Brazil is, as of April/2024, the 7th largest oil producer in the world, as informed by U.S. Energy Information Administration, International Energy Statistics. From October 2023 to October 2024 the average daily crude oil production was 3.4 million barrels per day while the natural gas production is 153 million cubic meters per day, Oil, Natural Gas and Biofuels Agency (“ANP”). The total amount of 3P oil reserves in Brazil (as of December 31, 2023) is 27.5 billion barrels of oil and 705 billion cubic meters of natural gas, as informed by ANP.

According to Brazilian Federal Constitution, the Federal government owns the reserves of oil and natural gas. The rights to explore and produce oil and natural gas in Brazil are granted under the concession (pursuant to Law No. 9,478/1997) or production sharing regimes (pursuant to Law No. 12,351/2010).

The concession regime is applicable to onshore and offshore fields, except in areas where the production sharing regime is required. In the concession regime, the contractor owns all the oil and gas that may be discovered and produced in the concession area and pays to the Federal Government participations, such as: signature bonus, payment for occupying or retaining an area (in the case of onshore blocks), royalties and, in the case of large production fields, special participation.

The production sharing regime is adopted in operations carried out in the Pre-Salt Polygon (located offshore, as set forth in the applicable law) and in strategic areas as defined by the Federal Government. In the production sharing regime, the ownership of the produced oil is shared between the contractor and the federal government. The contractor bears all the costs of the project (capex, opex and decex) and, in case of exploratory success, the contractor is reimbursed with a volume of hydrocarbons called “cost in oil”. In order to calculate the share of oil and natural gas owned by the Federal Government and by the contractor, the volume corresponding to the royalties due and all necessary investment and operating expenses are deducted from the total production activities (cost in oil). The difference, called “profit oil”, is shared between the companies participating in the consortium and the Federal Government, on the proportions set forth in the contract.

The risk of investing and finding – or not – oil or natural gas belongs to the contractor.

In both regimes, the Federal Government, through its Oil, Natural Gas and Biofuels Agency (“ANP”) carries out public bidding rounds for the granting of oil and gas blocks for exploration and production. There is a bidding for each block offered by ANP.

The criterion of selection of the winning offer is mentioned in the tender. For the concession regime biddings, the criterion is usually based on the value of the offer of the signature bonus to be paid to the government. While in the biddings of production sharing agreements the typical criterion is the value of the percentage of profit oil offered to the Federal Government. In both cases, the winning offer is the one which offers the highest value for the block.

The template of the concession or production sharing contract, as applicable, is attached to the tender protocol. ANP enters into contract with each of the winning bidders.

In addition to the bidding rounds for the concession and production sharing regimes, ANP offers blocks for exploration and production under the Permanent Offer System. As a matter of fact, the Permanent Offer System shall be the preferential system for the offer of areas for exploration and production of oil and natural gas.

The Permanent Offer System consists of the continuous offer of exploratory blocks and areas, onshore or offshore, under the concession regime, including blocks of fields returned to ANP or in the process of being returned as well as of blocks offered in previous rounds and not awarded. The offer of blocks located in the Pre-Salt Polygon, in strategic areas or on the Continental Shelf, i.e.  located beyond 200 nautical miles in the Permanent Offer System is subject to previous authorization of the National Council of Energy Policy (CNPE).

There are two types of Permanent Offer: Permanent Concession Offer and Permanent Production Sharing Offer, which is used according to the applicable contracting regime.

Anyone interested in participating in the Permanent Offer shall submit their registration request in accordance with the terms of the current notice. Any interested party who has their registration request approved by ANP Bidding Commission and keeps their registration documents up to date will be considered a bidder.

A cycle of the Permanent Offer will be opened with the approval of a declaration of interest accompanied by a guarantee of offer, with a specific schedule being established so that bidders can participate in said cycle.

The schedule to be established by ANP Bidding Commission for each cycle of the Permanent Offer shall observe the minimum period of 120 calendar days and a maximum of 180 calendar days between the date of publication of the approval of the 1^st declaration of interest in the Official Gazette and the date of the public bid presentation session.

The key features for the concession contracts, further to the typical provisions are:

a) provisions related to the exploration, development and production phases (presentation of plans, guarantees, duration of each phase, starting date of the respective phase, penalties for default to comply the applicable requirements, etc);

b) rules for the calculation and payment of royalties and special participation;

c) local content requirement for each phase. The local content requirement represents a percentage of Brazilian suppliers of goods and services that the winning bidder shall contract while performing the activities related to the contract (exploration and production);

d) decommissioning procedures;

e) Indication of Brazilian Law and arbitration for dispute resolution.

