We are happy to launch our Doing Business in Brazil guide, focusing in the oil and gas sector in Brazil. It covers some relevant legal issues foreign investors need to consider in their plans to start a business in Brazil, such as oil and gas specific regulatory, tax and labor issues, as well as corporate structures, intellectual property, data protection, visas and immigration.
The contract has a social function, and it is up to the public authorities to prevent any type of contractual imbalance caused by an unpredictable and/or inevitable event that may generate excessive burden to one of the contractors.
Brazilian law enshrines the principle of exoneration due to non-imputability, as provided in Article 393 of the Civil Code: “The debtor is not liable for damages resulting from unforeseeable circumstances or force majeure, if he is not expressly held responsible for them.” The act of God or force majeure are events whose effects cannot be avoided or prevented, imposed by natural or third party fact.
We first observe that the event must make it impossible to fulfill the obligation, such as, for example, a cargo transport that cannot be carried out because the highway was closed by the authorities to prevent the entry of vehicles and the spread of the coronavirus. In this case, the carrier is not responsible for the default of the transport obligation, and consequently for the damage caused. It is important to note that the effects of the event must be inevitable.
In view of these concepts, it is necessary to analyze the special circumstances of each contract to verify: whether there was a real impossibility of fulfilling the obligation and the inevitability of the obstacle. But if an event, such as the Covid-19 pandemic, complicates or makes it excessively expensive to fulfill an obligation, force majeure or unforeseeable circumstances concepts are not applicable. The effects of acts of God and force majeure must necessarily preclude the fulfillment of the obligation and, in order to determine such effects, it is important that the disabled party has expressly exempted itself from liability for losses arising from acts of God and force majeure.
According to the theory of unpredictability, however, applicable to continuous or deferred execution contracts, when there is an unpredictable fact, potential damage and excessive cost on the part of one party and extreme advantage for the other, the contract can be terminated, according to article 478 of the Civil Code.
As an alternative to the contract termination, it is important to note the article 421-A, recently introduced in the Civil Code by the Economic Freedom Act, establishes the possibility of contractual review, however, in an exceptional and limited way.
The companies negotiated their contracts taking into account an economic and business scenario, which has been profoundly modified by the pandemic caused by the coronavirus. As a consequence, several contracts can no longer be fulfilled and a revision is necessary to restore their balance.
Does this mean that the parties can fail to comply with their contractual obligations under the
It depends on the specific case. Regardless of the answer, it is important that the debtor party, from the outset, open a dialogue with the creditor, exposing its concrete difficulties and making room for the dialogue and negotiation in order to seek ways to reestablish the pacts, on an equal basis between the parties, avoiding the termination of contracts, by the principle of good faith, as recommended by art. 479, of the Civil Code.
The key word of the moment is collaboration, because going to the clash in the judiciary can further complicate the situation of the companies, not to mention that it implies costs and time for both parties. A mediator can help the parties to stay focused on the negotiation process, encouraging the generation of creative options, helping the parties to clarify interests, exchange information safely and build satisfatory business solutions.
Decomissioning of facilities is a big challenge for the Brazilian oil and natural gas industry. The beginning of the production occurred in 1940 in onshore fields and in the late 1960`s for the maritime, and the fields that start its exploitation in 1998 (bid “o”) has rigs operating for over than 25 years, in its final stage of life.
Besides the challenge of measuring the liability throughout the project, a number of factors has to be considered, mainly the suitability of the regulation and the technical capacity for presenting proper solutions for the decommissioning.
The regulator body – ANP (National Agency of Petroleum, Natural Gas and Biofuels) has the complex task of drafting rules which can guide the decommissioning activities, mitigating risks to people and environment. The operators shall be accountable for recovering the affected areas, with environmental liabilities.
Petrobras has been prioritizing the pre-salt production, which has soared in the late years (729% between 2012 and 2018), meanwhile pos-salt has faced a decrease (41% between 2012 and 2018). In this scenario, some decommissioning programs have been approved, such as Roncador and Marlim Sul, and several others are been analyzed.
Decommissioning opportunities will drive the market and create demand for various services and equipment for many years in Brazil. There are several related services: engineering projects, subsea inspection, waste management, environmental monitoring, among others. As for equipment, probes, HLSVs, PSVs, tugs, rafts and other specialized items are required. Investments in 2020-2040 in offshore are estimated at R $ 50 billion, considering 100 platforms and 1,000 offshore wells (source: ANP).
