural gas) a mixed economy corporation under majority shareholder state control competing in its oil, gas and petroleum-related activities with private enterprise as a concessionaire and new project partner under ANP approval.

Under Articles 23 and 26 of The Petroleum Law, Petrobras is first granted exploration and production areas after which the other concessionaires are awarded concession contracts through a bidding process and on the basis of ANP approval of proposed development and production plans. Article 45 of The Petroleum Law provides specifically for government take in signature bonuses, (19) royalties, (20) Special Participation (21) and payment for concession area retention and occupation. (22) Presidential Decree no. 2.705/98 later defined the criteria for government take, as provided for in The Petroleum Law, (23) and instituted various technical measures relative to ANP control.

In July 1998, the ANP announced the exploration and production areas to be granted to Petrobras and those to be granted as future bidding concessions. (24) On 6 August 1998, 397 concession contracts were signed between the ANP, Petrobras and the Ministry of Mines and Energy (MME) relative to oil exploration, development and production, 115 of which were exploration-related. (25) In October 1998, Petrobras signed the first binding farm-out agreement of joint venture partnership within its oil exploration and production concession areas (26) and, subsequently, exploration blocks within the sedimentary basins under ANP control were selected for bidding companies.

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