The key features for the production sharing contracts, further to the typical provisions are:

a) rules to calculate the cost in oil;

b) rules to calculate the profit oil and its sharing;

c) rules for the calculation and payment of royalties and special participation;

d) provisions related to the exploration, development and production phases (presentation of plans, guarantees, duration of each phase, starting date of the respective phase, penalties for default to comply the applicable requirements, etc);

e) local content requirement for each phase;

f) decommissioning procedures;

g) Indication of Brazilian Law and arbitration for dispute resolution.

There are no significant amounts of shale gas being exploited in Brazil.

There is one shale crude and gas reservoir that is explored by a consortium of private companies, previously owned by Petrobras.

It is worth to note that in 2013, it was offered at the 12^nd  Bidding Round some blocks on shore for the exploration of shale gas, through fracking. The contract for the exploration and production of said blocks were not executed due to a decision of the judicial courts to suspend it.

Despite the above information, in 2014, ANP regulated through ANP Resolution No. 21 the main requirements for Unconventional Reservoir Hydraulic Fracturing Optimization.

The key regulators of the oil and gas industry in Brazil are: the National Council of Energy Policy (“CNPE”); the Ministry of Mines and Energy, and; the Oil, Natural Gas and Biofuels National Agency (“ANP”).

Petrobras (Petróleo Brasileiro S.A.) is a listed company on which the Federal Government is the controlling shareholder. The company operates in the following areas: oil and gas exploration and production; oil and gas refining; transportation and trading; petrochemicals; electric power generation; biofuels production.

PPSA (Pré-sal Petróleo S.A.) is a public company on which the Federal Government is the only shareholder. The company represents the Brazilian Government in the production sharing contracts, being responsible to the management of these contracts as well as for the sale of the oil and gas of the Federal Government’s share.

Only companies incorporated and with administration in Brazil are allowed to enter into concession or production share agreements. However, there is no restriction on foreign companies fully controlling their Brazilian subsidiaries.

Brazilian environmental regulations are based on the polluter-pays principle, which establishes that those who pollute, directly or indirectly, shall fully compensate any damage caused to the environmental and such analysis is based on strict liability.

Further, potentially polluting activities, such as Upstream activities, are subject to a three-phased environmental licensing process for the exploration and production of oil and gas:

• Preliminary license;
• Installation license; and
• Operation license.

It is important to note that he issuance of these licenses requires extensive environmental studies, which must be submitted to and evaluated by the relevant environmental authorities. For upstream activities, obtaining the Preliminary License (LP) entails conducting an Environmental Impact Assessment (EIA) and preparing an Environmental Impact Report (RIMA), which must be reviewed and approved by the appropriate environmental authorities.

Licenses, if granted, stipulate specific conditions and limitations for developing the activities. Notably, being awarded an exploration area in a bid and entering into a concession or participation sharing contract does not automatically grant environmental licenses or create vested rights in licensing.

Licensing for potentially polluting activities may be done in a state level or at Federal Level (by IBAMA) in some situations, such as when the activity is performed in Brazilian offshore continental shelf or between 2 or more states. In any case, the environmental state and federal entities are independent from ANP and any other regulator.

In relation to the health and safety regimes, in addition to being compelled to follow industry standards, Brazilian operators shall also observe mandatory laws, regulations and normative regulations issued by the Labor Ministry, environmental entities as well ANP’s.

From a contractual point of view, in summary, the contractor shall:

a) at its own account and risk, obtain all licenses, authorizations, and permits required under the applicable laws and regulations;

b) have a safety and environment management system that complies with the best practices of the oil industry and the applicable laws and regulations;

c) ensure preservation of an ecologically balanced environment;

d) mitigate the occurrence of impacts and/or damages to the environment;

e) ensure the safety of the operations for purposes of protecting human life, the environment, and the Federal Government’s heritage;

f) ensure the protection of the Brazilian historical and cultural heritage;

g) restore degraded areas in compliance with the applicable laws and regulations and the best practices of the oil industry;

h) meet the operational safety and environmental preservation recommendations issued by ANP, pursuant to the applicable laws and regulations;

i) provide a management system for social responsibility and sustainability consistent with the best practices of the oil industry.