ANP Resolution No. 27/2006, currently under review by the ANP, with the participation of IBAMA, the Brazilian Navy and the Brazilian Petroleum Institute (IBP), will define the procedures to be adopted for the facilities decommissioning, return of areas, disposal and reversal of assets and the content of the program and the final decommissioning report. The purpose of the new resolution is to maximize reservoir recovery and avoid premature decommissioning, foster business between future and current operators, develop new markets and provide predictability and regulatory simplification.
Petrobras has initiated bids for decommissioning, and currently has eight projects (10 platforms) to be executed in the coming years. The Cação project is underway and has contributed to many lessons learned for future projects. Since 2015 the 13 wells have been decommissioned (probe P-59), the permanent deactivation of the transfer ducts and the dismantling of the decks of PCA-1, PCA-2 and PCA-3. Its remaining scope will be realized by an EPRD (Engineering, Preparation, Removal and Disposal) contract in 2020 (source: Petrobras).
Repetro has undergone significant changes with the implementation of Provisional Measure No. 795 of August 17, 2017. These changes required the issuance of a new Normative Instruction and the new Repetro is now called Repetro-Sped. With the new legislation, Repetro (previous regime) will remain in effect until 12/31/2020.
The main changes are: the inclusion of a new mode of application of the regime, which is the importation of goods for permanent permanence in the country with suspension of the payment of federal taxes on importation; The adoption of Sped for accounting control to replace the current computerized system used to control Repetro and Repetro-Sped will include the control of temporary admissions for economical use with proportional payment.
Petrobras has already brought six new platforms (FPSOs) in Repetro-Sped (acquired) and has 34 of its own in operation admitted to Repetro, which will therefore be nationalized by Dec. 2020. It has over 300 new subseas and 2,800 in operation to be nationalized, as well as 1,200 ancillary goods (source: Petrobras).
One of the advantages of the new system is that when migrating to Repetro-Sped, the accessory goods can be migrated together with the platform, which facilitates the processes. Petrobras has 57 offshore fields with material in Repetro.
Petrobras has now eight offshore decommissioning projects underway. In fact, three platforms in Bacia de Campos have already been disconnected. As these systems are very old (from the 1980s), it faces enormous difficulty in finding documentation and information to support regime migration.
The challenge is even greater when the platform is operated by third parties. In this case, decommissioning is jointly conducted by the vessel operator, the service provider (such as SBM, Modec and others) and the (oil) operators. Both have to provide sufficient documentation and information to achieve the purpose of decommissioning. In general, subsea equipment is the responsibility of the operator, and platforms and accessory equipment are imported by the contractor.
The amount of goods and services used in decommissioning operations is enormous. The same decommissioning vessels also install, so the market is competitive and the values are high.
Another challenge is the issue of storing the material in the bases. Studies and analysis related to the disassembly, disposal and destruction process are required in light of environmental issues.
In the Repetro-Sped definitive import mode, the goods must remain destined to the exploration, development and production of oil and natural gas deposits for a period of 5 years. The Repetro-Sped regime will be automatically terminated, and in the event of regular disposal of the good, after the expiration of a 5-year period from the registration of DI. If the good becomes unusable before 5 years of age, the beneficiary may allocate the equipment in another field, dispose of it to another legal entity qualified in the scheme or remain installed or release it in its original place of employment.
Destination of subsea goods (“subsea”) is considered to be used when affixed to the subsoil; and vessels and platforms where they are still available at the locations indicated in the concession agreement, authorization, assignment or sharing agreements.
Since the new legislation was published, there has been a fruitful market dialogue with the IRS, which has been very receptive to operators’ claims to correct flaws and loopholes in the law.
The analysis of all applicable legislation to the regime is a daunting task: laws, decrees, regulations, ordinances, normative instructions, constantly repealed and modified, which does not facilitate its absorption. Good assistance is provided by the “Repetro-Sped Manual”, which systematically summarizes the legislation; and the “Questions and Answers”, which are a direct channel for IRS communication with taxpayers. Obviously, for greater legal certainty, it is necessary that the answers are transcribed in normative.
Note that there are still unresolved issues. For example, the five-year rule applies to all equipment, including old equipment, and not only to equipment imported from January 1, 2018 on Repetro-Sped. Among the permitted hypotheses for the destination of the good, before or after the 5-year period, there is no explicit exportation, disposal of the good for non-beneficiary of Repetro-Sped or destruction. Thus, these cases could be considered deviation of purpose, imposing the payment of suspended taxes plus interest and late payment, calculated based on the migration ID of Repetro to Repetro-Sped.
