This case study explores changes in Brazil’s oil and gas regulatory landscape in the second half of the 1990s. Successful growth in the oil and gas sector was supported by the creation of an authoritative independent regulator, and the effective enablement of the NOC Petrobras. It also highlights the need for policies to be flexible and responsive to an ever-changing energy landscape.
In the second-half of the 1990s, Brazil’s oil and gas sector regulatory regime was comprehensively overhauled. Petrobras’ monopoly came to an end, and upstream exploration and production was opened to international investment. The 1997 Act 9.478 also created the National Council for Energy Policy (CNPE) to set policy for the energy industry, as well as an independent regulator, the Agência Nacional do Petróleo, Gás Natural e Biocombustíveis (ANP).
ANP is the principle government agency charged with monitoring the oil sector’s development. It is responsible for implementing CNPE’s resolutions, setting guidelines for licensing rounds and local content requirements, promoting the continuity of exploration and production in mature areas, monitoring compliance, and enforcing penalties when targets are not achieved. Local content requirements form part of ANP’s responsibility for contracting and mandating in order to promote the participation of small companies in the sector. As such, ANP breaks down engineering procurement and construction contracts into smaller, standardized orders that local firms can realistically fulfil, as well as promotes awareness of opportunities. These efforts are further supported by the Programme for the Mobilization of the National Oil and Natural Gas Industry, a programme coordinated by Petrobras and the Ministry for Mines and Energy to help develop local professionals and supply chains.59
The steps taken to liberalize the oil and gas sector have contributed to a substantial strengthening of both Petrobras’ and Brazil’s energy sector’s governance, productivity and financial performance. After many years of production lagging behind domestic consumption, Brazil is now recognized as a major hydrocarbons resource-holder and producer, attracting major international upstream investment. Indeed, of the Latin American nations involved in oil and gas production, only Brazil and Colombia (which also went through the process of introducing an independent regulator, improving fiscal terms and restructuring its national oil company, Ecopetrol) have seen production growth over the past 15 years, unlike Mexico, Venezuela and Argentina.60
This achievement is reflected in the EAPI, where Brazil is one of the highest scoring emerging economies, placing 23rd (alongside Colombia, which is the highest performing emerging economy overall, placing 9th), making it the highest placed of the E7. The oil and gas sector contributes significantly to Brazil’s ranking and the nation’s coffers; its transparent competitive bidding process, through a series of 10 licensing rounds, saw acreage awarded to 78 companies (Brazilian and international), while its local content policies have served to create a vibrant services sector (by 2007, 70% of exploration and production relied on local content, up from 25% in 1999).61
From a governance perspective, the pendulum is now swinging back – towards a larger state role and more interference with Petrobras as a state enterprise. The operating environment that was developed during the 1990s and into the 2000s has now evolved significantly. The scale of discovered ‘pre-salt’ reserves, which are expected to help Brazil triple its oil production,62 led the Brazilian authorities to conclude that, for these resources, the concession-based system had to change. As a result, in a designated geographical area that covers the parts of the Campos and Santos basins with pre-salt potential, the pendulum has swung back towards a guaranteed role for Petrobras and a different system of resource management, involving a higher government take. The new regulatory framework includes a number of notable attributes, the key of which is that the concession based framework previously used was replaced by a production sharing agreement, requiring Petrobras to be the sole operator of each production-sharing agreement (PSA) and hold a 30% minimum stake in all pre-salt projects.63
Industry commentators have emphasized the pressure that the new regulatory regime places on Petrobras, whose annual upstream spend to 2017 of $30 billion represents 5% of the anticipated global total. This pressure is amplified by the fact that as a national oil company, it also has a responsibility to maintain a large and diverse portfolio of activities across the oil and gas value chain.64 Local content requirements have been criticized for making production in Brazil even more expensive, so in less favourable times (e.g. in the context of reforms in Mexico and cheaper oil prices), these policies could prove unproductive. In addition to these factors, slow development, lack of competence and high costs are hampering the growth of oil production in Brazil. And there are concerns that pre-salt fields in the country (considering local content requirements, the mandatory role for Petrobras, etc.) could become less attractive to foreign investors because of new competition from Mexico, which enjoys a reputation as an investor-friendly country.
This case study shows how governance changes helped reform Brazil’s oil and gas sector from the mid-1990s. It also underscores the need for institutions to be flexible and adaptive to change. If developments go well for Petrobras in the medium term, the company will emerge from the pre-salt process with greatly increased production. This will help support its financial situation (contingent upon government policies on fuel prices, oil prices in the international markets and the evolution of the company’s refining capacity). For the time being, the impact of the sector on Brazil’s finances may be less clear.