In addition to the signature bonus, paid before the date of execution of the contract (concession or production sharing), the contractor shall pay to Federal Government:

a) royalties (The amount to be paid by contractor is obtained by multiplying three factors: (i) royalties aliquot for the producing field, which can vary from 5% to 15%, as defined by ANP; (ii) monthly production of oil and natural gas produced by the field, and; (iii) reference price for hydrocarbons in the month, as defined by ANP.;

b) special share (the amount to be paid is based on: (i) the net revenue from the quarterly production of each field, considering deductions (royalties, investments in exploration, operating costs, depreciation and taxes); (ii) progressive aliquot, which vary according to the field location; (iii) number of years of production, and; (iv) the respective volume of quarterly production inspected), and;

c) payment for land occupancy (landowners shall receive a monthly payment between 0.5% and 1% of the total hydrocarbon production in the area).

The main CAPEX tax incentive for oil and gas E&P activities is named REPETRO-SPED. REPETRO-SPED is a special custom and/or tax regime that grants relief of federal taxes and reduction of the State VAT (ICMS) on permanent importation or temporary admission of certain assets listed by Brazilian Internal Revenue Service, provided that certain conditions are met.

Note that the Brazilian Congress has approved a tax reform in the transactional taxes.  The Federal Welfare Contributions (PIS and COFINS), Excise Tax (IPI), State VAT and Municipal Service Tax (ISS) will be gradually replaced by the two VAT (CBS and IBS) and a Selective tax as of 2026 until 2032.  As of 2033, only CBS, IBS and Selective Tax will apply.

Throughout the contract period, the contractor shall comply with local content requirements, as provided on the respective contract. The requirement varies according to the phase of the project (exploration, development and production). The local content requirements for the total amount of goods and services contracted for each phase the project.

The transportation of crude oil produced in Brazil and being exported shall be carried out by a Brazilian shipping company.

There are various ordinances, issued by ANP, Brazilian Navy and IBAMA, that are applicable to the decommissioning of E&P installations.

In the concession or participation sharing contract, the operator undertakes obligations to fully decommission and abandon the area. As part of the contract, operator shall place a bond to guarantee sufficient funds for this decommissioning phase. Decomissioning obligations involve removal of all assets from the field (as a general rule, but subject to exceptions), indemnify all damages arising from the activities, promote environmental recovery of the area or monitor assets allowed to be left in the field.

The decommissioning plan must be approved by ANP and when considering offshore fields, also Brazilian Navy and IBAMA (federal environmental entity). Such plan must be presented to ANP several months before start of decommissioning activities.

Oil pipelines may be classified as transferring pipeline or transport pipeline, as provided on Law No. 9,478/1997.

Transferring oil pipelines are the ones with a route that supports a specific offshore E&P unit and for this reason its construction and operation are subject to the same rules provided on the respective E&P contract.

Transport oil or gas pipelines are the ones with a route that could be used by various parties and for this reason its operation and construction shall be authorized by ANP, in accordance with ANP Ordinance No. 52/2015.

Law No. 14,134/2021 sets forth that the construction and operation of offshore and onshore gas pipelines to transport the natural gas from the offshore EP unit to the natural gas processing plant are subject to authorization by ANP. Third parties have the right to use such pipelines, however ANP has not yet regulated this right.

Third parties have right to use oil and gas transport pipelines as well as other essential infrastructure, such as oil or gas terminals and processing facilities.  The provisions for third-party access are set out in the Petroleum Law and the New Gas Law and its related regulation decrees as well as the applicable ANP resolutions.

LNG liquefaction and LNG receiving terminals are subject to ANP authorization as provided in Law No. 14,134/2021. The construction and operation are subject to the provisions of ANP Ordinance No. 52/2015. Third parties have the right to use such terminals, however ANP has not yet regulated this right.

In Brazil there are seven LNG receiving terminals in operation, all of them employ FSRUs. There are not any LNG liquefaction terminal in Brazil.

Underground natural gas storage installations are subject to ANP authorization, as provided in Law No. 14,134/2021. Third parties have the right to use such installations, however, ANP has not yet regulated this right.

Until December/2024, in Brazil there is not any underground storage in operation in Brazil. However, there is a project under development.

The extension of the gas transmission system in Brazil is 9,409 km. The extension of gas distribution network is about 41,500 km. Both grids are spread in various states of the country.

The gas transmission system is owned and operated by private companies, under authorizations granted by ANP, as provided by Law No. 14,134/2021. All the capacity of the gas transmission system is available to third parties, then, according to referred law, the operator is not authorized to trade gas.

The gas distribution network is owned and operated by private and state companies. Such right, is granted under concession contracts. Third parties may access the distribution network as free consumer, in accordance with the applicable state law and regulation.