It should be noted that these assets were already applied to the E&P activity, under the Repetro regime, for a period sometimes much longer than the 5 years required by the new legislation.
There is an apparent difficulty in adapting the legislation to the activity due to its intrinsic characteristics.
In the migration of regimes from Repetro to Repetro-Sped, caution should be exercised, thus avoiding a series of legal penalties, such as the execution of the liability term (TR) with full payment of suspended taxes plus default charges, application of a 10% fine on the customs value of the goods for non-compliance with the terms and conditions of the special regime, and a 75% fine on the taxes due, in case of tax assessment.
In addition, little attention is paid to accounting entries, which, if incorrect, will have an impact on accounting and income taxes (IRPJ and CSLL).
Despite the difficulties in adapting to the new regime, it is clear that there has been a great evolution with the inclusion of the regime’s application modality in the importation of goods for permanent permanence in the country, and clearly a better understanding and dialogue between government, companies and the IRS, generating mutual benefits and the necessary stimulus for oil and gas exploration and production in the country. In their decommissioning activities, Petrobras and other operators should certainly seek to enjoy the benefits of the new regime, thereby reducing the high costs related to this activity.
Julia Mota is founder of Mota Advogados, law firm specialized in the oil and gas area.
Published at TN Petroleum Magazine in 05/28/2018
Decree 2.745/1998 simplified Petrobras’ procurement processes, bringing the required agility to compete in a market that became competitive after the opening of the oil and gas sector to the private sector, with the advent of Law 9.478/1997 (The Petroleum Law). After almost 20 years of the simplified regime, Petrobras is forced to comply with a public bidding regime, with the enactment of the State Law (13.303/2016). This law will govern all procurement by all Brazilian state-owned companies – around 150 of the federal government alone, not counting the state and municipal state-owned companies, which operate in several areas such as agriculture, tourism, ports, nuclear, war, banks, among others.
The process of adaptation to the State Law by Petrobras has been very difficult. This is because it treats the purchase of simple items, such as a common engine, for example, in the same way as sophisticated equipment such as christmas trees, which is not in line with industry best practices. The upstream sector presents peculiar characteristics, and the major oil companies in the world follow a specific pattern of procurement, due to the reduced number of suppliers in certain segments and the high technology involved. Oil companies need to develop strategic partnerships with their main suppliers, a business model not contemplated by the State Law, precisely because the law is generic.
A critical point is the 5th paragraph of Article 1 of the law, which provides that the state-owned company participating to a consortium, as operator, is subject to the law. This generated a problem because Petrobras, as operator of consortia formed for joint operation of oil and gas exploration, is in charge of the procurement of the consortia, which have always ran under a private legal regime. Compliance with public procurement rules came against Petrobras’ business plans and projects economics in the partnerships with other oil companies.
The recent Decree 9.355/2018, published on April 26, determines in its Article 1, paragraph 7 that goods and services procurement performed by the consortia operated by Petrobras are subject to the private regime of private companies, in which case the public tendering procedure is not applicable. The inclusion of this provision in this Decree was surprising, as its purpose is to determine rules for the assignment of Petrobras’ rights to the exploration, development and production of oil and gas. Timely or not, the new rule exempts Petrobras from the obligation set forth in above mentioned paragraph 5 of Article 1 of Law 13.303.
Petrobras plans to invest US$ 60.6 billion in exploration and production of oil and natural gas by 2021. The largest projects, especially in the pre-salt, will be explored by Petrobras in partnership with other companies. In this context, suppliers are confused and do not know how to act and participate in the projects developed by the consortia. A question arises: how to reconcile two different procurement regimes in the same company?
Petrobras has made a huge and commendable effort to inform and train suppliers in the new procedures of Law 13.303, including providing an application where suppliers can track all bids in progress. However, there is no information available on the procurement of the consortia. Without going into the merits of the (debatable) legality of Decree 9.355, the situation is Kafkian because Petrobras is currently exercising unfair competition with itself: when it operates alone, it does not have the same tools as when it acts in a consortium. In order to avoid bureaucracy, objections, delays and, as a consequence, cost increases, Petrobras tends to change its business model and to explore all its fields in partnership with other companies, in order to simplify procurement procedures.
