Recent Developments in Brazil's Oil & Gas Industry: Brazil Appears to Be Stemming the Tide of Resource Nationalism

Article excerpt

  I. INTRODUCTION: BRAZIL'S PROMINENCE IN GLOBAL OIL
     AND GAS DEVELOPMENT

 II. BACKGROUND: CREATION OF A SAFE HARBOR FOR
     FOREIGN INVESTMENT
     A. Development of Brazil's Legal Infrastructure
     B. Petrobras & International Competition

III. BRAZIL'S ENERGY MARKET: A SEA OF OPPORTUNITY
     A. Crude Oil: A Rising World Power
     B. Natural Gas
     C. Hydrocarbon Concessions: Attracting
        Foreign Capital

 IV. RECENT DEVELOPMENTS: A POTENTIAL BLOCKADE TO
     OIL AND GAS DEVELOPMENT
     A. Analysis of the ANP Bid Round 8 Suspension:
        The Supreme Court Tenders Pro Foreign
        Investor Decision
     B. Unitization: The ANP's Rising Storm
     C. Evolving Tax Incentives for Oil and Gas
        Development in Brazil: Will the Change in the
        Definition of Vessel Float with Investors?

  V. CONCLUSION: THE RESOURCE NATIONALISM SHIP HAS
     NOT SAILED, BUT IT MAY BE IN THE HARBOR

I. INTRODUCTION: BRAZIL'S PROMINENCE IN GLOBAL OIL AND GAS DEVELOPMENT

As the tenth largest energy consumer in the world (third largest in the Western Hemisphere after the United States and Canada), one of the world's largest ethanol producers and the country with the second largest crude oil reserves in South America, Brazil (1) is a critical player in the global energy market. (2) Only a year after becoming a net oil exporter, Petrobras's recent discovery in the Tupi field, off Brazil's southeastern Atlantic coast, could add as much as "5 billion [to] 8 billion barrels [of recoverable light crude]--equivalent to 40 percent of all the oil ever discovered in Brazil." (3) Further, the recent rumors surrounding the Carioca field in the Santos Basin, indicate that there could be another large discovery on the near horizon, but there have been no definitive announcements yet regarding such discovery. (4) In a time where high crude oil prices and internal politics have caused much of Latin America to look inward and focus on recapturing dominion and control over their natural resources, (5) Brazil continues to welcome foreign investment from international oil companies (IOCs) to increase direct investment in the hydrocarbon sector. (6) This is not to say that Brazil is a panacea for oil and gas development, as it has its challenges and uncertainties as well. Petrobras's Tupi discovery and the resultant withdrawal of "41 of the most promising blocks" (7) from Bid Round 9 introduced elements of instability and national preference that Brazil has heretofore avoided. This paper will highlight some of the more significant recent legal developments in Brazil and some pending concerns for investing in Brazil, principally in the upstream energy sector.

First, this Article will provide a general background of the Brazilian energy market and briefly touch on the events that have led it to be one of the most attractive countries for foreign investment in South America. A review of the current status of Bid Rounds 8 and 9 follows thereafter, including an analysis of two injunctions that suspended Bid Round 8 throughout 2007. Then, the Article addresses the increasing likelihood of reservoir unitization in offshore developments and potential constitutional challenges that may result. Finally, the Article examines a pending tax dispute regarding the reclassification of certain offshore oil and gas platforms that will have a material impact on the way most international oil companies structure their exploration and development programs in Brazil.

II. BACKGROUND: CREATION OF A SAFE HARBOR FOR FOREIGN INVESTMENT

A. Development of Brazil's Legal Infrastructure

A little over 10 years ago the Brazilian exploration and production sector was essentially closed to foreign participation. (8) It was not until the National Congress enacted Constitutional Amendment No. 9 in 1995 that constitutional restrictions against private participation in the oil and gas sector in Brazil were relaxed by allowing private companies to invest and participate in the upstream sector. …