It is worth to note that according to Brazilian Federal Constitution, the regulation of the gas transmission system is made by the federal government while the regulation of the gas distribution network services is made by the state on which the distribution grid is built.

In April 2021, Law No. 14,134/2021, known as New Gas Law, was published. This law aims to promote the natural gas industry in Brazil and contribute to increased competition, thus promoting a broad opening of the market.

The New Gas Law, together with other measures adopted by the Federal Government, seek to consolidate advances in transforming a model that in practice was monopolistic into a competitive, open and dynamic market, enabling price reduction, attracting new investments, access to infrastructure and development of pre-salt gas production.

The consumer of large quantities of natural gas (free consumer), the gas distribution companies and trading companies have the option to purchase natural gas from any agent that is authorized by ANP as a natural gas trader, which includes the distribution company.

According to the Federal Constitution, the regulation of the downstream gas market is made by the states.

Many states have updated their local regulations to have them in line with the New Gas Law, mainly in relation to ensure that consumers, as a free consumer, have the right to purchase gas from any trading company authorized by ANP.

After the publish of the New Gas Law, the recent most relevant changes in government policy and regulation in relation to the oil and gas industry are:

a) Law No. 14, 993/2024 (“The Future Fuel Law”) creates emission reduction targets for natural gas producers or importers by means of the acquisition of biomethane or of certificates of biomethane of guaranteed origin;

b) Decree No. 12,153/2024 amended Decree No. 10,172/2021 to change some regulations of the New Gas Law. The main changes are: new gas processing plants, offshore gas pipelines are subject to the same rules applicable to gas transmission pipelines, which includes restriction on vertical integration, pricing mechanisms and requirement for public calls before granting authorizations; ANP has the right to limit gas reinjections on oil production; definition of principles of non-discriminatory access to gas offshore pipeline, gas processing unit and underground storage natural gas facilities.

c) Bill 327/2021 approved in December/2024 creates the Energy Transition Acceleration Program (“PATEN”), which provides various incentives to the natural gas industry in Brazil. The Bill is waiting for the presidential sanction.

The key challenges for the government and industry are:

(i) the decarbonization of the oil and gas industry in Brazil

The oil and natural gas industry in Brazil has competitive advantages for the energy transition. There is a common understanding that oil and natural gas will remain indispensable to ensure the supply of energy and well-being of the population in the coming years.  To respond to the global challenge of reducing emissions, O&G companies have already diversify their investments to include new low-carbon technologies, implement measures to reduce emissions associated with its operations, in addition to prioritize types of oil with lower carbon intensity. This is the case of the Brazilian product: the country’s oil production is characterized by a lower carbon intensity per barrel than most from other producing countries.

In addition to above, we note that it is likely that many companies of the O&G industry are exposed to comply with the requirements of Law No. 15,042/2024 that creates the Brazilian Greenhouse Gas Emissions Trading System. Such companies shall comply with emission targets set forth by the government and purchase carbon credits whenever applicable.

(ii) the management of fuel prices in the context of high oil prices

Fuel prices are a point of concern of the government. High prices affect the energy costs of the companies and of the population. Increasing of prices may cause inflation.  In this context the role of fuels’ taxation is of major importance to compensate prices variations.

(iii) the strengthening of the natural gas market in accordance with the New Gas Law

The strengthening of the natural gas market to increase competition, thus promoting a broad opening of the market will require infrastructure investments all along the value chain. Despite there are many projects under development, it will be of high importance that the applicable ANP regulatory framework shall be quickly implemented to support such projects.

(iv) Decommissioning of various E&P units

There are many E&P units that need to be decommissioned in the next years. There are opportunities for scrap yards to be established in Brazil to support the decommissioning activities. The new companies shall comply with local and international regulations.

(v) Environmental License for E&P at Equatorial Margin

The Equatorial Margin is located in the north of the country, between the states of Amapá and Rio Grande do Norte is the new frontier of oil and gas in Brazil, with high potential of production. The area is close to the fields of Guyana, French Guiana and Suriname, well known for very rich oil reserves.

Until December/2024, the environmental license, required by Petrobras, to continue the development of the area was not granted by Ibama. The agency is requesting to Petrobras various adjustments on the plans.

The delay on granting the applicable environmental licenses is creating concerns and political stress.

The oil and natural gas industry in Brazil has competitive advantages for the energy transition.