To be efficient and fulfill its purpose, a company, state or non-state, must obey management principles and rules, not just legal principles and rules. The São Paulo Stock Exchange B3 recently authorized Petrobras to join the special Corporate Governance Level 2 listing segment: “These achievements reinforce the progress made in Petrobras’ corporate governance and ratify its commitment to continuous process improvement and alignment with best practices in the market” as stated by the oil company itself. In fact, there has been a significant improvement in its disclosure, transparency for stakeholders and compliance (code of ethics and organizational integrity). Advances are evident, and the risk of illegalities has been significantly reduced. This may be enough to prevent criminal actions, and the company could count on a uniform, simpler and more agile procurement procedure, in line with international standards, similar to other oil companies.
We are living a new context in Brazil: intolerance to corruption, bargaining and other crimes is notorious, reflecting a deep and historic cultural change. State companies needed a management, governance, and compliance clash. But when it comes to procurement procedures, although Law 13.303 is less bureaucratic than Law 8.666/93 (public procurement law), should Petrobras not have its own rules, adapted to the reality of the oil sector? In an extremely competitive market, this may be necessary.
An analysis of the best practices of procurement and hiring in this sector is inevitable, tracking the worldwide recognized and standardized practices. This would help determining in a logical and objective way, the best procedures for Petrobras, taking into account the legal nature of the company – a semi-public – since this continues to be the Brazilian option, that is, to maintain a state-owned company as a leading actor in this sector.
By Julia Mota
From April 2, Petrobras Rio Unit has started procurement of goods and services under the new legal system – Law 13.303/16, and from May 15 all Petrobras units in Brazil will also be running under the new rules. See below a summary of the process:
Step 1 – Vendors List Registration
Foreign suppliers can register for the supply of goods and services. The registration is available for all goods items and around 60 different services items. If you are not yet, get registered in Petrobras vendor’s list – benefits are:
- a) You have easier access to all public bids through your private area in the Petronect system;
- b) You receive notifications by email on the bids and pre-qualification process;
- c) You mitigate the risk of not being qualified when winning a bid.
It is highly recommended that the process is coordinated by a Portuguese spoken person, as the bulk of information and communication with Petrobras is in Portuguese. Registration must be updated yearly. If you are already listed, you must urgently adjust the items as all 1.600 goods and services items are under a full modification and updating process.
Step 2 – Risk analysis
Check the CFM (Materials Supply Conditions) and the standard drafts contracts and bid notices related to your product or service on Petronect page. This will help you being prepared way before the bid is launched: you have access to the terms and conditions, duties and obligations, civil liability and other relevant aspects that will be the basis for your proposed price. All drafts are supposed to be published on May 15 (according to Petrobras).
Step 3 – Pre-qualification
Pre-qualify for goods and services items open for pre-qualification process (in Petronect system). Fifty nine (59) items of goods and services will be subject to pre-qualification as they are considered high-technology items. Benefits: you will be eligible to participate to bids restricted to pre-qualified suppliers, even though your pre-qualification process is not finalized. The pre-qualification must also be updated yearly. Some documents may be replaced by documents already approved in Step 1, with the relevant complements. Check for the current open pre-qualification process at https://www.petronect.com.br/irj/portal/anonymous/pt purchasing and contracting, prequalification, prequalification open.
Important: Step 1 and 3 may be performed at the same time.
Step 4 – Analyze the bid notice and specific bid requirements
Follow up the international call for bid process through your logged in area in Petronect – or in the public area if you have not concluded your vendor’s list registration (Step 1); get access to the full list of requirements; analyze the bid notice and all requirements to make sure your company is capable of complying with all items. Important: the bids for Rio are already online! Take a look at https://www.petronect.com.br/irj/portal/anonymous/pt (purchasing and contracting; public bidding; published)
The bid notice may be challenged up to 5 working days before the bid for non-compliance with the legislation (lack of clarity, missing information, favoring of participants, restriction of competitiveness, etc.)
Step 5 – Bid
If you decide to proceed, you will bid through Petronect system and Petrobras will select one proposal only (the most advantageous one according to the stipulated criteria). If your company win and comply with all requirements of the bid notice, you will be called to negotiate with Petrobras. If the price proposed is up to Petrobras budget for this bid, you will go to the next phase of qualification – if you are already listed in the vendors list (Step 1) this phase will be skipped, except if the bid notice require additional specific items.
Step 6 – Appeal phase
At the sole appeal phase, competitors may challenge Petrobras’ decisions and your proposal (and vice-versa if you are not the winner).
Step 7 – Award phase
PETROBRAS awards the bid and approves the result or cancel – if no bidder price is equal or inferior to the stipulated budget and for other specific reasons.
This is the basic process, subject to modification in specific circumstances.
by Julia Mota, published at TN Petroleum Magazine in 03/09/2018
The RLCP – Petrobras’ Bids and Contracts Regulation was published on January 15, 2018, in compliance with Law 13.303/16 (State Companies Law), and is already governing bids – as a pilot – in Espirito Santo unit. As of April 2, the unit of Rio de Janeiro begins to run the new system and the remaining units on May 15. By June 30, all subsidiaries must also publish their own regulations.
The letters of invitation to bid will be gone and all bids must be public. It is important to note that the bids and contracts based on Decree 2.745/98 and the MPC (contracts guide) remain governed by these rules until the termination of the contracts: the two regimes will live together for some time. This dual regime requires increased attention from the staff of suppliers who operate the Petronect and the legal departments.
The bid’s rules under Law 13.303/16 are an “adjusted” version of the bid’s rules of the Differentiated Regime of Public Procurement – RDC (Law 12.462/11), which includes phase inversion (qualification is after judgment), bids stage (with open and closed dispute mode), appeals concentrated at the end, non-disclosed budget, integrated hiring, risk sharing, judgment criteria, tie breaker and other features. The RDC, in turn, brought various concepts of the bid regime – “Pregão” (Law 10.520/02).
For state-owned companies and public companies in general, previously subject to Law 8.666/93, the new regime reduces formalism and bureaucracy, but for Petrobras it represents a major setback. The main difference is the semi-integrated contract (contratação semi-integrada) for engineer and services contracts. Law 13.303/16 establishes a new type of contract, which is basically a “turn-key with basic project”. The turn-keys projects of Decree 2745 become exceptions, subject to strict technical and economic justification, according to the understandings of the Federal Court of Auditors -TCU (due to the identity of the provisions and concepts, the TCU, under the RDC, should be applicable to Petrobras issues).
Without an acceptable justification, Petrobras will have to go to the semi-integrated modality: the basic project shall be previously tendered, and its authors are not allowed to participate in the bid for the project. The basic project can eventually be modified by the contractor, “provided that the superiority of innovations is demonstrated in terms of cost reduction, increase in quality, reduced lead time and ease of maintenance or operation”. Some doubts: in this case will the contractor have the right to amendments? And what will be the criteria for evaluating the “new methodology and technology” offered by the bidder, under the terms of 5th line of Article 43 of Law 13303/16? We do not know how Petrobras will address these issues.
Another point that deserves reflection is the inversion of phases: judging takes place first, according to the public notice criteria (lower price, higher discount, better combination of technique and price, better technique, better artistic content, higher economic return and better disposal of alienated assets). How to guarantee isonomy in determining the parameters in the call for tender when they are not simply numerical?
Bids are public and anyone can access them, which makes it possible for any company to make a proposal, even if it does not have the least capacity to fulfill the contract. One way for Petrobras to avoid a flood of proposals will be the use of compulsory pre-qualification for strategic hiring, which today correspond to 60 families in the company vendors list.
The former certificates, the CRCC and DRS are no longer issued, replaced by a single document, the Certificate of Registration Register (CRC). The registration (cadastro) is not mandatory to participate in the bids, but remains strategic because it acts as a prior assessment, mitigating the risk of the bidder not being qualified to win a bid, in the end of the bid process. Furthermore, it allows access to calls for pre-qualification and bidding processes in registered families. Hence the importance of upgrading families according to the adjustment of families in course in the Petronect, since several of the old families will be canceled soon and only the updated family roll should receive the calls.
It is worth mentioning the possibility of including mediation in the contracts, as an extrajudicial method to resolve disputes. The adoption of mediation can be a huge saving of time and money, enabling win-win solutions and the survival of some suppliers who are out of breath to await a court decision that could take a decade.
We know that Petrobras competes with other oil companies that are not subject to the same formalism and bureaucracy, and also that all this legal apparatus is not a solution to the problem of corruption. From this point of view, Petrobras is expected to be able to create efficient mechanisms to comply with the new Law, without the new requirements rendering the project’s management impractical. It only makes sense to maintain a state-owned company in the exploration of economic activity if it has the tools to act in an agile, rational and efficient manner.
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