Legislation

We highlight the following legislation applicable to the O&G industry:

a) Law No. 8,723 provides that all gasoline consumed in the country are mixed with 27% of ethanol. This limit may be extended to 35% in case it is considered technically feasible by the Federal Government;

b) Law No. 13,576/2017, which created the ‘RenovaBio program’, the ANP Resolution 791/2019 forecasted annual targets for reducing greenhouse gas emissions for fuel trading. Fuel distribution companies shall comply with targets of greenhouse gas emissions, which are achieved by the purchase on the market of Decarbonization Credit. The credits are sold by certified biofuel plants;

c) Law No. 14,993/2024 created the ProBioQAV which is a program that aims to encourage research, production, commercialization and energy use, in the Brazilian energy matrix, of sustainable aviation fuel (Sustainable Aviation Fuel – SAF). The law establishes that air operators must reduce greenhouse gas emissions in their domestic operations through the use of SAF, whose reduction percentages will increase progressively per year, with it being predicted that in 2027 the reduction will be 1% and in 2037 the reduction will be 10%.

d) Law No. 14,993/2024 cretated the National Green Diesel Program (PNDV) which is a program that aims to encourage research, production, commercialization and energy use of green diesel in the Brazilian energy matrix. The law establishes that the CNPE will determine, each year, the mandatory minimum volumetric share of green diesel in relation to the diesel sold to the final consumer. While the aforementioned percentage of mixing green diesel with diesel oil is not defined, the new law established that from March/2025 the percentage of mixing biodiesel with diesel oil will be 15%, which will increase annually until in 2030 the percentage is 20%. It is appropriate to highlight that biodiesel and green diesel are different biofuels, as established in the ANP regulations.

e) Law No. 14,993/2024 created the National Program for Decarbonization of Natural Gas Producers and Importers and Biomethane Incentives which aims to encourage research, production, commercialization and use of biomethane and biogas in the Brazilian energy matrix with a view to decarbonizing the natural gas sector. The CNPE will define an annual target for reducing GHG emissions in the natural gas market sold, self-produced or self-imported by natural gas producers and importers, to be met through the participation of biomethane in natural gas consumption. This obligation will come into force on January 1, 2026, with an initial value of 1% and cannot exceed a 10% reduction in emissions. Compliance with this obligation will be proven by the purchase or use of biomethane or by the annual registration of the acquisition of CGOB. Therefore, the biomethane molecule can be sold separately from its environmental attribute. CGOB stands for Certificate of Guarantee of Origin of Biomethane (CGOB), being a traceability certificate based on the volume of biomethane produced and sold by the biofuel producer, demonstrating its renewable nature. In addition to this recent law, the production and use of biogas and biomethane is encouraged by various federal and states legislations by means of incentives;

f) Law No. 15,042/2024 that creates the Brazilian Greenhouse Gas Emissions Trading System shall apply to many companies of the O&G industry by requiring the achievement of emission targets set forth by the government and the purchase carbon credits whenever applicable.

g) Law No. 14,948/2024 establishes the regulatory framework for the production of low-carbon hydrogen. To establish the regulatory framework for low-carbon hydrogen, the creates the National Policy on Low-Carbon Hydrogen. The policy’s objectives include: (i) encouraging various low-carbon hydrogen production pathways and their derivatives; (ii) promoting the energy applications of low-carbon hydrogen and its derivatives, highlighting its role as a driver of energy transition in various sectors of the national economy; (iii) valuing the use of low-carbon hydrogen and its derivatives for domestic market supply and export purposes; (iv) protecting the environment; (v) fostering energy transition; (vi) promoting free competition; and (vii) attracting and encouraging national and foreign investments.

h) Bill 327/2021 approved in December/2024 by the Brazilian Congress creates the Energy Transition Acceleration Program (“PATEN”), which provide various incentives to the natural gas industry in Brazil. The bill is waiting the presidential sanction.

Carbon Capture

Carbon Capture is adopted by Petrobras since 2008. Currently, all platforms that produce in the Santos Basin pre-salt (21 in number) incorporate CCUS technology associated with advanced oil recovery.

Hydrogen

In relation to hydrogen, Petrobras informed in October/2024 that the company will build its first pilot plant to generate renewable hydrogen at the Vale do Açu Thermoelectric Plant, in Alto do Rodrigues, Rio Grande do Norte. The test plant is expected to come into operation in the first quarter of 2026. Renewable hydrogen will be generated by the water electrolysis process using solar energy, which consists of breaking water molecules using an electric current, separating hydrogen and oxygen.